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Kaiser Watch May 24, 2023: What two global crises mean for resource juniors

Posted: May 24, 2023JK: Kaiser Watch May 24, 2023 with Jim Goddard and John Kaiser
Published: May 24, 2023KRO: Kaiser Watch May 24, 2023: What two global crises mean for resource juniors
Kaiser Watch is a weekly 15-30 minute audio show produced by KaiserResearch.com with Jim Goddard and John Kaiser discussing the junior resource sector. The show has three parts: the first is a general topic, the second discusses developments involving the KRO Favorites which as of January 1, 2022 are no longer exclusive to KRO members, and the third is a peek inside the members only KRO Bottom-Fish Workshop. KRO is transitioning into a Do-It-Yourself research platform that covers all Canadian and Australian resource listings and which also features a Bottom-Fish Workshop where John Kaiser highlights juniors with solvable "missing pieces". Companies that graduate from the Workshop may become part of the Annual Favorites collection whose profiles and related commentary are unrestricted for non-members. Visit the KRO Favorites Dashboard for quick access to all the unrestricted Favorites related content. KRO is not sponsored or compensated directly or indirectly by public companies. The business model is based solely on membership fees in the form of a USD $450 Annual Individual Membership that at some point will increase substantially to reflect KRO's shift to a research platform. However, when the change happens active members will be grandfathered to renew indefinitely at the current rate provided they maintain a continuous paid membership. Kaiser Watch is available at Kaiser Research YouTube and as a Podcast downloadable from KaiserResearch.com. Each episode will be made available through the publication of a Kaiser Media Watch blog report which will provide links to specific questions and include supplementary graphics. All episodes will be archived at Kaiser Watch.

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Kaiser Watch May 24, 2023: What two global crises mean for resource juniors
Jim (0:00:00): What will be the topic of your presentation at the upcoming Metals Investor Forum in Vancouver this weekend?

The Metals Investor Forum will take place in Vancouver at the Rosewood Hotel on Friday May 26 and Saturday May 27. Participation is free to the public but one must register online ahead of time. My session is on Saturday in the afternoon at 1:50 pm. My topic will be "Two Global Crises: what they mean for resource juniors". I will play on the theme Yellow, Red and White Gold reflecting the three metals I believe will be most important for the junior resource sector over the next couple years. I will also refer to Iridescent Gold as a catchall for metals whose supply will be disrupted if the geopolitical conflict between China and the United States turns hot.

Yellow gold, of course, is the regular gold whose price trend seems to have a permanent grip on the mood of the audience for resource juniors. Gold this past month has been struggling to establish $2,000 as its new base rather than a ceiling which it stopped short of in 2011, and briefly broke through in 2020 during the covid pandemic and again in 2022 when Russia invaded Ukraine. This year, despite interest rates having been jacked to the highest level since 2007, gold has clawed its way above $2,000. The current reason seems to be anxiety about what will happen if the US debt ceiling is not lifted and the United States defaults on its obligation to pay its debts. When the Republican Party first launched a debt ceiling extortion attack in 2011 the capitulation by the Obama administration was followed by an 8 year bear market for gold that did not turn around until 2020 when the world was blindsided by the covid pandemic which prompted extraordinary measures that cranked up the US debt and bestowed on Trump the honor of seeing the national debt increase during his term by a greater amount than accomplished by any predecessor. Biden is on track to becoming the new debt increase champion by the end of 2024 and this is supposedly what the Republican Party is upset about now.

What is different today from a decade ago is the geopolitical context. A decade ago China was still a fast growing economy with quite a ways to go before catching up with the United States. Although America's financial sector engineered the global financial crisis, the United States was still resting on its laurels as the leader of a globalized economy. But a lot has changed in the past decade, starting with the emergence of Xi Jinping as China's new leader. At the time the hope of the "liberal" world order was that growing prosperity would cause China's hybrid communist-capitalist system to become westernized and the country to become a huge market for western corporations. Xi, however, decided to re-establish China as a Communist autocracy with ever tighter control over corporate activity with a bias toward domestic entities. At the same time he used technology to impose hyper-surveillance on the Chinese people so that Beijing could make sure nothing could be heard or spoken that was at odds with Beijing's desired messaging. He also launched the Belt and Road Initiative as a way to reach into emerging countries that could supply China with the raw materials it cannot produce domestically.

