Poseidon Nickel is an emerging nickel producer that’s pursuing redevelopment of the historic Mt Windarra nickel project in Western Australia. The company represents one of the few new emerging sulphide producers in the world.
| Corporate Details |  |
| Status: Emerging Producer | |
| Size: Small Cap | |
| Commodity Exposure: Nickel | |
| Share Price: $0.14 | |
| 12-month Range: $0.066 – $0.15 | |
| Shares: 514m, Options: 109m | |
| Top 20: 40% | |
| Net Cash: $3m | |
| Market Value: $72m |
| Key Parameters | Rating (✓out of 5) | Quarterly Statistics |
| Management Quality | ✓✓✓✓✓ | Q1 2014 Exploration Spend: $0.595m |
| Financial Security | ✓✓✓✓✓ | Q1 2014 Admin Spend: $0.778m |
| Project Quality | ✓✓✓✓✓ | Exploration Spend 43%, Admin Spend 57% |
| Exploration / Resource Potential | ✓✓✓✓✓ | Q2 2014 Forecast Exploration Spend: $0.5m |
| Project Risk | ✓✓✓✓✓ | Q2 2014 Forecast Admin. Spend: $0.7m |
We introduced emerging nickel producer, Poseidon Nickel, to our Portfolio during December 2010. Our rationale was based very much on the ‘straw hats in winter’ philosophy, which involved accumulating a position in a high-quality up-and-coming nickel play, whilst underlying nickel prices remained low. Of course things have changed dramatically over the past six months or so (as we predicted they would), with nickel prices surging by 42% so far during 2014 (and ranking as the best-performing LME metal).
Poseidon’s sole focus is the recommissioning of the historic Windarra nickel project, which comprises previously operational open-pit and underground mines at South Windarra and Mount Windarra respectively, in Western Australia’s nickel belt. The total current Mineral Resource lies within two positions separated by a distance of around 10km, including an existing brownfields mine at Mt Windarra and a new discovery at Cerberus. The project also boasts substantial existing regional infrastructure.
Poseidon has taken dramatic steps to both accelerate its path to production and slash overall capital development costs, thus minimizing the funding required to achieve production, along with associated financial risks. This has been achieved by abandonment of the company’s original plan to build its own stand-alone processing plant; instead Poseidon has sought out existing regional processing options. This culminated in the purchase this week of the Black Swan mine and infrastructure from Russia’s Norilsk.
Recent Activity
Black Swan Acquisition
Poseidon announced a major company-transforming transaction this week in the form of the acquisition of the Black Swan nickel operation from Norilsk Nickel. The acquisition is hugely significant as it dramatically accelerates Poseidon’s path to production, on a substantially larger scale and at a hugely reduced cost than would otherwise be the case if it had to develop its own nickel sulphide processing infrastructure.
The key to the acquisition is the Black Swan nickel sulphide plant, which is capable of processing ores from Poseidon’s Windarra deposits. The plant was upgraded during 2006, but was subsequently placed on care-and-maintenance during February 2009 in the wake of the GFC. The plant has a proven throughput capacity of 2.15M tpa compared with the 0.7M tpa plant previously contemplated for Windarra.
Poseidon has the option to either recommission the plant in its current location, or move it closer to its Windarra deposits. The current location benefits from being connected to the power grid and having access to a nearby workforce in Kalgoorlie. These significant benefits will be weighed up against the cost of trucking ore from Windarra to the current Black Swan plant.
Apart from the infrastructure, the Black Swan project also includes sulphide nickel mineralisation that can be utilized to supplement Windarra ore if a decision is made to process in the current location. The Black Swan deposit comprises a Mineral Resource of approximately 26.3Mt at 0.70% for 185,800 tonnes of contained metal (at 0.4% nickel cut-off grade).
Norilsk commissioned Golder Associates during 2012 to conduct an independent review of an internally produced feasibility study into reopening Black Swan, which resulted in positive conclusions. The results of this study as well as the existing resource base, will be reviewed by Poseidon and reported under JORC 2012 guidelines following the completion of the acquisition.
