Poseidon Nickel is an emerging nickel producer that’s pursuing redevelopment of the historic Mt Windarra nickel project in WA. The stock has risen by almost 60% since our initial Buy recommendation at $0.14 just a few weeks ago.
| Corporate Details |  |
| Status: Emerging Producer | |
| Size: Small Cap | |
| Commodity Exposure: Nickel | |
| Share Price: $0.22 | |
| 12-month Range: $0.066 – $0.24 | |
| Shares: 514m, Options: 109m | |
| Top 20: 40% | |
| Net Cash: $4.3m | |
| Market Value: $113m |
| Key Parameters | Rating (✓out of 5) | Quarterly Statistics |
| Management Quality | ✓✓✓✓✓ | Q2 2014 Exploration Spend: $0.642m |
| Financial Security | ✓✓✓✓✓ | Q2 2014 Admin Spend: $0.876m |
| Project Quality | ✓✓✓✓✓ | Exploration Spend 42%, Admin Spend 58% |
| Exploration / Resource Potential | ✓✓✓✓✓ | Q2 2014 Forecast Exploration Spend: $0.6m |
| Project Risk | ✓✓✓✓✓ | Q2 2014 Forecast Admin. Spend: $1.0m |
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’d predicted, with nickel prices surging by more than 40% 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 aggressive steps to both accelerate its path to production and slash overall capital development costs, thus minimizing the funding required to achieve production status as well as associated financial risks. The company achieved this by abandoning its original plan to build a stand-alone nickel processing plant; instead Poseidon has sought-out existing regional processing options. This culminated in the recent acquisition of the Black Swan mine and infrastructure from Russian nickel play Norilsk.
Recent Activity
Black Swan Acquisition
Poseidon recently advised of a significant company-transforming transaction in the form of the purchase of the Black Swan nickel operation in WA from Norilsk Nickel. The acquisition dramatically accelerates Poseidon’s path to nickel production, and on a substantially larger scale and at a hugely reduced cost than would otherwise have been the case if it had to build 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 during February 2009 was placed on care-and-maintenance 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 grid power as well as having access to a nearby workforce in Kalgoorlie. These significant benefits will be weighed against the cost of trucking ore from Windarra to the Black Swan plant.
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.
The acquisition price is confidential; however Poseidon states that it will not need to raise additional money for the acquisition. We therefore 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, represents 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. 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. 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 has previously indicated that the final refurbishment program would cost approximately $4 million and could be completed within a 4-6 month period. This cost is just a fraction of the previously estimated restart costs of $11 million, with remaining capital associated with increasing mine ventilation suitable for mining, initial mine activities and working capital.
Strengthening Nickel Price
One of the major factors that have encouraged Poseidon to resume mine development is the strengthening nickel price outlook. The primary catalyst was Indonesia’s decision to 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.
Summary
Poseidon’s Windarra project is situated in the midst of Western Australia’s historic nickel mining region and has seen $94 million invested over the past five years with respect to refurbishment of the existing mine and facilities, as well as extending the resource base to support an initial ten-year mine life. The project operated historically for 16 years under previous ownership, providing Poseidon with a wealth of geological, metallurgical and mining data. The project is in our view a low-risk development due to its brownfields nature and conventional mining and processing methodology.
We are hugely encouraged by recent nickel market developments as well as the company’s aggressive corporate activity, which has reinforced our confidence in its capacity to deliver on its accelerated production timeline. We also anticipate that continued activity during the remainder of 2014 will help generate further strong sharemarket interest. We retain our Speculative Buy recommendation on Poseidon Nickel.