Along the way Vladimir Putin, whose Russia was a fading economic power relative to the United States and China because he allowed crony capitalism parasitic on Russia's resource base to be the basis of its economy, decided it was time to re-establish the Soviet Union, starting with Ukraine, first with Crimea in 2014 and then with a full-blown invasion of Ukraine in 2022. China decided to align itself with Russia because it had a similar goal of annexing Taiwan whose existence is a democratic rebuke of China's autocracy. This accelerated the geopolitical power conflict between China and the United States which has been brewing for the past decade.

The Biden administration has packaged the conflict as one between autocracy and democracy, but it is not as simple as the Cold War conflict between Communism and capitalism. Alexander Stubb, former prime minister of Finland, recently provided a much better description of the conflict in a Financial Times opinion piece on May 10. (The west must learn from its mistakes if it wants to shape the new world order. He describes the conflict as a triangle involving the global west, which includes the United States, Europe and their allies, the global east which includes China, Russia, Iran and about 20 other outright autocracies, and the global south, which includes the non-autocratic members of the so-called BRICS nations, India, Brazil, and South Africa, plus most countries in Latin America, Africa and Asia.

This group of 125 countries that make up the global south has refused to condemn Russia's invasion of Ukraine in a UN resolution, and has been reluctant to participate in the sanctions imposed by the United States on Russia. The global south consists of countries which Freedom House would classify as "partly free" based on its civil liberties and political rights scoring system, whereas the global east would be "not free" while the global west is "free". The global south's primary goal is a better economic future. It is on the sidelines watching the struggle between the competing systems of the United States and China play out.

Unlike the Cold War where the Soviet Union had the goal of establishing global Communism run by Russians, China has no such agenda for the countries it wants as part of its trading network. Countries in the global south can shift to left or right wing autocracies, China would not care so long as it can secure some degree of economic leverage over the prevailing regime. During the Cold War the United States aligned itself with right wing autocracies whose leadership was happy for support against left wing opposition. Now that Russia is a right wing autocracy there is no distinction between left or right wing autocracy within the global east. It is really a struggle between China and the United States for domination of the global economy, and the global south's primary question is, how will we benefit?

Since the US dollar is the primary exchange medium for global trade and also provides price discovery, the underlying desire within the global west and global south nations is to keep using the US dollar for trade, both to price the exchange of goods and services and to park the proceeds of a consummated transaction. The very fact that the losers of a democratic election can use a meaningless concept like a debt ceiling to threaten a US default unless the winners to the bidding of the losers has already harmed the credibility of the United States. Should a default actually happen, it will stigmitize the United States as an unreliable foundation of the global dollar system. Because no other currency is as ubiquitous as the dollar, none is an ideal immediate replacement. A debt ceiling default would push the global south into a closer economic embrace with China. And even if a deal is struck, it only punts the extortion problem down the road. Gold as a fungible asset class stands to benefit as a bridge when the dollar dominated global transaction system begins to fragment. My presentation will outline how the various paths of this geopolitical conflict can allow $2,000 to become the new base for gold from which it can launch real price gains as this new world order sorts itself out. Such a development underpinned by a general understanding of the irreversible drive of a real price uptrend will create a bull market for gold exploration and development juniors. The most likely path, namely a world partitioned into separate economic zones defined by the global west and global east, with members of the global south choosing whatever zone serves their interests best, will also create a bull market for juniors chasing Iridescent Gold, namely metals such as rare earths whose supply is concentrated in the countries of the global east.

