ELBM - Top 3 Near- And Medium-Term Nickel Producers To Consider

2023-04-11 10:40:22 ET

Summary

• Nickel prices have been doing well the past few years as demand for nickel from electric vehicles is rapidly rising and the global economy continues to grow, boosting stainless steel demand.
• The nickel market is forecasting oversupply of nickel pig iron ("NPI'') nickel and very tight supply/deficits of battery-grade nickel.
• We look at three nickel juniors - two have projects in Brazil and one in Australia. Two are pure mining projects and one is a refining project.
• The usual risks for junior miners and refiners apply.

This article first appeared in Trend Investing on March 9, 2023, but has been updated for this article.

The nickel price and market news has mostly been positive the past few years. This is especially true for nickel juniors that can bring on new nickel supply, ideally from a nickel sulphide project, as this is typically the fastest and most affordable way to make battery grade nickel (nickel sulphate) for EV batteries.

Nickel spot price 5 year chart - Current price = USD 10.21/lb .

The nickel market is forecasting oversupply of nickel pig iron ("NPI'') nickel and very tight supply/deficits of battery grade nickel.

Sumitomo Metal Mining forecasts (as of Nov. 2022) small nickel deficits for 2023 ( source , page 11).

Top 3 near- & mid-term nickel producers to consider

Horizonte Minerals Plc [AIM:HZM] [TSX:HZM] - Price = GBP 142.00, C$2.44.

Horizonte is developing two, 100% owned, long life, tier one, open pit, nickel "laterite" projects in Pará State, Brazil. Its Araguaia Nickel Project is on track to be Brazil's next major ferronickel mine. Their second project is the Vermelho nickel-cobalt Project.

On February 9 Horizonte Minerals announced the awarding of the "mining services contract to Fagundes for its Araguaia Nickel Project...Construction at Araguaia remains on schedule and on budget."

As of 31st January, 2023 construction was 40% complete . First production of nickel from Araguaia is scheduled for Q1, 2024.

Construction is well underway at the Araguaia Nickel Project in Brazil ( source )

The Araguaia Feasibility Study based on a US$23,000/t Ni price (the current nickel price is 23,450/tonne ) resulted in a post-tax NPV8% of US$1.5b for Phase/Stage 1 and US$2.4b for Phase/Stage 2. Stage 1 CapEx of US$443m has already been covered by US$633m secured via a mix of equity and debt funding.

Vermelho nickel-cobalt Project PFS results - Post-tax NPV8% US$3.4b ( source )

Production from Araguaia is targeted to grow in two phases and reach 29,000tpa. Once Vermelho comes online the combined total production of the two projects is targeted to reach 64,000tpa of nickel.

Horizonte Minerals summary ( source )

Horizonte Minerals trades on a market cap of GBP 382m or C$656m .

Market Screener has an average price target of GBP 213.75 representing 50% potential upside.

We view Horizonte Minerals as a strong buy, suitable for a 5 year plus time frame. Note that there is moderate Brazil country risk and cost blowout risk often associated with nickel laterite projects.

You can view the company presentation here .

Centaurus Metals Limited [ASX:CTM] ( CTTZF ) - Price = A$0.87

Centaurus Metals is an Australian company focused on the near-term development of the Jaguar Nickel Sulphide Project, located in the Carajás Mineral Province of Northern Brazil.

The November 2022 Mineral Resource Estimate is 108.0Mt @ 0.87% Ni for 938,500 tonnes of contained nickel . Centaurus state they have "the largest nickel sulphide deposit on the ASX not held by the majors."

Recent deep drilling has resulted in some great high grade results including 20.4m at 3.94% Ni from 612.7m (JAG-DD-22-445).

November 2022 Mineral Resource Estimate showing the shallow resource ( source )

The Jaguar Project 2021 Scoping Study resulted in a post-tax NPV of A$1.11 billion 52% IRR (based on a nickel price of US$7.50/lb + US$0.50/lb sulphate premium. At a US$10.00/lb nickel price (the current nickel price is US$10.87/lb ), the post tax NPV8% is A$2.2 billion with 89% IRR. Initial CapEx is estimated at US$288m. Production average production is estimated at ~20,000tpa of nickel and an initial mine life of 13 years. It assumes that 75% of the mill feed is from an open pit. The mine life (open pit & underground) could potentially increase to 20 years by the DFS stage which may also potentially help the Project economics.

Jaguar Project 2021 Scoping Study highlights ( source )

Access and infrastructure are reasonable. Grid power is within 40km of the Project.

Jaguar Project location map ( source )

Near term catalysts are a DFS in late Q4 2023 , FID thereafter, then construction in 2025/26, and production in Q1 2027; subject to permitting/licensing and funding.

Centaurus Metals is not exactly a near term producer but rather a mid-term producer. We have included them as the Jaguar Project is a rare large size nickel "sulphide" project that looks likely to make it to production and quite possibly in 2026 all going well.

Centaurus Metals trades on a market cap of A$371m . Market Screener has a price target of A$1.96 representing 118% potential upside.

We view Centaurus Metals as a good speculative buy, suitable for a 5 year plus time frame. Note that there is moderate Brazil country risk.

You can view the latest company presentation here .

Queensland Pacific Metals [ASX:QPM] ( QPMLF ) ("QPM") - Price = A$0.13

Queensland Pacific Metals ("QPM") owns 100% of the Townsville Energy Chemicals Hub [TECH] Project located 40km south of Townsville, Queensland, Australia.

QPM has licensed a proprietary process ("The DNi Process TM") that can process laterite ore using nitric acid leach under atmospheric conditions. ~99% nitric acid is recycled meaning there is no solids waste and no tailings dam required. It has been extensively tested and piloted.

