As prices rise amid the Philippines mine closures, Royal Nickel Corporation’s price target for financing has been hit
David Bar | February 23, 2017 | SmallCapPower: There has been a lot of activity in the first six weeks of 2017 for the nickel market. At the beginning of January, prices dropped over 11% between the 10th and 26th, from US$4.78/lb to the low of US$4.24/lb on the 26th. However, since then prices have rebounded more than 17% as of February 16th, and currently sit at just over $5.00/lb (Figure 1, below).
Figure 1: Nickel Price from January 3rd, to February 16th
The driving force behind these events were the announcements that Indonesia was easing the ban it enacted back in 2014 on ore exports and that the Philippines was closing 23 of their 41 active mines, most of which were nickel mines, due to environmental concerns. The Philippines is the world’s largest nickel miner, producing an estimated 20% (530,000 metric tonnes) of global nickel production in 2015 according to the U.S. Geological Survey.
Although this is bad news for the Chinese Nickel Pig Iron (NPI) industry, which benefits hugely from the volume that the Philippines produces, the benefit could be felt by a Canadian company currently sidelined by the low prices, Royal Nickel Corporation (TSX: RNX).
From the Top Down
Whenever you’re looking into a mining company there are three main considerations to analyze; the management, the asset(s), and the location of the asset(s). Analyzing the management of any company is a good first step because without strong leadership, success will be hard to come by. However, due to the capital intensive nature and operational difficulty that surrounds the discovery, development and operation of a mineral property, this rule is even more imperative for a mining company.
Management
From the top down, RNC has strong leadership as President and CEO Mark Selby has held numerous senior management positions at other mining companies. He was formerly the Senior VP of Business Development at Quadra Mining, as well as the VP of Strategic Planning and Corporate Development at Inco Limited. With a history of M&A experience, he helped transform Royal Nickel Corporation into a producer, through acquisitions, while RNC awaits market conditions to bring online its Dumont project in Quebec, Canada. Additionally, sitting as Chairman, you have Scott Hand, who was the Chairman and CEO of Inco Limited from 2002 to 2007, when it was purchased for $19.4 billion by Brazilian mining giant Vale.
You also have a long list of executives that have previous experience in all aspects of mining from construction to ramp up and continued operations. For example, Project Director Christian Brousseau coordinated the engineering and construction of Goldcorp’s Éléonore Project in northern Quebec, a 7,000 tpd nameplate project. Director of Mining Operations, Kevin Small, oversaw the ramp up of the Taylor Mine in Timmins, Ontario in 2016, overseeing the production of 32,052oz of the expected 40,000-50,000oz guidance from Jan- Sept, 2016 before he joined RNC.
Asset and Geographical Location
With two producing mines, the 100% owned Beta Hunt in Australia, the 30% interest in Hudbay Minerals Reed Mine in Manitoba, Canada, and the Dumont Nickel Project in Quebec, RNC’s has a strong asset base.
Although there has been a lot of activity in the Company regarding its operations in Australia, from production ramp up and purchase options, I’m going to focus on what will be its flagship asset, the Dumont Project in Quebec.
Figure 2: Location of Dumont Project
Source: RNC Technical Report
With a 20-year mine life, and 33-year production life, the Dumont Mine would be the 5th largest nickel sulphide operation in the world by annual production at 105,000 tpd. Boasting 6.9 billion pounds of Proven and Probable nickel, the open-pit mine project has an NPV of $1.1 billion at an 8% discount rate. This is a world-class asset that, once started, will be able to generate large cash flows shortly after production starts and fund future exploration and development activities.
The location of the project is also a very important consideration as it will determine the difficulty of initiating the project and potential political risks (i.e. expropriation) that could arise. With that in mind, the Dumont property is located in the mining-friendly jurisdiction of Quebec, located right on Provincial Highway 111, and has the Canadian National Railway running through it. The only critical infrastructure that would need to be constructed would be a 10 kilometer powerline to provide electricity, for which RNC has already discussed the feasibility of with Hydro-Quebec.
This project seems almost too good to not be in production yet, however the depressed nickel prices that the market has been living under are the main perpetrator. The economic analysis that was completed for this project was done so in 2013 and under the assumptions that nickel prices would be double what they are today (Figure 3: below). However, with the recent up-tick in the nickel market, you may start to see signs that the project will be brought to life. In February 2016, CEO Mark Selby did state that project financing would resume when the market bounces prices above the $5/ lb level.
Figure 3: Price Assumptions for Dumont Technical Report
Source: RNC Technical Report
In the Meantime
Thomson Reuters is forecasting a supply deficit of 31,000 tonnes of nickel in 2017 for the second straight year. Although Thomson Reuters believes that the closure of mines in the Philippines and the reentry of Indonesia into the market will offset each other, how things unfold over the next couple of months will continue to provide uncertainty to the market. That uncertainty should continue to push prices up at least in the short term, which could provide RNC the window to obtain the financing to start pushing forward with its Dumont project.
With two producing assets currently in its portfolio, the next two earnings report (fiscal 2016, and Q1 2017) will be important for the Company’s stock in the eyes of investors. As the release of its 2016 Fiscal Year results nears, investors will be looking to see if RNC has hit its goal of processing 50,000 tonnes per month of ore from its gold operations at Beta Hunt by December 2016. With the production ramp up at its Beta Hunt mine expected to generate between 65-70,000oz, according to its 2017 production guidance, this will be the first indication of the Company’s ability to meet that goal, and its ability as a producer.
Possessing the management team that it does, with a world-class resource in a world-class mining jurisdiction waiting to be tapped, any stir in the market of this project going forward could create some strong momentum for RNC.
