Description

Nico Resources (ASX : NC1) Market Cap : US$45.2m, FDEV : US$38.5m

A$0.66

Executive Summary

BHP has just agreed to acquire Oz Minerals (ASX: OZL) for A$9.6bn. This was in large part to secure a stable feed of nickel for BHP’s Nickel West and Kwinana refinery, especially from OZL’s current production but especially from its exciting West Musgrave nickel project.

With West Musgrave now fully funded, NiCo Resources (ASX: NC1) is a logical second acquisition for BHP to fully capitalize on the economies of scale, joint utilization of infrastructure spend in the region, and the complimentary ore bodies.

Nico Resources (Nico) owns the fully permitted Central Musgrave Nickel and Cobalt laterite Project, situated near the triple point between Western Australia, The Northern Territory and South Australia. The Wingellina area hosts a JORC compliant Ore Reserve of 1.56mt of recoverable Nickel metal and 123,000t of Cobalt in WA, while Claude Hills has an Inferred Resource of 270,000t of Nickel and 23,000t of Cobalt just across the border in SA. The 1469km² of tenements host vast additional deposits that have not been drilled to JORC compliant standards, which should comfortably add a further 0.5mt of payable Nickel plus Cobalt. The Ore Reserve also contains economic Scandium credits of over 120g/t in places, but these have not been quantified to JORC standards.

Source: Australian Critical Minerals Prospectus P.8. (https://www.globalaustralia.gov.au/sites/default/files/2022-12/Australian_Critical_Minerals_Prospecuts_2022_Dec22.pdf)

Based only on the Wingellina Ore Reserve, we postulate an ungeared, post tax NPV8 of US$2.39bn. The Fully Diluted Enterprise Value of US$38.5m equates to 1.6% of this NPV. The shares are therefore profoundly undervalued for this stage of development and permitting, especially when seen against the background of the rapid transition to battery electric vehicles.

For illustrative purposes we ran a conservative Scandium scenario, based on only 37g/t Sc and applying a discount of 50% to the current spot price of Scandium of $1006/kg. This yielded an NPV8 of US$2.97bn. The Fully Diluted Enterprise Value of US$38.5m equates to 1.3% of the NPV for this scenario.

Both scenarios exclude any value from Claude Hills, Mt Davies and Beadell. On the available information, Claude Hills appears to be superior to Wingellina in having a lower Aluminum oxide content. This would make it possible to upgrade the Claude Hills ore through a basic washing process to discard the low-grade, coarse fraction. The upgraded ore would provide valuable blending material to Wingellina ore and improve the slurry density in the autoclaves. Current drilling at Claude Hills will also determine the extent of the high-grade Cobalt pods.

Considering the findings by Worley Consultants in the PEA released December 22nd we believe that Wingellina will be awarded Major Project Status, which will unlock Central Government grants and concessionary Australia Export Finance loans. It will also put Nico in play as an acquisition target.

We think it likely that BHP could consider acquiring Nico, given the considerable synergies with their West Musgrave project, 50km west of Wingellina. (See section below). Alternatively, Glencore with its successful look alike Murrin Murrin project near Kalgoorlie, would be able to apply its significant experience in optimizing Wingellina’s High Pressure Acid Leach plant. Lastly, any of the majors could be enticed by the prospect of a Tier 1 nickel project in Western Australia that could produce first metal within 3 years of acquisition.

Background

Nico Resources was only listed in January ‘22, but is the beneficiary of decades of prior exploration, metallurgical test work and permitting. This shallow, opencast project is highly attractive, with the orebody hosted in a soft limonite layer that seldom requires blasting.

The mine will feed a central plant from a series of 15 pits, based on areas where the ore is high grade, free dig, occurs over wide and deep dimensions, contains few acid consuming elements (MgO, CaO & AlO) and excludes high plasticity clays such as smectites.

The ores at Wingellina are the result of high grade dunite pipes that were deeply weathered in the Cretaceous eon. The depth of weathering at Wingellina is unusual, creating a much thicker limonite layer than usually occurs in countries like Indonesia. The weathering process dissolved the acid consuming Magnesium Oxide, silica, Aluminum and other light elements, leaving behind a skeletal lattice of hydrated iron ore, called limonite. This orange iron ore clay is disproportionately enriched in nickel, cobalt, scandium and sometimes also PGM’s.

As one descends in the stratigraphy, the acid consuming elements increase with depth, until one encounters the saprolite and eventually the semi weathered saprock and then the fresh sulfide ore. While the saprolite carries more grade than the limonite, the ore is less amenable to acid leaching and is usually smelted at high temperatures to produce a low-grade pig iron containing as little as 2% nickel. This breakthrough in nickel pig iron by the Tshinshang group 25 years ago, transformed the stainless-steel market by undercutting the traditional nickel sulfide mines, that produce refined nickel metal.

