|Summary: Nickel is known as the devil’s metal because of its fickle nature, but the devil is definitely in the detail for WA miner Sirius Resources. Its rich Nova mine will be a huge cash cow for the company over time, and now the prospect of a major new discovery should drive its share price in the short term.|
|Key take-out: Low-cost production from the Nova mine will be a major benefit for Sirius, even if the nickel price continues to fall.|
|Key beneficiaries: General investors. Category: Shares.|
|Recommendation: Outperform (under review).|
Nickel, as was pointed out in my August 23 story, has the nickname of the devil’s metal for good reason. However even the devil will struggle to hold down a stock that has not only made a world-class discovery but is on the scent of a second, which is why Sirius Resources (SIR) is a stock set to outperform.
Over the past year, courtesy of an oversupplied market, the nickel price has been in the doghouse, falling by 25% from $US8.50 a pound to $US6.34/lb.
For high-cost producers of the metal, which is almost entirely consumed in making stainless steel, the drop has been a financial disaster, pushing some towards the precipice of closure.
For Sirius, which has an anticipated cash cost of $US1.57/lb from its rich Nova discovery in the Fraser Range east of Kalgoorlie in Western Australia, a nickel price of $US6.34/lb is more than comfortable. Even if the all-in cost doubles to $US3.14/lb, after allowing for financing and other charges, the potential profit margin per pound is still more than 100%.
Encouraging as those early numbers are for a mine centred on the Nova orebody, what caught the attention of delegates at the Mines and Money conference in London earlier this month was exploration news, especially about an emerging second discovery called Crux.
Sirius’s chief executive, Mark Bennett, spent more time talking about Crux than he did about Nova, a pointer to what he expects to unfold as exploration accelerates and assays start to flow in.
So far, all that Bennett can say about Crux is that the rocks appear to be identical to those at Nova.
During a brief conversation I had with Dr Bennett on the floor of the conference centre, he said Crux had displayed the best soil “anomalies” since the discovery of Nova. Anomalies in surface soil samples are an early-stage indication of what might lie deeper underground.
“There’s a long way to go with Crux but it and the other areas of interest in our tenements are pointers to the potential of the region as a future significant mineral province,” he said.
For investors, Sirius and the other companies operating in the Fraser Range represent the hottest exploration story in Australia today. And while metal prices might be low relative to the boom years, they are not depressed and any high-grade discovery will be developed.
Financiers are already lining up to fund Nova, which has an estimated capital cost of $471 million and a first-stage life of 10 years. During this time it should produce 28,000 tonnes of nickel a year, plus 11,000 tonnes of associated copper and 940 tonnes of high-value cobalt.
If all goes to plan, Nova will start production about three years from now and generate $2.8 billion in cash flow over its initial 10-year life. This is an impressive number for a stock currently capitalised at $536 million.
To put those numbers into perspective, the volume of metal will rank Nova somewhere between the 10th and 14th biggest nickel mine in the world.
Impressive as the size might be, and remember Nova could be the first of several mines, the cost per pound estimate is even more impressive because at $A1.57/lb Nova will be the eighth lowest cost nickel mine in the world.
Cash is not a problem for Sirius as it is with many other small-to-medium exploration and mining companies. In its latest quarterly report (dated September 30) the company had $108 million in the bank, having just completed an $83.5 million capital rising. Ongoing feasibility studies into Nova, and exploration at Crux (and other targets) received an equal spending allocation.
For investors, there are three reasons to add Sirius to your shopping list. They are:
- Production certainty, or as certain as is possible in the mining world. Nova is one of the best discoveries of any metal in Australia over the past decade, and while nickel is currently an unloved metal Nova will be a highly profitable (and world class) mine. The high grades, and thickness of the ore body which boost the economics of any mine, mean that Nova will be in production long after higher-cost mines are mothballed.
- Discovery news, which is less of a certainty than production. But Nova, and the early-stage indications of the rocks around the emerging mine, are pointers to the Fraser Range one day becoming as well-known as other great Australian mining provinces such as Broken Hill, Mt Isa and Kalgoorlie. Such a comment might sound premature, and will need much more exploration to be proved, but the signs are there for anyone with the time to look.
- Metal prices are in the doldrums today (especially nickel), but accelerating global growth after five depressing years means that stockpiles of surplus metal will be absorbed over the next few years. Also, old (high-cost) mines will be forced out of business. Dr Bennett estimates that 40% of the world’s nickel is currently being produced at a loss, a situation which cannot continue for much longer. In his London presentation he pointed to consensus nickel price forecasts $US10/lb “during Nova’s first 10 years of production”.
As a metal, nickel might be off the agenda for most investors and most big mining companies. BHP Billiton announced yesterday that it will suspend mining at its Nickel West Leinster Perseverance Underground mine due to safety concerns. The company is one of the mining majors trying to quit the industry, but is struggling to find a buyer for its Nickel West business.
But what Sirius represents is an example of the industry expression: “grade is king”, and at Nova (with more to come) there is both grade, and tonnage, and they represent future substantial cash flows.
On the market, Sirius shares have been lacklustre performers, slipping from $2.15 at the start of the month to recent trades at $2.02. However, even at their latest price, Sirius shares are substantially higher than the 73.5 cents at the time of my last detailed look at the company in August 2012 (see A Sirius minerals development), before they ran to an all-time high of $5 on March 15 this year.
At the latest price of $2.02 the stock is significantly below the 12-month price forecasts from investment banks. Macquarie is tipping $3.10 as a target (a potential rise of 53%), while UBS is even more optimistic with a target price of $3.50 (up 73%).