The other part of my talk will be mostly about red gold (copper) and white gold (lithium), both of which are key metals for energy transition goals. Global warming and the resulting climate change is the other global crisis for which a solution is desired by most nations except Russia whose vast land mass overlapping the Arctic stands to benefit from global warming caused by greenhouse gas emissions. It is entirely possible for the global economy to split into two isolated zones headed by China and the United States with limited trade between them while all nations remain committed to achieving the energy transition. Copper demand is projected to increase 50% by 2030 to facilitate net zero emission related goals, while the IEA projects a 500%-600% demand increase for lithium. The latter can only be accomplished if lithium carbonate establishes a floor price around $10/lb. This means that by 2030 yellow, red and white gold will have annual supply markets worth $100-$300 billion. There is insufficient copper in the development pipeline to meet this 2030 NZE goal so for it to happen the real price of copper will need to rise so that lower grade deposits are dragged into the money. The supply of copper is globally diversified, so the higher real price will promote exploration and development around the world, though many of these regions will be off limits to resource juniors because many of their countries already are global east autocracies and many of the global south are drifting into autocracy, left wing style in Latin American and right wing style in Africa and parts of Asia beyond China's influence. Members of the global west, especially if they remain interested in ESG criteria, will look for new copper supply from secure jurisdictions such as Canada and Australia where open-pittable grade tends to be lower than in other parts of the world.

Lithium, which just over two decades ago in 2005 was a tiny $200 million annual market, was worth $20-$40 billion in 2022 depending on what one uses as an average lithium price. A five-fold supply expansion by 2030 would make lithium a $100-$200 billion market, putting it in a league with yellow and red gold beyond nickel and zinc. Half of that future supply will come from Australian pegmatites and brines in China and the Lithium Triangle of South America. The other half will come from Archean cratons in Canada, Brazil, Africa and Europe. There is a vast abundance of outcropping pegmatites documented as a by-product of precious and base metals exploration. The obvious ones visible from Google Earth were grabbed a long time ago; the smaller outcrops whose sub-surface extent and lithium content is unknown are the target of Lithium Mania 2.0. Lithium enriched pegmatite exploration will unfold as the greatest exploration boom ever and it will be dominated by resource juniors.

My past two MIF presentations in Vancouver and Toronto focused on the importance of lithium for the energy transition and why Lithium Mania 2.0, the hunt for pegmatite deposits beyond Australia in secure jurisdictions like Canada, will dominate resource junior speculation over the next couple years. I have only two companies in my May MIF session. The first is West Vault Mining Inc which is a gold optionality play I adopted as a Good Spec Value rated KRO Favorite in Tracker April 13, 2023 based on its Hasbrouck project in Nevada. The second is Beyond Lithium Inc which has acquired an extensive portfolio of known pegmatite showings in Ontario from a prospector group which in early 2022 assembled the claims groups using an archival research approach resembling that deployed by Brunswick Exploration Ltd last year. I did invite a copper junior to which I recently assigned a Bottom-Fish Spec Value rating but the company decided not to be part of my session, so red gold is not represented in my session.

West Vault Mining Inc (WVM-V)

Good Spec Value
Hasbrouck United States - Nevada 7-Permitting & Feasibility Au Ag

Long Term Price Chart for Gold

NPV Sensitivity to Gold Price for Hasbrouck Project
Jim (0:12:45): How important is the latest metallurgy press release for FPX Nickel?

On May 17, 2023 FPX Nickel Corp published the results of a hydrometallurgical study for the production of battery grade nickel and cobalt sulphate from the 60%-66% ferro-nickel concentrate it plans to produce from its 120,000 tpd Decar nickel project in central British Columbia. The study by Sherritt Technologies built on a scoping study published in September 2022 using a concentrate sample produced by the PFS calibre study done on the primary flowsheet for the awaruite mineralized ore in the Baptiste deposit. The work improved upon the scoping study flowsheet by adding an atmospheric leaching stage for the discharge from an initial pressure oxidation stage which allowed the recovery of a minor copper by-product and which neutralized the acid in the discharge courtesy of a reactive property of the partially leached awaruite so that the discharge could be sent back through the autoclave.

The change created three benefits: 1) removing the copper impurity in a form that has resale value, 2) reducing the amount of reagent needed to neutralize the acidity of the autoclave's discharge, and, 3) reducing the size of the required autoclave. This part of the flowsheet also removed the iron impurity which previously required a subsequent stage. Solvent extraction was then used on the pregnant liquor solution to remove the cobalt and precipitate it as a cobalt hydroxide with 99% cobalt recovery, and then applied to the nickel to precipitate nickel sulphate crystals. The optimized flowsheet demonstrated that the nickel sulphate crystals had a minimum 22% nickel content and impurity levels well below maximum specifications. The market not surprisingly yawned at this confirmation that battery grade nickel sulphate can be made from Decar's ferro-nickel concentrate which would otherwise be destined as a direct feedstock for stainless steel mills.

