Poseidon (POS) – Matau Research – 20150210

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Poseidon Nickel Ltd (POS) 10 February 2015

Nickel Revival POS raised AUD 30m of equity in 2014, to develop its key projects, Mt Windarra, Lake Johnston and Black Swan. All three have been previously mined and have established mine development, plant and equipment with ore known to produce attractive concentrates. No further equity needs to be raised. We derive an unrisked DCF value of $0.45/share and a risked 12 mo fwd target price of $0.35/share, well above the ($0.12) share price. Forward earnings and cashflow multiples are below 2x. POS is significantly under-valued by the market. Windarra production is forecast for the June Qtr 2015 with Lake Johnston later in the year.

Description

  • POS is developing three nickel-sulphide projects in Western Australia. All have previously been operating nickel sulphide mines, and all are able to be brought into production with little capital. Each has potential for additions to resources and reserves. These are Windarra, Lake Johnston and Black Swan projects.
  • About $24m of capital is estimated to be required to recommence both the Windarra and Lake Johnston operations within 2015. Black Swan operations are planned to be brought on line in about 2017-2018 for a further $11-12m, with the time-frame of that restart subject to commodity market conditions.
  •  POS completed a $30m placement in the December 2014 HY which will fund the development of the three projects.
  •  POS has previously received funding from convertible notes totalling USD 35m in two tranches. The notes are currently held by Jefferies LLC (Jefferies). We have assumed redemption in FY2017. Based on our forecast nickel and AUD prices and a 50% dedication of cashflow to debt repayment, POS does not need to raise additional equity or refinance upon redemption.
  •  An ore toll-treatment and concentrate off-take agreement for Windarra ore with BHP’s Leinster operation has been made for an initial period of 2 years, for 0.35-0.50 Mtpa. That volume may be expanded to 0.7 Mtpa but also allows additional ore to be processed at POS’ Black Swan facility, when it is re-started.
  •  The agreement provides POS with considerable flexibility for blending ore from Windarra with Black Swan to take advantage of the capacity of the Black Swan mill, while starting mining at Windarra without need to build a concentrator to process initial ore output. It also removed a significant capital requirement, avoiding the need to construct a concentrator at Windarra. Of the permutations for processing of Windarra ore we have assumed and modelled the processing of Windarra ore at Leinster from 2015 to 2018 then transport of all Windarra ore to Black Swan thereafter.
  •  Operating costs for the three operations are forecast to be within the second quartile of the C1 nickel cash cost curve.
  •  Forecast Cashflow multiples and PE’s are very low, less than 2x, and the Market EV is half the Enterprise EV. POS is clearly under-valued.

Catalysts

  • Achievement of milestones toward confirmation and approvals of re-development, and recommencement of mining, at each of the Mt Windarra, Lake Johnston and Black Swan project(s).
  • Confirmation of exhaustion of Chinese stockpiles of (Indonesian) high grade Ni laterite ore, anticipated in about March 2015. An extended Philippine monsoon would assist this process. Shipments from Philippines to China already slowed in November due to the onset of the monsoon.
  • Nickel price response to shortages of Philippine laterite ore deliveries into China during the monsoon, and or decreases in LME Ni inventories.

Risks

  •  No reaction of the nickel price during the monsoon period (above), or to increases in LME Ni inventories, implying that China has alternative sources of high grade Ni laterite ore, or alternative supply of nickel.
  • Poor performance of the POS acquired nickel assets upon re-start. We consider this is unlikely as all have been prior operating mines with known operating parameters. Cessation of operations and putting on care-maintenance was generally due to low nickel prices during the global finance crisis in 2009, rather than other technical parameters.

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