Small Caps | Oct 14 2014
This story features POSEIDON NICKEL LIMITED. For more info SHARE ANALYSIS: POS
-Lower capital intensity
-Production capability nears
-Timed for nickel tightness
By Eva Brocklehurst
Poseidon Nickel ((POS)) has transformed over the first half of FY15. Earlier this year the company's main asset was the Windarra project in Western Australia but now two others with established infrastructure have been acquired from Norilsk, that is Black Swan and Lake Johnston, also in WA. In the process Poseidon has more than doubled its resource inventory to around 400,000 tonnes of contained nickel.
The company is moving from a one-project, high capex company to having three projects on the go with development options and one of the lowest capital intensity ratings of an emerging nickel producer, in DJ Carmichael's view. The existing mill and mine infrastructure of the two acquisitions means the company has secured a capex saving of around $240m in not having to develop a plant at Windarra. Poseidon has also completed a toll treatment deal and will truck ore to the Nickel West concentrator from Windarra under an ore tolling and concentrate purchase agreement for a minimum 350,000tpa and up to 500,000tpa. This will enable a rapid ramp-up in cash flow from Windarra, reducing capex as well.
Poseidon has completed a capital raising of $30m to put the two new projects into operation and will use some of the proceeds to retire an $8.4m debt to Andrew Forrest's Minderoo, which removes a potential overhang for the stock. The Black Swan and Lake Johnston projects cost $2.5m collectively and provide the capacity to produce around 15,000 tonnes of payable nickel per annum. Of the two, Lake Johnston is the more developed and is expected to be in production by the second quarter of 2015, working up production to 1.5mtpa. The start up of Black Swan is yet to be determined but DJ Carmichael models a start date of 2017.
The broker believes Poseidon is timing it well for the re-start of these operations, given a tightening nickel market. The impact of the Indonesian ban on saprolitic nickel ore exports will start to take effect next year. Prices dipped recently because of increased production from Philippines laterite nickel deposits but, as Indonesian inventories are drawn down in the second half of 2015, the nickel price is expected to rise again. DJ Carmichael quotes consensus forecasts for nickel prices which indicate 2016 and 2017 pricing at US$21,000/t and US$21,208/t respectively.
Poseidon needs to raise the remainder of start-up funding, around $20m, through a debt facility to provide working capital and enable completion of capital works at Windarra and Lake Johnston. Lake Johnston can be brought into production ahead of Black Swan because of its higher grade, operational readiness and relatively low start-up capex requirement, which DJ Carmichael estimates is around $5-19m versus $12.8m for Black Swan. Assuming the $20m debt facility is obtained, Poseidon Nickel is expected to become the next major nickel producer in Australia. DJ Carmichael has maintained a Speculative Buy recommendation and a valuation of 62c per share. The broker has not included any value for gold tailings processing at this point, taking the view that management's efforts will be directed to the establishment of its nickel assets over the medium term.
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For more info SHARE ANALYSIS: POS - POSEIDON NICKEL LIMITED