Wingellina’s ore will be crushed and screened, mixed with water to create a slurry, flocculants will be added to increase the density of the slurry to 45% - 50% solids, it will then be pre-heated to 255ºC and fed into an autoclave with sulfuric acid, where it will spend 60 minutes at 50 atmospheres. This is the first of a series of steps that will gradually liberate the Nickel and Cobalt, by removing the iron, manganese and other non-product elements. The Nickel and Cobalt will be upgraded to a Mixed Hydroxide Precipitate (MHP), containing ~10% Nickel and ~1% Cobalt in the form of hydroxides. The MHP can then be converted to separate Nickel Sulphate (22.2%Ni) and Cobalt Sulphate (20.5% Co), which are the final products required in the manufacturing of the cathodes in Lithium-ion batteries.

The mine has permitted access to high quality water from the Officer Basin, pure enough for the growing of vegetables (1,000 – 2,000 ppm TDS). The water will be purified in a Reverse Osmosis plant at modest cost, using solar power. The mine also owns its own nearby Lewis calcrete deposit, which is a high-quality surficial limestone, which will be used to neutralize the pH of the slurry residues.

Wingellina’s Nickel will be produced via a hydro metallurgical process, making extensive use of renewable energy. This will have a lower carbon footprint compared to traditional sulphide mines that use pyrometallurgy.

What has changed?

The first nickel laterites near Wingellina were discovered by Inco in 1956. The extraction of nickel from laterites was pioneered at Moa mine in Cuba, just months before the Castro revolution of 1959. So what has changed?

Metallurgical improvements.

The industry has made vast progress in demystifying the metallurgy, to the point where once proprietary insights are well known and patents have largely lapsed. The current technology is referred to as 5th generation High Pressure Acid Leach (HPAL). During this time the industry learned costly lessons at mines like Bulong, where management failed to pay attention to the highly variable contact depths between the laterite layers or Ravensthorpe, where low grade and orebodies truncated by wildlife sanctuaries are a management nightmare.

The green revolution.

The advent of Lithium-ion batteries is a major new source of demand for Nickel, with automotive battery demand likely to equal the entire current demand for Nickel at the equivalent of 52.6m annual BEV sales based on NMC 811 chemistry at 60kWh. (BHP estimate of 38kg Ni). This could occur as soon as 2035.

The other change is that this demand is almost entirely in the form of Nickel Sulphate. For laterite mines this eliminates the last part of the metallurgical process, reducing capex, operating costs and working capital. In contrast, the traditional sulfide mines are being squeezed out of the stainless steel market by nickel pig iron from the saprolite mines. For them the metallurgical process to produce saleable nickel has lengthened, as they need to dissolve their nickel metal in sulfuric acid to produce nickel sulphate at an all-in cost recently estimated by S&P Platts of $4,300/t of contained nickel metal.

Source: BHP – What is Nickel

The lower cost of Solar, Wind, Batteries and Reverse Osmosis.

The centre of Australia has one of the world’s highest solar irradiance rates, with Wingellina receiving ~2100Wh/m2. This translates to a current cost of solar electricity of less than US$40/MWh, compared to the global average of US$47/MWh (BNEF). This represents a massive cost saving compared to diesel that has to be transported over 1300km by rail and 541 km by road from Darwin. It also raises the possibility of battery powered trucks, recharged from solar. This and daylight production scheduling feature prominently in OZ Minerals’ business plan for the new Nebo-Babel mines, 50km west of Wingellina. (See below).

The need for responsibly produced non-Chinese minerals.

The Minerals Security Partnership was announced three weeks ago by Treasury Secretary Yellen. This policy of “friend-shoring” of strategic raw materials is aimed at ensuring reliable and ESG compliant supplies of final commodity inputs for the green energy transition and the strategic manufacturing sector. See www.state.gov/minerals- security-partnership/

The policy will create a supply chain among nations that share a common set of democratic values. The initial partner countries include Australia, Canada, Japan, Korea, the UK, the US and the European Commission. The Pentagon has also asked Congress to amend the Defense Production Act to broaden the list of countries where the Department of Defense can procure and finance the production of raw materials.

We expect this partnership to lead to the founding of a body reminiscent of the US Atomic Energy Commission (AEC) that amongst others oversaw the sourcing of uranium for the US atomic programme from 1946 to 1975. The AEC provided long-term off-take agreements, production backed loans at low interest rates and a floor price for yellowcake.

We also expect the launch of a rival commodities exchange to the Sino-controlled LME and SHFE.

