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Tracker 2009-09
November 13, 2009
First Point Minerals Corp (FPX-V: $0.12)
Recommendation Strategy for First Point Minerals Corp
Synopsis: First Point Minerals Corp (FPX-V: $0.12) is recommended as a new top priority bottom-fish buy in the $0.10-$0.19 range based on the company's innovative nickel strategy which targets low grade ultramafic bodies that contain a magnetic and dense form of nickel mineralization known as nickel-iron alloy. I have been following this story since April 2009 when Peter Bradshaw button-holed me after my workshop during the Cambridge Calgary Conference and explained to me the nickel angle on which the First Point team had been working since 2007. Ironically this was the same conference during which Dan Larkin of Quest Uranium Corp (QUC-V: $2.46) also bent my ear to explain that Quest had a piece of the Strange Lake rare earth deposit. Both juniors were stuck in a rut below $0.10, headed by toiling geologists who were nurturing interesting stories with the help of a scant $500,000 treasury, and pitching their story to sometimes sympathetic but ultimately deaf ears. In the case of Quest I jumped onto the story immediately because I understood that rare earths were in the vanguard of an emerging global security of supply problem that will eventually result in strategic logic trumping the economic logic to which the mining industry and capital markets have been enslaved since the end of the Cold War. In the case of First Point I realized that the story hinged on the outcome of metallurgical studies management was conducting on sample material, and I decided to take a watch and see attitude. The time has now come to bottom-fish aggressively for First Point.
On November 13, 2009 First Point was halted for an announcement that Cliffs Natural Resources Inc (CLF-N: $) was purchasing a 19.9% equity stake in First Point and optioning up to 75% of the Decar "nickel-iron alloy" project in central British Columbia. Much to my delight the market rewarded First Point with a rain of paper, 2,219,500 shares to be precise, when the stock resumed trading, knocking First Point down $0.01 for the day. While this is not exactly a ringing endorsement from the market, it does represent an extraordinary opportunity for bottom-fishers to soak up a position in a junior that controls a major new nickel twist on the security of supply problem, and to place a contrarian bet against the approach to nickel bottom-fishing taken by Ross Beaty, who is tackling the hypothetical security of supply problem for nickel by accumulating sub-economic laterite and sulphide deposits through Anfield Nickel Corp (ANF-V: $2.95), a $0.30-$0.49 bottom-fish recommendation that has already achieved our target 500% bottom-fish gain. Unlike Anfield, which is a machine play bankrolled by an invitation only crowd that includes Rick Rule and which we are keeping as a Spec Cycle Hold 100% recommendation in anticipation of much higher prices as Beaty acquires other "worthless" nickel deposits on the cheap, First Point is a late life cycle junior with plenty of liquidity and a roster of nay-sayers including Ross Beaty himself to whom Bradshaw has pitched the story. The Cliffs deal, however, provides a powerful endorsement for First Point's strategy, and it eliminates a major concern of mine, namely, how does First Point prove an out of the box concept without diluting existing shareholders into oblivion. The deal is a strong one because not only has First Point convinced a major producer of steel inputs that its Decar nickel project has development potential, but it has in the process attracted a major new equity shareholder whose investment will allow First Point to deploy a proprietary exploration tool designed to identify similar nickel-iron alloy deposits around the world. In other words, while Ross Beaty is trying to figure out how to acquire metallurgically challenged nickel laterite and sulphide deposits for next to nothing from their owners, who will be wondering if perhaps China can indeed decouple from the crippled American economy and underwrite a secular bull market in base metals, and betting that the future holds substantially higher nickel prices without correspondingly higher energy and processing costs, First Point's team will be trotting around the globe sampling "open for staking" ultramafic bodies universally dismissed as worthless because their 0.25% nickel grade is assumed to be attributable to a silicate mineral whose nickel recovery cost far exceeds even the $25 per lb price to which nickel spiked in 2007. First Point will have 78,769,311 shares fully diluted after the Cliff's financing, which represents an implied project value of $9.5 million for its 100% owned nickel projects, and $37.8 million for the Decar project if Cliff's funds it through to a bankable feasibility study. If Cliffs demonstrates the feasibility of mining a low grade nickel-iron alloy deposit, it will likely buy out First Point at what is likely to be a valuation 5-10 times higher. If in addition First Point assembles a significant portfolio of similar nickel-iron alloy deposits in strategic locations around the world, the company would become the focus of a bidding war that could result in a substantially higher buyout price.
