SVH Tracker - January 12, 2017: Recommendation Strategy for First Point Minerals Corp
First Point Minerals Corp delivered a 70% gain from the $0.05 price on December 31, 2015 when it was rolled over from the SVH 2015 Edition into the SVH 2016 Edition as a Good Relative Spec Value Buy at $0.05 based on its 100% owned Decar project as an optionality bet on stronger nickel prices. First Point spent 2016 treading water while the price of nickel continued to languish below $5.00 per lb as the deluge of laterite ore for China's nickel pig iron furnaces continued from the Philippines. During November and December nickel poked its head above $5 in sympathy with the Trump "infrastructure" rally but by year end the price had retreated. Recent weakness reflects a perverse decision by Indonesia to partially revoke its export ban on laterite nickel ore, a decision that is not sitting well with Chinese investors who spent billions building nickel pig iron smelters in Indonesia. In 2015 after First Point regained 100% of Decar the company decided to go into hibernation, laying off its senior management and appointing Martin Turenne as the caretaker CEO. SVH Tracker Mar 23, 2016 which explains the First Point story is still current. In a nutshell Decar is a very low grade nickel deposit whose nickel resides in a mineral called awaruite which is a naturally occurring form of stainless steel. Decar distinguishes itself from other low grade nickel deposits because the nickel can be cheaply recovered using gravity and magnetic separation alone, with minimal environmental headaches for the tailings and waste rock. The PEA indicated $9/lb nickel was needed to make Decar worth developing, but optimization potential suggests that at $6/lb nickel the deposits starts becoming very interesting from a develop,ment perspective, especially in view of the jurisdiction's security and the low level of energy and reagent input costs compared to laterite and sulphide nickel mines. The company's plan was to spend about $3 million on an updated PEA which optimizes the ore schedule, improves concentrate metallurgy and drills off a sweet spot in the southeast part of the deposit. In early 2017 First Point decided to change its strategy when it raised $320,000 at $0.10 from insiders, at a premium to market with no warrant, of which a third is earmarked for marketing work intended to improve the 75% payability of the nickel content in the concentrate that Cliffs assumed in its 2013 PEA. Management believes that if it is successful in boosting payability, it need spend only $1.2 million to deliver an updated PEA because drilling off the southeast sweet spot will no longer be necessary. The junior will thus only be in partial hibernation during 2017, though still largely at the mercy of the nickel price.
The only major new development for the nickel market is the election of Rodrigo Duterte as president of the Philippines. Duterte is a murderous thug who tore a page from Mein Kampf and launched a killing spree targeting drug "addicts". He has also thumbed his nose at the United States, embraced China's efforts to control the South China Sea through its artificial island building strategy, and is cozying up to Vladimir Putin. In other words, he is strongly encouraging the United States to pivot away from Asia, a policy endorsed by America's own budding strongman whom Putin helped elect. Oddly, Duterte has a soft spot for the environment and has appointed a minister who is determined to shut down the really bad nickel laterite mining operations, of which a dozen were flagged for suspension last September. The Philippines, now the world's biggest nickel producer, has probably reached the limit of its supply expansion capacity and may see production decline even without an environmentally driven curtailment or a strategic decision to follow Indonesia's ban on raw ore exports. That, however, will not alone send nickel to the $6 plus level First Point needs to develop Decar. Short term higher nickel prices need a massive supply disruption and that could come about for two reasons: 1) Putin meddles in France and Germany's 2017 elections in support of authoritarian, nationalist governments as he accomplished in the United States, a development that would accelerate the demise of the Eurozone and defuse potential European resistance to Russia's future annexation of the Baltic states and the reconsolidation of the Soviet Union, and, 2) Trump annoys China so much that it gets on with annexing Taiwan and forging a South China Sea alliance that excludes the United States. In either case it is unlikely that Donald Trump would survive long as president, but in both cases these moves would be long-lasting geopolitical shocks which hasten the world's realization that America is indeed on a slippery slope to UnGreatness unless the United States musters a forceful response. A response is unlikely to be forceful unless collateral damage includes disruption of nickel supply from Russia's Norilsk Mine or nickel laterite ore from the Philippines to China. Either development would send nickel above $10 per lb where the wisdom of developing a low pollution nickel deposit in a secure jurisdiction such as Decar becomes obvious. Since I neither wish nor think that will happen in 2017 it is hard to see a meaningful price move for First Point. As such it is not suitable as an SVH buy recommendation but ideal as a long term bottom-fish accumulation target. Accordingly I closed out the SVH recommendation on December 30, 2016 and adopted it as a bottom-fish accumulation target below $0.10.
*JK owns shares in First Point Minerals Corp