Impact of pig iron on nickel outlook bit of a porky

Centaurus sell-off on so-called nickel breakthrough highlights renewed value in a sector set to clean-up on green energy. Plus, DFS on FYI’s HPA points to bumper NPV.
1st April 2021
Barry FitzGerald

The nickel stocks would like to forget their “Ides of March” moment when the stainless steel and lithium-ion battery material tumbled 12% lower in a hurry.

The early March fall was a response to China’s Tsingshan announcing it was entering the battery materials space with a nickel matte product (75% nickel) from its Indonesia laterite operations.

Up until now the nickel pig iron (NPI) product (15% nickel) it produced went solely to the stainless steel market as it is not suitable for batteries. But convert it into nickel matte, hey presto, Tsingshan is in the battery materials space.

It is not as easy as it might sound, and because NPI is an energy-intensive process (as will be the conversion) using dirty Indonesian coal-fired power, the only customer base will be in China.

It is unlikely that European and US auto-makers will want to see any of the stuff in their batteries. Afterall, EVs are meant to be clean and green.

Just as important is that the way things are shaping up, the world will need every nickel unit it get its hands on as the 2020s unfold.

According to commodity consultant Roskill, nickel demand from the stainless steel sector was about 1.55 million tonnes in 2020 while batteries absorbed 143,000 tonnes.

“However, it is the battery sector that is forecast to become the most significant driver of nickel demand growth moving forward,” Roskill says. “Batteries are expected to increase by 13.5% (CAGR) to 2040, where demand from the sector could reach over 1.8 million tonnes.’’

Converted NPI can help fill the surge in demand but the preference and premium pricing will remain with the sulphide nickel producers, the lowest cost (opex and capex), and greenest source of battery material.

Since the early March NPI shock, the nickel price has stabilised at around the $US7.40/lb level, suggesting that the thematic of rising demand/prices for (green) material as the 2020s unfolds remains intact, albeit a little dented.

But while the nickel price has stabilised, share price recovery in the nickel stocks has remained patchy at best. As a group, they overshoot to the downside in response to the Tsingshan conversion yarn.

The good news in that is that there has been a return of value in the sector on the basis that NPI conversion is not the nickel price destroyer some have portrayed it as being.

Centaurus (CTM) is an example. Its 17% share price fall from early March to 72c on Thursday is despite the story around its Jaguar nickel sulphide project in northern Brazil getting a whole lot better, courtesy of a scoping study released on Monday.

The base case pointed to an open pit and underground mining operation over an initial 10-year mine life, delivering nickel sulphide feed to a 2.7Mtpa conventional nickel flotation plant to produce 20,000tpa of nickel in concentrates at a low life-of-mine C1 operating cost of $US2.41/lb.

Capex was put at all of $US178m for what is a serious annual production level, highlighting  the overall attractiveness of sulphide operations comparted with the laterite competition in the nickel space.

Using a nickel price of $US7.50/lb, which is about where it is now, the post-tax NPV was put at $A604m for an IRR of 54%. Average annual EBITDA was $A164m which is kind of interesting for a company with a market cap of $A268m.

Little wonder then that the company will now advance Jaguar to a PFS by the end of the year, then DFS by the end of 2022, for a first production target in the second half of 2024.

As a measure of the upside that could emerge long before 2024, should nickel get to say $USS9/lb, the project’s post tax NPV climbs to $A1.01 billion, with an IRR of 80%.

Both Euroz Hartleys and Sprott had deep dives into the scoping study. Suffice to say that Euroz Hartley left its share price target at $1.15 while Sprott – which has a particular insight in to how the North Americans value nickel projects - increased its target to $1.20 a share.

 

FYI Resources:

FYI Resources (FYI) has come along nicely since it was mentioned here back in September last year as a 16c stock with a market cap of $40m.

It is now trading at 56c for a market cap of $176m, which goes to show that the ever-broadening advanced materials sector can match it for upside with sexier parts of the minerals space like (successful) exploration.

FYI is on a pathway to becoming a producer of high purity alumina (HPA), which continues to enjoy super-charged growth in demand for its use in LED lighting and as a heat separator in lithium-ion batteries to prevent nasty fires.

Last year’s interest in the stock at the lower levels was based on the emergence of Alcoa, no less, as a potential partner in FYI’s HPA project, which involves the integrated development of the Cadoux kaolin mine, 220km north-east of Perth, supplying a HPA refinery at Kwinana.

Alcoa’s interest was by way of a memorandum of understanding which also envisaged the establishment of the all-important customer offtake base for the project.

There are still some conditions precedent to be ticked off before the Alcoa arrangement is formalised. It has taken longer than first envisaged but very much remains a live event.

It is against that background that FYI has just released an updated DFS study in to the HPA project. It contained all the clues needed to suss why a company of Alcoa’s scale could view the HPA project as something it might need to get involved with.

The updated DFS builds on the technical and commercial de-risking events, and updated inputs, since the original DFS in March last year to arrive at an 87% increase in the base NPV of the project to $US1.01 billion ($A1.44 billion).

Capex is higher at $US202m from $US189m because of currency movements but there are more important upside gains from an increase in production from 8,000tpa to 10,000tpa, and an increase in independently assessed basket prices for HPA from $US24,000t to $US26,400t.

FYI reckons it can produce HPA for $US6,661t. No wonder capex payback was put at 3.2 years for a project that goes for an initial 25 years.

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