The first question, of course, is what on earth is a "nickel-iron alloy"? To put it simply, it is a naturally occurring "stainless steel" whose nickel composition ranges 63%-83% while the rest is iron. Its technical name is awaruite and it occurs as grains within mafic to ultramafic rocks which have undergone "obduction" where oceanic crust, instead of being "subducted" back into the mantle, gets "obducted" onto the continental crust and ends up stranded as rafts on the top of mountain ranges. This typically happens during continental collisions where oceanic crust, generally known as "ophiolites" and specifically as "gabbro", "basalt", "dunite", "peridotite" and "eclogite", gets shoved up rather than down during the suture event. These ophiolites contain 0.2%-0.4% nickel tied up in a silicate mineral called olivine. During the "ascent" metamorphic conditions can force the nickel out of its silicate lattice and in the right conditions nickel can combine with iron to form uniformly disseminated grains of "nickel-iron alloy" within a large body of rock representing hundreds of millions of tonnes. Depending on the initial olivine content and the degree of metamorphism the nickel-iron alloy content will be a percentage of the overall nickel grade. If the nickel grade attributable to nickel-iron alloy works out to 0.1%-0.15% nickel, this represents a US $20-$25 per tonne rock value at a US $8/lb nickel price.
A grade of 0.1%-0.15% nickel is far below the grades of economic sulphide or laterite nickel deposits. Laterite deposits occur at the top of ultramafic rocks and are formed through a process of weathering and groundwater circulation that enriches the nickel grade over time, but still leaves the nickel tied up in complex silicates. While the grade will range 1.5%-3% and the ore is at surface and thus amenable to low cost strip mining, extracting the nickel from the laterite ore involves a high input of energy and chemicals. There is no lack of laterite nickel in the world, but the feasibility of extracting laterite nickel will always be a function of energy and chemical costs, as well as very high capital costs. Nickel sulphide deposits in contrast are formed through magmatic and hydrothermal processes which can enrich the grade as high as 6%, but the geometry of these zones can be complex and their location is typically underground except where erosion has exposed the zone at surface. Sulphide nickel deposits have high extraction costs and result in concentrates that have to be transported to a smelter with the result that the grade has to be at least 2% unless unusual economies of scale are available. One example of a very large low grade nickel sulphide deposit is the Turnagain deposit of Hard Creek Nickel Corp (HNC-T: $0.23) which boasts 1.2 billion tonnes of 0.21% nickel which represents a rock value of US $37 per tonne at $8 nickel. The problem with the Turnagain deposit is its remote location in northern British Columbia into which power infrastructure needs to be extended, and the mitigation cost of dealing with the acid generation potential of the tailings and waste rock. What makes the nickel-iron alloy story interesting is that the costs of recovering nickel appear to be substantially lower. Unlike nickel laterites or sulphides the nickel-iron alloy is very magnetic and has a density of 8.2, which is 71% higher than pentlandite, the primary sulphide mineral, whose density is similar to pyrite and pyrrhotite which are typically present in a nickel sulphide deposit. Ultramafic rock which contains no sulphides but does contain a 0.1%-0.15% nickel-iron alloy related nickel grade would be subjected to crushing and grinding, followed by magnetic and gravity separation techniques that result in a low cost product that could be shipped directly to steelmakers. The key to cost control and recovery rates will be the coarseness of the nickel-iron alloy mineralized rock. The out of the box concept that First Point has developed and which Cliffs will now put to the test is that there exist large bodies of nickel-iron alloy deposits which contain large spatially continuous volumes of coarse-grained material that could be economically developed at nickel prices as low as $5/lb in the same way that low grade copper porphyry deposits have been developed. Preliminary prospecting and mapping work has established that the Decar property hosts more than 300 million tonnes of nickel-iron alloy bearing rock of sufficient coarseness to be a candidate for development as a very large scale, low cost open pit nickel mine whose concentrate can be shipped directly to a steelmaker's foundry. Although the target has not been drilled, the nature of this type of ultramafic body coupled with observed vertical relief of 600 metres makes management confident that this large tonnage footprint is present. Initial tests indicate that nickel is 75% of the nickel-iron alloy grains in the rock. Drilling will be needed to confirm distribution of grade and texture.
