Canada Nickel (TSX-V:CNC, OTC: CNIKF) released its resource update for its Crawford Nickel-Cobalt Sulphide Project located in the heart of the Timmins-Cochrane Mining Camp in Ontario, Canada. The resource update confirms what I suspected, Crawford is absolutely massive with more than US$50 billion worth of metal outlined in the Crawford resource at today's metal prices ($7.20/lb nickel, $15/lb cobalt).
The key to this update which most investors will focus on is the high-grade core which CNC calls the "Main-Higher Grade Zone". This resource update increased the contained nickel in the 0.35% grade shell by 96% to 208,800 tonnes (58 million tonnes at 0.36% nickel) and in the 0.30% grade shell by 109% to 683,400 tonnes (201 million tonnes at 0.34% nickel).
This is what the Main Zone looks like as of this update:
And this is an excellent illustration depicting how CNC has expanded the Main Zone since the May update:
At the end of this post I offer a back of the napkin analysis of what cash flows from production at Crawford might look like, but first I want to summarize where CNC is at today, and where we are going over the next 12-18 months:
- Canada Nickel has defined a world class nickel-cobalt sulphide deposit in a tier-1 mining jurisdiction (it doesn't get much better than Timmins, Ontario both in terms of infrastructure and rule of law/clarity of permitting process).
- Future mining operations will undoubtedly begin at the Main-Higher Grade Zone - mineralization at the Main Zone begins relatively near-to-surface (less than 50 meters depth) and continues to 500+ meters depth. This Main Zone at Crawford will keep the future operator of this mine very busy for many years as this zone alone contains more than US$10 billion worth of metal at today's metal prices. Its higher grade nature means higher operating margins early in the mine life.
- CNC will now work to put together a maiden PEA (scoping study) over the next couple of months which will give the market a much better idea of what the economics will look like at Crawford. CNC has promised this maiden PEA will be released by the end of December.
- CNC will be busy over the next couple of months as the company continues to drill prospective nickel and PGM targets across its property package, while also completing metallurgical and engineering testing required for the PEA.
- Once the PEA is completed by year end, CNC intends to use 2021 to move straight to a feasibility study (FS). Once a FS is completed (by year end 2021) Canada Nickel will begin permitting and contemplating project financing and construction.
As the nickel price continues its upward ascent I believe that Canada Nickel will be acquired at some point in 2021. Nickel has recently become comfortable lifting its head above the US$7/lb price level and many metals price forecasts see nickel prices moving higher over the next decade; the EV revolution is poised to create surging nickel demand, while years of underinvestment in nickel mine supply will mean that much higher nickel prices will be required to incentive new supply to come online in order to meet increasing demand.
Simply stated, if you see nickel rising to $9, $10, or even higher over the next several years then I believe CNC shares could be worth multiples of today's price and well worth an investment at today's share price. However, if you are not optimistic on nickel and cobalt prices then you'd probably be best served by selling CNC and looking elsewhere.
I'll add that first production at Crawford is likely to be at some point in 2024 if all goes well. The timing of this project couldn't be better as global demand for nickel is set to soar beginning in roughly 2023 just as years of underinvestment in new supply begins to bite hard. A $10 nickel price forecast may look conservative a couple years from now. In which case a world class nickel-sulphide deposit in a tier-1 jurisdiction will suddenly become the Belle of the Ball with every major global mining company desiring this asset.
The following is very rough back of the napkin math that I came up with based upon publicly available information and today's new release in order to help get a ballpark idea of what we are looking at in terms of economics at Crawford - these are my estimates and they are sure to not be accurate once we get the actual PEA and FS:
Mine Life - 35+ years
Initial capex (including mill, mining fleet/equipment, etc.) - US$800 million
Mill Throughput - 35,000 tonnes per day
US$/tonne payable (assuming 55% nickel recovery, 50% magnetite (iron) recovery, and 30% PGM recovery) - US$35 per tonne
US$ cost/tonne of mining - US$10 per tonne
Annual operating cash flow during first phase of mining of the Higher-Grade Main Zone (using US$7.50/lb price of nickel and today's exchange rates etc.): US$300,000,000
If we put a conservative 5x multiple on the operating cash flow and subtract the initial capex we get to US$700,000,000 which is C$917,000,000 at today's $1.31 USD/CAD exchange rate.
Canada Nickel has a fully diluted share count of 89,100,000 shares which includes 3,000,000 warrants which would bring in an additional C$6,300,000 if exercised. As of today, Canada Nickel has C$14 million in working capital (more than C$20 million if you were to include the C$2.10 warrants) which gives the company more than enough money to work through the feasibility study stage in 2021. I'm sure that CNC would be open to a strategic financing if the right opportunity arose, however, for now the company is well funded and focused on delivering a maiden PEA to the market by the end of December.
Today, CNC's fully-diluted market cap is C$187 million using a C$2.10 share price. It's not hard to see that the potential price for any future acquisition is multiples of today's share price. The future path of the price of nickel will obviously have a tremendous impact on both the perceived and realized valuation of Crawford and Canada Nickel shares, however, I believe today's valuation is well anchored by what the company has delineated to date at Crawford. The potential upside for shareholders is significant and CNC shares also offer a powerful embedded call option on the price of nickel.
Tomorrow at 10:00am EST Canada Nickel is hosting a live Q&A conference call (7:00 a.m. Pacific time). Participants may join the call by dialing:
Local: Toronto: 416-764-8688
North American Toll Free: 888-390-0546
Disclosure: Author owns CNC.V shares at the time of publishing and may choose to buy or sell at any time without notice. Author has been compensated for marketing services by Canada Nickel Company Inc.
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