Spec Value Hunter Comment - June 14, 2012: First Point joins Big Anomaly Club
First Point Minerals Corp has started exploration work on its 100% owned Klow and Wale projects in British Columbia, as well as the Mich project in the Yukon, with Klow getting the first attention. The 5,197 hectare Klow property is located 55 km north of the Decar project in which Cliffs is earning up to 75%. First Point plans a 6 hole, 1,800 m drill program on 300 metre spacing to test a surface mapped target area 1,000 m by 300-550 m wide where coarse grained awaruite nickel mineralization has been mapped. The size and initial surface grades are not as good as Decar, though considerably poorer exposure may be partly responsible. The drilling will test a tonnage footprint approaching 300 million tonnes. On June 12 First Point announced that Raymond James would do a $2 million best efforts flow-through financing at a yet to be determined price (set at $0.60 on June 15), which prompted fears that this was another one of those trashy, double-dipping charity swaps Canadian brokers like to use as a tool to fund their favorite charities by putting up $0.10 on the dollar. These deals usually result in the flow-through paper being slammed into the market by the charity the instant it is free-trading four months later. However, I have been told that this financing is being put up by long term investors rounded up by Jim Gilbert, who was appointed CEO and President in January 2012 to replace Peter Bradshaw who is now Chairman of First Point. If it closes at a premium to the current $0.50-$0.60 trading range this financing will be a positive development that boosts fully diluted to about 108 million shares and leaves First Point in a position to fund followup exploration later this season if good results are delivered for Klow or Wale (fully diluted is now 108,209,451 shares).
Klow is interesting and well located, but speculators should pin their Big Anomaly hopes on the much larger targets on the 11,904 hectare Wale project 45 km east of Dease Lake in northern British Columbia. The location is not as good as Decar and Klow, but surface sampling in 2011 delivered grain sizes and recoverable nickel grades comparable to Decar for a large target area with dimensions of 3,100 m by 670-1,060 m wide. Due to heavy rains and a sudden rapid melt in northern BC and southern Yukon this area is currently inaccessible, but First Point does expect to be drilling by the end of August when it plans a 2,700 m drill program that will test with widely spaced holes a 2 billion tonne footprint of prospective rock. The drill spacing will be too wide to allow an initial inferred resource estimate, but the Decar experience has shown us that this type of system has remarkable continuity and grade consistency thanks to the fact that the mineralization is created by regional metamorphism rather than hydrothermal processes that exploit zones of structural weakness. If drilling yields long intersections of consistent nickel-iron alloy mineralization (awaruite) with a recoverable nickel grade via Davis Tube exceeding 0.1% nickel, back-of-the-napkin tonnage calculations will give us reasonably close estimates of what a 43-101 resource estimate will eventually provide.
The potential economic value will remain unknown until Cliffs publishes a PEA for Decar that will show us the sort of flow-sheet and cost structure associated with mining this style of low grade nickel mineralization. In my Spec Value Hunter Comment - April 16, 2012 I attempted a speculative discounted cash flow model based valuation using cost assumptions for a 60,000 tpd open-pit mine borrowed from Terrane's feasibility study for Mt Milligan which suggested a $1-$3 price target range at $6-$8/lb nickel for First Point's 25% net interest in Decar. Capital and operating costs would be somewhat higher for the Wale project, though the location is not a difficult one such as plagues some northern deposits. On a 100% ownership basis the Wale project is a high impact Big Anomaly target that could furnish 1,000% plus gains for First Point from the current $0.50-$0.60 range at which we are stuck while we await word from Cliffs about the summer infill program recommended for Decar. Drilling success at Wale should move the stock into a $1-$2 range this fall, but a much bigger move will have to wait for the publication of a PEA by Cliffs which does not have to be done until March 2013. It is important that Spec Value Hunters keep in mind that this type of deposit has never been commercially mined, and the risk is that despite Cliffs' apparent internal high hopes, the numbers at the end of day may fall short of a decent internal rate of return and net present value.
Cliffs apparently was not happy about First Point's decision to press release its decision in early May to proceed with arbitration over getting access to third party reports Cliffs has commissioned for the Decar project (see Spec Value Hunter Comment - May 7, 2012). I suspect Cliffs is already sitting on a draft of the PEA, and I suspect First Point management decided to risk Cliffs' anger because of concern that Cliffs itself might become the focus of a takeover bid if the general market slump worsens and cremates Cliff's stock price as it did during 2008. The concern is that a nickel producer like Vale or Xstrata seeking Cliff's iron assets might snag Cliffs and bury everything related to Decar because the revolutionary implications of mining awaruite are not helpful for the upside potential of their existing laterite and sulphide nickel operations. First Point management is relying on Cliffs to generate the flowsheet and marketing strategy for awaruite based products, and would like to be in possession of such information should Cliffs succumb to a hostile takeover bid. Such thoughts are far from the minds of Cliffs management which on June 6 secured a memorandum of understanding (MOU) with the Tl'Azt'En first nation in whose jurisdiction Decar falls. This is an important milestone because it clears the way for Cliffs to proceed with a 49 hole 16,500 m infill drilling program recommended by Caracle Creek as a followup for the initial inferred resource estimate. One of the factors holding back First Point's stock price is the market's concern that the bleak macroeconomic outlook might prompt Cliffs to defer the infill drilling until next year because it does not need a drill indicated resource for the PEA it must produce by the end of Q1 of 2013. Confirmation that Cliffs is proceeding with the recommended summer program at Decar would be interpreted as a sign that Cliffs is so happy with its draft PEA numbers that it is charging ahead with prefeasibility study related work at Decar. Since time is running out to mobilize a summer work program we should hear news on this front very soon.
I continue to regard First Point as a Good Relative Spec Value Buy in the current price range based on the Decar project alone, but I also see it as a must have position in any Big Anomaly Club portfolio because the stock is carrying zero speculative premium for the possibility that Wale will turn out to be a 100% owned clone of Decar by Q4 of 2012 that blows the upside potential well-beyond the 3-4 fold gains one might expect from Decar alone making it through a bankable feasibility study. To understand this take a look at the First Point IPV chart where you can see the 100% net Wale project at the target drilling stage with an implied project value of $57 million, while the 25% net Decar project at the more advanced PEA/Metallurgy stage commands an implied project value of $221 million. First Point offers both discovery exploration and nickel price cash flow speculation, which is why it is Spec Value Hunter recommendation and member of the Big Anomaly Club.
*JK owns shares in First Point Minerals Corp