Under the Cliffs deal the iron producer can earn 51% by spending US $5 million over four years, with $1 million during the first year a firm commitment. First Point will operate the initial exploration work, which will include another $150,000 for metallurgical studies over the winter while the rest will be spent on delineating a coarse-grained nickel-iron alloy resource on the Decar property. Upon vesting for 51% Cliffs will have the option to increase to 60% by producing a scoping study, to 65% by completing a prefeasibility study, and to 75% by delivering a 43-101 compliant bankable feasibility study. In addition First Point will retain a 1% NSR in Decar. If First Point dilutes below 10% its interest will convert into an additional 1% NSR. In addition, Cliffs is purchasing 14,376,069 shares at $0.09 which will result in Cliffs having a 19.9% equity stake in First Point which it has the right to maintain. Cliffs has the right to appoint one person to the board, and has entered a standstill agreement to vote with the First Point during the next four years. First Point's board consists of a strong technical team that includes Peter Bradshaw, John McDonald, Tom Beattie, John Gammon and Ron Britten. Although the board shows as owning only 2 million shares directly, Peter Bradshaw assures me that its network of close supporters holds about 20% of the issued stock.
Although the private placement will inject $1.2 million unto First Point's treasury, I did question the wisdom of giving Cliffs such a large equity stake at such a cheap price. It turns out that Cliffs insisted on this private placement and would not otherwise have done the Decar farm-in deal. The reason is not evident in any of First Point's disclosures, but during my conversation with Peter Bradshaw it became apparent that there is a very strategic reason for Cliff's insistence on the private placement. First Point started playing with the concept of exploiting nickel-iron alloy deposits more than a decade ago, and stepped up its research activity in 2007 when nickel became all the rage and 7 "juniors" disappeared in a wave of buyouts exceeding $10 billion in value. The team researched the academic literature and made field visits to large belts of ultramafic bodies whose alteration indicated potential nickel-iron alloy potential. This was not an easy task because it is very difficult and expensive to determine what percentage of the low nickel grade in an altered ultramafic is attributable to nickel-iron alloy grains. While a sample can be readily fire assayed to determine the nickel grade, the fire assay does not establish how much of the nickel content is due to olivine from which commercial recovery is not even a concept. To find out one must produce polished thin sections that are viewed through an electron scanning microscope that allows an operator to measure and count the nickel-iron alloy grains. To overcome this problem Peter Bradshaw put his scientific background as a PhD geochemist to work on coming up with a commercial geochemical method for measuring the percentage of the nickel grade that is attributable to nickel-iron alloy. He has worked on this for several years and claims that he has succeeded in developing a proprietary method in conjunction with a metallurgical lab that has entered into a 21 year confidentiality agreement. He reckons that it would take three years for a third party to come up with a similar measurement solution. Cliffs insisted on the 19.9% equity stake because it knows that First Point now has an efficient method to evaluate other nickel-iron alloy prospects and that its Decar option will legitimize First Point's story. So rather than have First Point raise money from other curious backers and scour the planet for similar projects, Cliffs has put up the money and established an equity foothold that will enable it stop another predator from scooping control of First Point without paying fair value.