The nickel sulphate flowsheet will be incorporated into the PFS which is still projected for delivery in September 2023. The significance of this development is not that the nickel sulphate will add economic value to the Decar project, though this may be possible if the nickel sulphate premium above LME refined nickel is high enough. However, that outcome has two variables: the future price of LME nickel and the future premium for nickel sulphate. The real importance of this news is that it demonstrates the technical achievement of making battery grade nickel sulphate and establishes the cost of doing so. Quite likely the cost will be similar to what a battery maker may be able to pay for nickel sulphate from Indonesia, but it is the source and associated carbon footprint that matters. This is important because it expands the end-user audience for Decar's ferro-nickel concentrate beyond stainless steel makers. Currently nickel sulphate is made from dissolution of LME grade nickel briquette (matte) created by smelting of sulphide concentrates or mixed sulphide precipitates from laterite ores. Both these sources have more stages than FPX Nickel's flowsheet and have higher carbon footprints, especially in the case of Indonesia's nickel output which is mainly processed with coal powered electricity. Decar's nickel sulphate output is thus of great potential interest to North American and European carmakers, as described in a May 21, 2023 NYT article, The US Needs Minerals for Electric Cars. Everybody Else Wants them Too..

There has been plenty of head-scratching as to why none of this positive PFS related news budges FPX Nickel out of its $0.40-$0.50 trading range. I've done a 20% cost escalation for the 2020 PEA and the project still clears key development hurdles for a project of its scale and longevity. The PFS will reveal how much cost escalation has affected economics, but it will also reveal benefits from optimizations such as better recoveries. Retail audiences are generally not motivated to buy a junior whose project is at the feasibility demonstration stage, but will chase one that is trending up. Stocks at this development stage generally cannot develop an uptrend without the inflow of institutional capital. But institutions are currently avoiding the resource sector while they eye the weak post zero-covid rebound of China's economy and fret about a potential North American recession caused by persistent or even higher interest rates driven by the refusal of inflation to subside or perhaps even by a debt ceiling related default. Resource sector investors are hunkered down in the trenches.

The next fact based trigger for a repricing of FPX Nickel will be publication of the PFS in September, but that carries the risk that the numbers will disappoint the market, or nickel prices may have temporarily swooned as a result of new Indonesian supply not being matched by an increase in Chinese demand. It is possible that the revealed identity of the 9.9% strategic investor who paid $12 million at $0.50 last year would inspire an upwards repricing of FPX Nickel, but the identity of the investor would need to be a special surprise that turns heads. A mining company like Vale or BHP would inspire a shoulder shrug.

When I pressed CEO Martin Turenne on this topic he insisted that the revealed identity would have a big impact on the market's perception. That suggests it is a downstream entity. If it is a battery maker such as LG or CATL that would want an ESG qualified feedstock the strategic investment makes sense and the nickel sulphate news would be vindication even if it turns out be an economic wash. But I think a battery maker waiting to offtake nickel sulphate would hardly stir the market, even less so a more upstream chemical company with a name ordinary people never heard of. And a carmaker like Tesla also would induce a yawn because Tesla has not insisted on secrecy in other deals and having done so with FPX would just induce puzzlement. Maybe one of the other American, Japanese or European carmaker giants might excite the market, but secrecy tantalizes for only so long; when we finally find out the identity the only thing that will make jaws drop is if it turns out to be a giant, very well known brand that isn't supposed to be interested in battery feedstocks, something on the scale of an Apple or Google.

