House cleaning at Nickel28 makes it more valuable

Long term investors should benefit materially

Nickel28 (NKL.TO) is a junior streaming company with a nickel-cobalt joint venture in Papua New Guinea in which Nickel28 has an 8.56% carried interest, the company’s share of capital expenses borrwed from the operator as a non-recourse loan and in the process of repayment from the mine’s cash flows. Nickel28’s share of the mine (known as the “Ramu mine”) cash flow comprises about US$24 million a year of which US$8 million is paid to Nickel28 directly and the remaining US$16 million applied to reduce the outstanding balance of the non-recourse debt.

As at October 31, 2023 Nickel28’s non-recourse debt to Ramu was approximately US49 million with a payment to Nickel28 from 2023 operations due in the near future which should reduce the balance to approximately US$33 million. Depending on the price of nickel and cobalt and the mine’s cost performance, it is possible (even likely) the debt will be retired within two or three years. At that point, Nickel28’s share of Ramu cash flows after maintenance capital is paid directly to Nickel28. In Canadian funds, that should approximate over $30 million a year.

Other than the non-recourse debt, Nickel28 is debt free with a cash balance of about CDN$10 million last October, certainly higher after receipt of the anticipated US$8 million payment for Ramu 2023 operations. A debt free streaming company should be valued at somewhere around seven to ten times cash flow, putting a potential value on the Ramu holding alone in the order of CDN$200 million or over CDN$2.00 a share.

But Nickel28 assets include a lot more than the Ramu JV. The company has a portfolio of streaming contracts on mines proceeding towards production, albeit at a snail’s pace under Canada’s onerous permitting rules driven by Trudeau’s toxic Impact Assessment Act. I expect Trudeau to be ousted next year and a new Conservative government under Pierre Poilievre promises to cut the red tape, get rid of the “gatekeepers” and speed approvals of key projects.

Nickel28 shares have been under pressure for a year or two following a conflict between shareholders that saw a reorganization of the board last year with Ian Ross, Chris Wallace, Ned Collery and Brett Richards join the board as shareholders demonstrated their distaste for excess compensation awards that benefited the top management at the expense of minority shareholders to the tune of millions a year. With a market capitalization of only CDN$57 million at CDN$0.60 per share the amounts were material.

Today, the board fired the President, CEO and CFO for cause and appointed Chris Wallace as interim CEO. This was long overdue. I have known Wallace for years and admire his financial skills and leadership qualities. I have no doubt the reconstituted board is taking Nickel28 on a path to realize its intrinsic value and build that value over time.

The market seems to agree with me, bidding up NKL shares almost 15% to day on the heels of the announcement of the management house-cleaning.

I value the shares (including its portfolio of streaming assets) at about CDN$3.00 a share. In my opinion, the shares are deeply undervalued. The company itself recognizes the intrinsic value of the shares is tied to the price of nickel and cobalt and sees the value at a nickel price of US$10.00 a share at CDN$2.21 a share for the Ramu JV alone. The price of nickel today is US$8.73 a pound suggesting a value for the Rama interest of ~$1.50 and I value the streaming portfolio and cash on hand at approximately $1.50 per share which gives rise to my CDN$3.00 share value.

Once the company has repaid its Ramu debt, I anticipate a dividend which, if it were at 50% of cash flow (leaving 50% for reinvestment) would amount to somewhere around 15 cents a share.

I added 50,000 shares today.