QPM's DNI Process can use any laterite ore as feedstock and process it with zero solids waste ( source )

QPM plan to source nickel & cobalt laterite ore from New Caledonia, process it at their proposed TECH facility, then sell the metal products (nickel, cobalt, high purity alumina ("HPA"), and iron ore (hematite)). QPM has binding contracts for New Caledonia ore at market linked pricing from SLN and SMT with target grade of 1.6% Ni and 0.18% Co. QPM has targeted limonite ore feed which is in abundance and has limited competition with other buyers.

Laterite ore from New Caledonia to be processed by QPM's TECH facility 40kms south of Townsville, Australia

The TECH Project site (290 Has) is proposed to be in a heavy industrial park 40km south of Townsville. There is direct road access from the proposed TECH Project site Townsville Port.

The conceptual TECH Project layout showing the proposed nickel, cobalt, and HPA refineries ( source )

2022 Feasibility Study results

As shown below the base case Stage 1 pre-tax NPV8% is A$2.665b with a Stage 1 project CapEx estimate of A$1.9b.

Feasibility Study highlights for the TECH Project ( source )

Note: All figures below are in Australian dollars unless shown otherwise. Red oval highlights by the author.

QPM has offtake agreements for 100% of nickel and cobalt sales for the life of the project with General Motors (details here ), LG Energy Solutions and POSCO, all three of which are also shareholders of QPM. GM's equity investment is for up to US$69m (initial investment of US$20.1m was undertaken at a share price of $0.18 per share, which is significantly higher than the current share price of QPM at A$0.12).

QPM state : "QPM now has all primary approvals (Tier 1 approvals) required to begin construction of the TECH Project." They also state : "Receipt of all major Federal and State regulatory approvals for construction of the TECH Project."

The Project has been awarded Significant Investment Project status by the Queensland government.

The Project has received conditional commitment letters from Government backed lenders + EOIs from other financiers. This includes a non-binding letter of interest received from Export Development Canada ("EDC") for the potential provision of debt funding for the TECH Project for up to A$200m. There is also A$250m indicative financing letter of interest received from Export Finance Australia ("EFA"). There is also an Indicative letter of interest and support received from Korea Trade Insurance Corporation (K-Sure). Northern Australian Infrastructure Facility ("NAIF") is another possibility.

Near term catalysts are a DFS completion by late Q3/ early Q4, 2023 and a FID by end 2023.

QPM's market cap is A$227m and the Company had A $45.1m in cash and cash equivalents as at the end of December, 2022.

We view Queensland Pacific Metals as a spec accumulate on dips (smaller $). We like the technology and the Project location and concept; but have concern at raising the A$1.9b (USD 1.26b) upfront Project CapEx. Certainly if the development banks all offer large low interest rate loans (as happened with Lynas Rare Earths) then the Project can work. We may also see further equity contributions from the off-takers (GM, LGES, POSCO) and/or a USA government loan at some stage is also a possibility. The Project upfront CapEx may also fall ("value engineering (cost reduction) initiatives will also be undertaken across the Project"). If the funding happened soon QPM could be a 2025/26 nickel-cobalt-HPA-hematite refiner/producer.

You can view the December 2022 Quarterly Report here and the Company presentation here.

Others (also good options)

• Electra Battery Materials [TSXV:ELBM] ( ELBM ) - Electra targets to have their Ontario cobalt refinery (North America's first cobalt sulphate refinery) operational with ore feed from Glencore by the Spring of 2023 . In 2024-25 a refinery will potentially be built to produce battery grade nickel sulfate and manganese. They are also working on battery recycling to produce a mixed hydroxide nickel and cobalt product. They also own the Iron Creek Cobalt-Copper Project in Idaho, USA. More details in the recent Trend Investing article "Electra Battery Materials Looks Set To Be A 2023 Cobalt Refiner And Battery Materials Recycler In Canada."

Quoted from the above Trend Investing article on Electra Battery Materials ( source )

• Talon Metals [TSX:TLO] ( TLOFF ) - Tamarack Project JV with Rio Tinto. You can read a January 2023 Trend Investing article on Talon Metals here .

A quote from the Trend Investing article (note: Talon can earn in to 60% of Tamarack) ( source )

Risks

• Macroeconomic risks - A global recession may reduce demand for nickel if global construction slows or declines. Nickel is mostly used in stainless steel so construction and China have been key markets.
• The EV boom stalls or moves away from using nickel in cathodes. LFP is gaining share over NMC/NCA cathodes.
• Nickel prices falling . Nickel is mostly used in stainless steel so is mostly impacted by any fall in global construction.
• Mining risks - Exploration, funding, permitting , production , project delays/cost blowouts .
• Refining risks - Technical challenges, higher costs and difficulties with laterite ore. Laterite projects have a history of large cost blowouts.
• Company risks - Management, debt , environmental , liquidity, currency risks.
• Sovereign risk - Brazil is moderate risk, Australia is low risk.
• Stock market risks - Dilution, takeover, lack of liquidity (best to buy on local exchange), market sentiment.

Conclusion

Our top 3 near term nickel producers are Horizonte Minerals , Centaurus Metals , and Queensland Pacific Metals . However we also still like cobalt/nickel refinery play Electra Battery Materials and junior US nickel miner Talon Metals . Electra is a very near term refiner of cobalt with nickel targeted to follow.

New nickel projects are quite hard to find. This is because large scale nickel sulphide ore projects are rare or deep underground and nickel laterite projects can have a huge CapEx.

Of the three main nickel companies discussed in the article we prefer Horizonte Minerals (2 Brazil nickel laterite projects) and Centaurus Metals (Brazil sulphide project); but continue to like Electra and Talon for their primarily North America location and also near to mid-term production potential.

Please read the risks section as investing in junior miners is risky.

As usual all comments are welcome.

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