With regard to the Van deposit within the Decar property which grades similar to Baptiste and in some parts has better grades, FPX Nickel has decided not to conduct a followup drill program this year. Turenne estimates it would cost $4-$5 million to achieve the density required for a maiden inferred resource estimate. Spending less than needed to deliver a resource estimate would have no market impact other than have shareholders worry that another financing will be needed sooner than later. If FPX delivered a resource for Van similar to Baptiste the market would then ask, what is the NPV of a 40 year mine life that begins 45 years from now? Not much. What about if a parallel operation was started 15 years from now? Still don't care because the market isn't assigning a fair value to Baptiste that reflects confidence Baptiste will ever be put into production on the terms outlined in the PEA. So what difference would two birds in the bush make? Van's existence backed by a resource estimate would only matter if it could serve as a bargaining chip when majors get serious about acquiring and developing Decar. Then the threat of spinning out Van as a separate property could ratchet up the bid or the competition. So I think it is wise not to spend more money on Van for now. Does this mean there is an internal assumption no producer will come knocking until 2025? Not necessarily, because any potential bidder for FPX Nickel would understand the nature of the Baptiste and Van mineralization, would secure access to core logs through a non-disclosure agreement, and would know how to approximate a 43-101 resource estimate.

FPX Nickel Corp (FPX-V)

Good Spec Value
Decar Canada - British Columbia 6-Prefeasibility Ni

Awaruite, sulphide and laterite ore paths to nickel sulphate

Nickel Sulphate Flowsheet before and after PFS Optimization Study

Technical Specifications for Battery Grade Nickel Sulphate

Long Term Chart for Nickel Prices and Warehouse Stocks

2022 Supply Breakdown for Nickel

NPV Nickel Price Sensitivity for 2020 Decar PEA with 20% Cost Escalation

Timelines for the Advancement of Baptiste and Van deposits to Production

Van's location on other side of the mountain makes future spinout plausible
Jim (0:24:44): How do you think Lithium Mania 2.0 will play out over the next quarter?

The bungee plunge in lithium carbonate prices reached a limit of $11-$12/lb a couple weeks ago and has since rebounded into the $19-$20/lb range as battery makers restock lithium feedstock. We avoided a kersplatt for the lithium producers and explorers where the price dropped past $10 into the $3-$5/lb range reached in 2018-2020 when new supply mobilized from Australian pegmatites overwhelmed demand from the EV sector until 2021 when the reverse happened. I don't expect lithium carbonate to get back to the $30+ level but I would not be surprised to see it oscillate between $10-$20 during the rest of the year. This is the ideal scenario because within this range a 1% Li2O grade represents a rock value of $273 to $1,090 per tonne. Lithium Mania 2.0 is about finding near surface pegmatites in Canada that are open pittable. As long as a junior is finding pegmatites with a 1% or better grade and the lithium carbonate price stays above $10/lb that will be the equivalent of having an open-pittable gold discovery grading 8.5 g/t or better, or an open-pittable copper discovery grading 6.2% or better. I've created a graphic to depict the gold and copper grade equivalencies for the rock values indicated by a Li2O 1%-2% grade range and $10-$20/lb lithium carbonate price range. When you consider that these pegmatites can achieve 100 million plus tonnes, you realize there never was anything like that lucrative available for at or near surface copper or gold deposits. The only reason this opportunity exists is because of the extraordinarily short timeline for when the energy transition needs a 600% expansion of lithium supply. The key for the juniors is to demonstrate that there is lateral extent for an outcropping pegmatite grading 1% Li2O or better.

An unprecedented discovery frontier is unfolding for resource juniors focused on pegmatite exploration, in particular in Canada where pegmatites were documented during the past 70 years as a by-product of gold and base metals exploration. Now that investors long lithium juniors have shaken off the bungee plunger's sickening mid-flight question about the reliability of the weight and cord stretch calculations, the marked is poised to resume an uptrend, as soon as the debt ceiling Damocles sword as been taken away or done what it has to do. Patriot Battery Metals has rebounded from the $12-$14 range it settled into after a $17.70 peak in early February which it appears ready to challenge. The latest round of drill results continued to be in the 1.5%-2.0% range. The recently announced Allkem/Livent merger creates a new Quebec lithium champion which could prod Albemarle, Wesfarmers or SQM to make a move on PMET before it becomes too expensive. BHP and Rio Tinto have apparently sniffed that the early winners are too expensive, which leaves the field open to producers Pilbara Minerals or Mineral Resources to make premium-priced paper bids for PMET that establish a world class beachhead in Quebec's James Bay region. By July PMET hopes to have published a maiden inferred resource estimate for the CV5 pegmatite which the market expects to come in at 50-100 million tonnes of 1%-2% Li2O with some brokerage firm analysts offering estimates within the upper end of that range.

