Nickel28 will benefit from the EV stampede
Nickel and Cobalt markets will be tight and royalties to Nickel28 will grow
Demand for nickel and cobalt is set to surge as automakers shift production to electrically powered vehicles (EV’s) from those using internal combustion engines (ICE). Growth in demand for these key metals will parallel that of copper I covered in an earlier article on Copper Mountain (CMMC). Shortages of nickel in particular will be a headache for EV assemblers according to industry watchers.
Nickel28 (NKL.TO) (formerly Conic Metals) holds a portfolio of streaming royalty interests in one operating mine and several development stage mines all of which are or are expected to be major producers of these key metals. The anchor stream is an 8.56 percent carried interest in the Ramu nickel-cobalt mine in Papua New Guinea That mine generates about $40 million of cash flow attributable to Nickel28 about 35% of which is paid to Nickel28 in cash with the remainder applied to construction debt arising from the company’s carried interest in the Ramu mine. Under the “carried interest) arrangement, the developer of the mine paid 100% of the mine construction costs but recognized Nickel28’s share as a non-recourse loan to Nickel28 to be repaid from the mine’s cash flows. At the current rate and nickel prices, the non-recourse loan will be paid out within 2 to 3 years after which Nickel28 will receive its share of Ramu mine cash flows in cash.
Nickel28’s leverage to Ramu cash flows and nickel and cobalt prices is well described in the company’s corporate presentation. $40 million annual cash flow for a company wilth a market capitalization of about $90 million makes the current share price low based solely on the Ramu holding.
But Nickel28 has a portfolio of other streaming assets which are expected to reach the production stage over the next few years. The most interesting one is the fully-permitted Dumont mine in Quebec where Nickel28 has a 1.75% Net Smelter Royalty (NSR). A net smelter revenue is a payment based on the revenue from the mine regardless of whether the mine is profitable or otherwise. Dumont has proven and probable nickel reserves of about 6 billion pounds (2.8 million tonnes) of nickel, which today sells for about $8 U.S. a pound. Expressed in Canadian dollars, Nickel28’s share of the Dumont mine’s revenue over its life will total somewhere around $1 million if nickel prices persist at today’s level, and substantially more if the expected demand and tight supply results in higher prices.
I won’t belabor the other royalty interests in Nickel28’s portfolio, but there is no doubt in my mind that they have value. The question for investors is how to value royalty streams on undeveloped mining deposits. The answer to that question is to consider the deposit a “real option” on future commodity prices and use Black-Scholes theory to come up with a value for the mine. I have done just that and come up with a value of $2.6 billion U.S. for the mine itself, not particularly relevant to the value of Nickel28’s NSR but important as an indicator of the odds the mine will be built. Here is that analysis.
Based on the $8.00 U.S. nickel price, once in production Nickel28 should receive about $15 million Canadian in royalty payments each year for the expected 30 year life of the mine. That NSR has a value somewhere in the range of $100 to $150 million, greater than the current market value of the company shares.
A similar analysis of the other streaming interests (necessarily more speculative since the deposits are not yet permitted) shows significant potential value. I don’t think it is useful to speculate on the value they may add, suffice to say it is positive.
On balance I find NKL.TO shares to be undervalued at their current market price of ~$1.00 per share and expect to see the shares trade north of $3.00 per share over the next five to ten years. I own 100,000 shares.