The acquisition price to be paid to Norilsk for the project is subject to confidentiality; however Poseidon states that it will not need to raise additional money for the acquisition. We estimate the consideration price to be in the vicinity of $2 million, which in the context of the benefits it bestows upon Poseidon in terms of dramatically reduced capex and accelerated path to production, is really a bargain-basement acquisition.
Poseidon has paid a 10% deposit to Norilsk and the remainder will be due when conditions precedent are satisfied, with completion anticipated within the next six months. Poseidon states it anticipates making further announcements that will complement the acquisition within the next few weeks. In addition, negotiations for the sale of Windarra ore to another processing plant are continuing and Poseidon anticipates sales during late 2014. Utilisation of the Black Swan processing plant will complement these sales.
Acceleration of Mine Refurbishment
Poseidon recently recommissioned mine refurbishment activities at Mt Windarra and has employed new personnel as it aims to ramp-up development work ahead of a potential return to production later in 2014. Refurbishment activities were previously suspended during mid-2013 upon the completion of the underground drilling program.
Poseidon is now preparing to recommence underground operations and is completing necessary maintenance work on the water-extraction system. The company has also recently purchased additional underground Mono pumps and will be commencing installation.
Poseidon announced in its March 2014 quarterly report that the final refurbishment program would cost approximately $4 million and can be completed within a 4-6 month period. The cost is a portion of the restart costs of $11 million previously estimated, with remaining capital associated with increasing mine ventilation suitable for mining, initial mine activities and working capital.
To manage and expedite this critical path to production, the company appointed Cathy Cruikshank as General Manager Operations. She has extensive nickel experience, having been the Deputy Underground Mine Manager at the Perseverance Underground Nickel Mine. In addition, Robert Boston was appointed to assist with the completion of current ore off-take (marketing) contracts and major mining contracts. He is a corporate executive with experience in projects, project finance and resource development.
Strengthening Nickel Price
One of the primary considerations that has encouraged Poseidon to resume mine refurbishment is the strengthening nickel price and positive price outlook, which have provided the company with sufficient confidence to accelerate Windarra’s reopening. The primary catalyst was Indonesia’s decision to formally implement a ban of unprocessed ore from January 2014 onwards. Indonesia is the primary supplier of low-cost nickel pig iron to China, the world’s biggest producer of stainless steel.
Project Background
Poseidon’s Windarra project is situated in the midst of Western Australia’s historic nickel mining region and has seen the company invest $94 million over the past five years with respect to refurbishment of the existing mine and facilities, along with extending the resource base to support an initial ten-year mine life.
The project operated historically for 16 years under previous ownership and the company has the advantage of a wealth of geological, metallurgical and mining data. The resource is one of the largest of any West Australian nickel sulphide project that has restarted production within the past decade. The project is in our view a low-risk development due to its brownfields nature and conventional mining and processing methodology.
The production strategy involves the commencement of nickel operations at the Mt Windarra brownfields mine through a combination of ore toll-treatment with local facilities, as well as treatment at its own facility (likely to be Black Swan). Planned expansion will involve the mining of the Cerberus greenfields ore body, situated just 10km south of the existing Mt Windarra mine.
A second potential earnings stream involves gold production via the reprocessing of tailings from previous operations at Windarra. Processing would be on-site for an initial period of six years and involve the construction of CIL tanks, with smelting taking place off-site at a toll-treatment facility.
Exploration of the 24km long Windarra ultramafic will be ongoing in order to expand production throughput. The first priority targets will be for modelled parallel lodes at the Mt Windarra and Cerberus mines and the potential extension of the South Windarra orebody.
Summary:
Given our strong existing exposure to Poseidon Nickel we retain a Hold recommendation on the stock for the present time, although we recommend the stock as a Spec Buy for those investors without current exposure. I am hugely encouraged by recent nickel market developments as well as the company’s recent corporate activity, which has underlined our confidence in its capacity to deliver on its accelerated production timeline. I anticipate that heightened activity throughout the remainder of 2014 will help drive ongoing sharemarket interest.