With regard to the Canadian resource juniors participating in Lithium Mania 2.0 few of them have drill programs underway, especially not in the James Bay region. Brunswick has reported partial drill results for its Anatacau West property in the southern half of the James Bay region where it has confirmed that Allkem's Cyr pegmatite system does extend onto Brunswick's property with grades of 1% or better. Brunswick started a small drill program on the Hearst pegmatite showing in Ontario in late April which should be due for a "visuals" update. But for Brunswick and nearly all Lithium Mania 2.0 juniors, including, Beyond Lithium Inc, the next big exploration stage involves putting boots on the ground to walk their properties, inspect the locations of documented pegmatites, use a LIPS or XRF gun to shoot outcropping pegmatite for lithium fertility (the XRF gun can only detect heavy element lithium pathfinders such as rubidium, which the LIPS gun is specialized to detect the presence of light elements such as lithium), try to identify spodumene in the field, and at a minimum collect samples for lab confirmation. A key part of this prospecting wave, which will unfold across Canada and I predict will be the biggest such prospecting wave in the history of Canadian exploration, will be to assess the lateral extent of pegmatite outcrops which may have only limited exposure.

Regions such as the southern half of James Bay where big outcropping pegmatites such as Cyr, Wabouchi, Rose and Moblan were found many decades ago will be the focus of "second order" exploration where indicators such as geology, lake bottom sediments and glacial dispersion history will be applied to focus prospectors into areas where pegmatite outcrops may be too subtle or small to have attracted attention in prior decades when lithium was still a smallish market. Some of these areas are more accessible than others which is why Brunswick will shortly be back on the Anatacau West and the much larger main Anatacau block 22 km to the east for boots on the ground inspection. The rumor mills in social media networks will be buzzing this summer with "reports from the field", especially for properties in minimally explored areas like the northern half of James Bay where PMET's Corvette pegmatites sit and where "first order" outcrop discoveries with considerable exposed size are entirely possible. While we may get LIPS or XRF readings indicating high Li2O grades these numbers will not be representative. Trench samples will take 2-3 months for assays to arrive.

With most companies heading into the field this June the earliest wave of surface values will be August, setting the stage for drill programs in September. Most companies will not be able to mobilize a drill program until Q1 of 2024, but the market will be watching the fall drilling juniors very closely for confirmation of another CV5 scale discovery. For by then Patriot Battery Metals may already have disappeared through a buyout by a bigger company. And because the PMET shareholders understand that Corvette is only an incremental solution to the projected 2030 supply requirements, much of the proceeds of a PMET buyout will be recycled into other Lithium Mania 2.0 juniors. But most importantly, the large retail and institutional audience on the sidelines will have seen the rapid wealth creation cycle of PMET, and will finally understand that lithium is evolving into a $100-$200 billion market that puts it in a league with yellow and red gold, but with open pittable rock values that are no longer possible to find at surface for gold and copper anywhere in Canada. By Q4 of 2023 there will be an unprecedented inflow of speculative risk capital into lithium focused resource juniors, and pudgy Jabbas like Rio Tinto and BHP will enter the fray in a big way, in fact in a much bigger way than they did in the 1990s when diamonds were discovered in Canada.

Patriot Battery Metals Corp (PMET-V)

Unrated Spec Value
Corvette Canada - Quebec 3-Discovery Delineation Li
Brunswick Exploration Inc (BRW-V)

Fair Spec Value
Anatacau Canada - Quebec 2-Target Drilling Li
Beyond Lithium Inc (BY-CSE)

Bottom-Fish Spec Value
Gathering Lake South Canada - Ontario 2-Target Drilling Li

Lithium Carbonate Price Chart with AuEq and CuEq Grades for 1%-2% Li2O at $10-$20/lb lithium carbonate

James Bay Map showing 1st and 2nd Order Pegmatite Targeting Regions

Ontario Map showing distribution of Beyond Lithium's 66 properties with 500+ pegmatite showings
Disclosure: JK owns FPX Nickel and Brunswick; FPX Nickel and West Vault are Good Spec Value rated KRO Favorites, Brunswick is a Fair Spec Value rated Favorite; Beyond is Bottom-Fish Spec Value rated;

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