Chapter Nine: Hidden Gem - Nickel28 is deeply undervalued
The market has little understanding of the value of this streaming company
Nickel28 (NKL.TO) is a small capitalization Canadian streaming company that holds a portfolio of streaming assets on nickel and cobalt mines most of which are still in a development stage. It is specious to put much value on a streaming contract for a deposit a long way from production since most deposits never make it into production and those that do often start production ten to twenty years after the deposit was discovered, a testimony to the stupidity of the Liberal government’s Impact Assessment Act which makes major projects almost impossible to permit. That all changes when a major deposit does become permitted and changes even more when production is underway or imminent.
Nickel28’s streaming portfolio includes an 8.86% carried interest in the Ramu mine in Papua New Guinea from which Nickel28 receives its share of the cash flows of the mine annually. Since the interest was “carried” the mine owner paid Nickel28’s share of the capital costs and start-up operating costs as a non-recourse loan to Nickel28. That loan is being paid down by Nickel28’s share of Ramu operating profits. The portion of the loan attributable to operating costs has been repaid already, and Nickel28 receives a cash distribution for its share of the operating profits with its share of the cash flows allocated to capital costs continuing to be applied to its non-recourse debt for the capital portion of the loan.
Ramu is a profitable mine. Nickel28’s share of the mine’s cash flows is on the order of US$30 million annually and its remaining share of the capital and start up costs of the mine comprising amounted to US$73 million as at January 31, 2022. During the prior year, Nickel28’s share of Ramu cash flows repaid US$34 million of the non-recourse loan. When the remaining US$73 million is repaid, Nickel28’s share of the mine increases to 11.3% without any payment by Nickel28. That event should happen within 2-3 years, after which Nickel28’s cash flows from its Ramu interest will be paid out to it annually and comprise US$30 to US$40 million per year for the remaining fourteen years of the Ramu mine life.
Based solely on the Ramu interest which should contribute over US$400 million to Nickel28 in cash over the next fourteen years, the current market capitalization of Nickel28 of about CAD$70 million is deeply undervalued.
But Nickel28’s streaming portfolio is much larger than just Ramu, listed below.
Of the list, the Dumont deposit in Quebec is one of the world’s largest nickel deposits and is now fully-permitted. With the demand for electric vehicles (EV’s) growing rapidly there is a likely shortage of nickel and nickel demand should provide the impetus for Dumont to go into production. The question is what is the value of Dumont to Nickel28?
I value undeveloped mineral deposits using a modified Black Scholes approach, and based on the NI 43-101 disclosures of the Dumont deposit, I find the deposit has a curent value (as an option on future commodity prices) of US$4.5 billion and Nickel28’s 1.75% Net Smelter Royalty (NSR) has a present value at a 9% discount rate of about US$150 million, or about US$1.75 per NKL28 shares.
Each of the portfolio of Nickel28’s royalty interests has a current value but I ignore those for this article. What I see is that the value of a Nickel28 share in Candian currency is somewhere around CAD$3.00 to CAD$4.00 a share. If the nickel prices rise in the face of EV driven shortages of that key metal, that value could be higher. Seeing the market price of the shares in the CAD$1.00 range, I concluded the shares undervalued and hold about 200,000 shares.
With the non-recourse Ramu mine debt likely to be repaid in the near term, Nickel28 management is contemplating a dividend and on January 30, 2023 felt it necessary to comment on dividend policy. A $0.10 annual dividend would comprise about CAD$9 million of annual expense, a fraction of the Ramu cash flow Nickel28 should receive once the debt is gone, but providing a yield in the 10% range if, as and when that occurs.
Investment in mines is fraught with risk. Investment in companies with low overheads whose revenues come not only from mine cash flows but “off the top” from NSR’s is a lot lower risk, something made clear by larger streaming companies like Franco Nevada and Wheaton. For me, NKL shares are a relatively low risk way to participate in long term demand for nickel and cobalt. It is not hard to foresee the day when NKL shares trade in the $10 to $15 range. I am happy to wait for that day.
If it is cheap, there is probably a reason .... May be looking at the history of Cobalt 27 And Conic Metals can give a clue about management behavior regarding shareholders
Great write up