SWOT Analysis

Strengths

Fully licensed, long-life asset

Tier 1 Ore Reserve equivalent to >30m ozs gold High grade Limonite orebody, with low impurities

Opencast, with a Low Strip ratio (0.5:1 Waste to Ore ration in first 20 years) Free dig (Only 10% blasting required in first 20 years)

Simple metallurgy with 95% extraction

Abundant High quality near-site Water (1,000 – 2,000 ppm TDS) Abundant High quality near-site Lime (Calcrete) for acid neutralization All waste materials are benign and non-acid generating

Meaningful Scandium credits, with excellent extraction on site Low Acid consumption of just 296kg/ton

No conservation areas or endangered species No ferricrete cap

No sharp variations in lithologies

CEO and execs have significant skin in the game

Weaknesses

Distance from Darwin (1300km by rail plus 541 km road)

High capex intensity, possibly $2.75bn for Phase 1 and $1.05bn for Phase 2 The Aluminium Oxide content in Wingellina’s ore

Opportunities

Premium pricing for Nickel Sulphate and Cobalt Sulphate over spot prices Premium pricing for responsibly sourced metals with a low carbon footprint Prioritise the 15 high grade domains to shorten the pay-back period

Vehicle OEM’s follow Stellantis by investing in mining companies (Vulcan Lithium) Share costs of Mereenie gas pipeline with BHP (West Musgrave nickel)

No Resources declared at Mt Davies, the original high grade discovery site Australia Export Finance loans

Ore Resources can be cheaply converted to Proved Ore Reserves Ore Resources remain open, both laterally and at depth

Scandium borehole intercepts of over 120ppm (2.0g/t of Au equivalent) Highly prospective for Nickel/PGM sulphide orebodies (similar to West Musgrave)

 Posco’s PosNEP test work from 2014 to monetize Wingellina’s iron ore

Threats

Rising Sulphur prices

Shortages of skilled labour in Australia

PT Hydrotech Metal Indonesia’s new “Step Temperature Acid Leach” that can allegedly extract Nickel Sulphate cheaply from saprolite ores

Synergies with BHP’s West Musgrave

With the West Musgrave nickel/copper project being only some 50km west of Wingellina, and Oz Minerals having announced the Final Investment Decision on the Nebo and Babel mines in September, for two open-pit mines, that will feed into a single plant, producing a total of 820,000t of Nickel and 890,000t of Copper over 26 years at an upfront capital cost of A$1.1bn. The greater project area has also yielded promising exploration results and Oz planned to bring further mines into production on a hub and spoke basis.

Map showing the proximity of BHP’s Nebo-Babel mines to Wingellina

The mines will be largely reliant on wind, solar and batteries for their power requirements, with either gas or diesel as back-up. The gas option would require the building of a pipeline from the Mereenie gas field, situated 400km northeast of Wingellina. This pipeline would pass just north of Wingellina on its way to Musgrave, making it more affordable for both groups.

Recent presentations by Oz have discussed the possibility of adding further value to Musgrave’s planned metal concentrates, by producing a Mixed Hydroxide Product or MHP. This would dovetail perfectly with Wingellina’s metallurgical flow sheet, raising the possibility of a large, centralized MHP plant. The MHP would then feed a Sulphate plant, enabling the production of the final Nickel Sulphate and Cobalt Sulphate used in Li-ion batteries. The joint MHP and Sulphate plants would lower unit costs, benefit from cheaper gas and qualify for concessionary funding as a strategic development node.

The Musgrave orebodies are sulfide in nature, compared to the oxides at Wingellina. In other words, Musgrave produces sulfur while Wingellina consumes sulfur in the leaching of its oxide ores. The transport costs between these mines and the coast creates a further incentive to evaluate the benefits of a joint production plan, rather than to evaluate their metallurgical flow sheets in isolation from each other.

Catalysts

The updated PEA from Worley Consultants

Drilling results from the Claude Hills high grade Cobalt pods

Fully Diluted Enterprise Value of US$38.5m equates to 1.6% of this NPV

Bottomline

Wood Mackenzie estimates that battery demand will constitute 55% of overall Nickel demand by 2035. Even at the current modest demand of 12%, the melt-up in LME Nickel in March demonstrated the extent to which seasoned market participants underestimated the impact of this trend.

As we speak, the price of Nickel Sulphate is rapidly developing from a derived quantity of LME Cash Nickel to the price that determines where Cash Nickel is headed.

We view Wingellina with its shovel ready ~2m tons of Nickel Sulphate as an extremely undervalued exposure to this exciting market, trading at ~2% of NPV and only 0.1% of notional turnover.

Catalyst

• The DFS from Worley Consultants
• Drilling results from the Claude Hills high grade Cobalt pods
• Discussions with potential off-take partners