Cliffs is already dealing with such a situation in the case of Freewest Resources Canada Inc (FWR-V: $0.49) in which it has acquired a 7% equity stake and in whose Black Thor chromite deposit in the McFaulds Lake region of northern Ontario it has conducted considerable due diligence. Freewest has outlined a chromite deposit with a footprint of more than 100 million tonnes, but the grade in the 25-35% range is lower than the grade mined in South Africa which is currently the world's primary producer of ferro chromium, a critical input for stainless steel. Cliffs itself is a NYSE listed producer of iron ore pellets and coking coal which it supplies to North American integrated steelmakers. Although it also has operations in South America and Australia, its main operations are in North America. Economic logic dictates that the Black Thor and other chromite deposits in northern Ontario cannot compete against South African chromite production because of the lower grade which requires an extra stage of concentration so that it meets the 44% grade requirement for ferro chromium conversion. But in taking a serious interest in the Black Thor chromite Cliffs appears to be making a long term strategic bet that South Africa's power problems will not be solved any time soon, that other problems could disrupt South African supply, and that growing demand from China could either divert ferro chromium supply or make it far more expensive than current levels. If Cliffs takes over Freewest and the other juniors which control the Black Thor and Big Daddy chromite deposits, and puts up the $1.6 billion capital cost to develop this resource and build a ferro chromium plant farther south where there is ample electricity, it will be the only North American mining company with a secure supply of ferro chromium to feed the North American steel mills.
Cliffs slow approach to Freewest's chromite project has been thrown a curve ball by Noront Resources Inc (NOT-V: $1.58) which has launched a hostile paper bid for Freewest on the basis of 1 Noront share for 4 Freewest shares. Noront's claim to fame is the high grade nickel-copper-platinum group Eagles Nest discovery it has made in the McFaulds Lake region which at this stage is too small to justify the infrastructure investment needed to bring power and transportation into this remote region. Noront's arguments in favor of Freewest shareholders tendering to its opportunistic bid are so pitiful I am not even going to dissect them. Suffice it to say that Noront is headed by a pair of out-of-control amateurs called Wes Hanson and Joe Hamilton with almost zero skin in the game and a penchant for spending other people's money who were installed by a hedge fund manager who got hung in 2007 after swallowing too much baloney about the supposed Voisey's Bay scale of the Eagle's Nest discovery. These are the same people who talked up their tweety-bird sized Blackbird chromite deposit last March at PDAC while dismissing Freewest's chromite discovery as inconsequential. Since Noront launched its takeover bid Freewest's stock has increased to reflect the initial "premium" implied by Noront's puffed up stock price and the proposed ratio, and stayed there while Noront's stock price has declined as Noront shareholders started to recognize that Noront is a seriously over-priced junior trying to buttress itself by scooping an asset that is worthless unless Cliffs develops it. Freewest has, of course, rejected the Noront bid, and recently entered into an exclusive due diligence arrangement with an undisclosed party whose identity is unlikely to be anybody but Cliffs whose hand is being prematurely forced by the pre-emptive Noront paper bid.
Conclusion: Given Cliffs' strategic logic based interest in Freewest's chromite deposit it is no surprise that it has taken a strong interest in First Point's nickel-iron alloy concept, and based on its experience with Noront's hostile nuisance bid for Freewest, it is also no surprise that it insisted on acquiring a 19.9% equity stake in First Point. The strategic logic that Cliffs is deploying with First Point is the assumption that global economic growth will bring back higher nickel prices, in part because of another supply-demand imbalance such as happened in 2004-2007, but also in part because energy and chemical prices may rise. In this scenario nickel prices will surge higher, but so will the cost structure, with the result that producers of laterite and sulphide derived nickel will not enjoy a jump in profitability. In contrast a large scale nickel-iron alloy mine in close proximity to power and transportation infrastructure such as is the case with Decar will enjoy the higher nickel price because energy costs are a smaller portion of processing costs. Successful development of Decar would also put Cliffs in a position to supply the North American steel industry with ferro chromium and nickel, both critical inputs for stainless steel. As a result I regard First Point Minerals Corp as an excellent security of supply story which has a unique twist others will not readily be able to duplicate during the next couple years.
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