Giga Metals: Investing for the Future
(GIGA.V, HNCKF) The Nickel project for Nickel bulls.
tl;dr:
Giga Metals is a hyper-leveraged, low-carbon Nickel developer of the huge (top 10 globally) low-grade “Turnagain” Nickel Sulphide project. It is located in strong, stable BC and has recently signed a binding JV with Mitsubishi at a valuation more than twice the current market cap. These characteristics make it an extremely compelling story for investors who are bullish on the long-term macro market for Nickel demand. An imminent PFS – expected at the end of July – is anticipated to have a positive impact on project economics, and investors can expect catalysts to continue to dot the calendar for Giga over the next 12+ months.
Note: For previous JRI coverage on Giga, check out ep. 27 here.
There is a prevailing market wisdom when picking through junior exploration companies to not bother with projects that aren’t economic at current market pricing. The wisdom goes that there are already so many other challenges in mine development that picking a project that is already uneconomic is essentially making your investment dead on arrival from day 1. And I generally am supportive of that maxim. From this perspective, Giga Metals is an average play at best.
However, Giga Metals has the distinction of its valuation being extremely sensitive to the price of Nickel. Further, I believe that the commodities market in general – and Nickel in particular – have enough bullish tailwinds to make Giga Metals an extremely intriguing project. There are two looming macro conditions that are developing for commodities – the rapid ballooning of global demand as the world goes green, and the increasing need for regional production in a world of hardening borders. These 2 macro forces are setting up many minerals, including Nickel, for strong upside pressure in both demand and pricing. Therefore, companies that have outsized, leveraged exposure to Nickel pricing are potential exceptions to the above rule that would produce outsized, leveraged returns for investors willing to assume the requisite risk of entering a position based on future projections. Enter Giga Metals.
Now, Giga Metals is not your typical Nickel development project. Consider:
It is eye-poppingly huge. Its 1.6Mt of recoverable M+I Nickel makes it top 5 or 10 in the world of undeveloped Nickel deposits.
It has a big, long mine plan - averaging 33,000 tons of Ni produced annually over 37 years of mine life. (Not yet including the updated MRE as seen to the right.)
It is low-grade, possessing a head grade of .210% Ni.
It is an expensive project - USD$1.9B to build, and ~USD$9B to operate as per 2021 .
On a per annum basis, it works out to USD$243M/year.
The mine plan has a much more reasonable $/t pricing due to the sheer size, scale, and output of the project, coming in at USD$7.89 operating cost over LoM all-in.
It also has over $USD20B of recoverable metal in it at USD$10.41/lb Ni.
It also has considerable, legitimate further exploration potential with multiple targets the company intends to drill out, making it likely that the LoM will be significantly longer than years once the land package is fully mastered.
It is distant-but-accessible in BC’s North – road-accessible, but requiring an expensive powerline (USD$278m) which is already built into the capex.
It has a miniscule true strip ratio of just 0.19.
Its economics at current Ni prices (USD $10.41/lb) provides an adequate after-tax IRR of 11.6% and a sub-average after-tax NPV of USD $588 million dollars, but those numbers don’t tell the whole story and would-be investors owe it a deeper look.
The imminent PFS will see a significant increase in M+I tons and there are some hoped for/anticipated improvements in economics.
To be clear, Giga Metals is more than just a curiosity. There is a compelling set of reasons for why it should demand the attention of anyone bullish on the long-term outlook of Nickel.
First off, the economics of Turnagain deserve a closer look. For one thing, the sheer scale of Turnagain sort of short circuits “one size fits all”, NPV-based valuation methods, as mines with long mine life see the latter years end up severely undervalued. Especially beyond 25 or 30 years, cash flow ends up discounted to near zero at typical discount rates. Major companies such as Mitsubishi see this very differently – long-term, consistent, predictable access to their desired mineral is absolutely critical to their company. So while the NPV will still need help from a rising spot price tide, the numbers are stronger than they might appear at first blush.
It is also important to note that the project is ultra-leveraged to Ni pricing. Every USD$1.00 increase in Nickel spot price results in roughly USD$330m being added to the project’s after-tax NPV. Consider here that for the past 15+ years, there is a rough-but-present 2x leveraged correlation of Nickel price to Nickel demand. The point is that even small increases in demand can have outsized impacts on price discovery for a commodity if the trend is strong and continuing.
Forecasts out to 2030 see Nickel demand increasing anywhere from 15% to 88% as the world electrifies.1 Even the lower end of that spectrum could result in significant increase in spot price, especially when you consider the growing impact of geopolitics and environmental demands. For example, pricing Nickel USD$5/lb higher to USD$15.41/lb pushes the IRR to 19.8%, a very viable number for a project of this size and scope, and NPV to north of USD$2.19B, improving the current value of the project past the cost of initial capital. This is also before any cost-saving measures, which Giga is hinting will be an important aspect.
Returning to the topic of increasing production and demand, Indonesia is aggressively increasing production and presently supplies the outright majority of all global Nickel production. However, its Nickel Laterite ore is mined in environmentally catastrophic fashion, and is very expensive to convert the Nickel Laterite into something that can be used for EV and battery purposes. In addition to that, China has a heavy presence in Indonesia, and as the world slowly fractures into opposing regions, the need to onshore critical mineral production into western countries with much more stringent environmental standards will only continue to increase.2 While the imminent death of globalization has been greatly exaggerated, increased demand for Canadian Nickel Sulphides seems inevitable, and will only serve to increase upward valuation pressures on companies like Giga.
I believe that all these characteristics of Giga which make it unique also make it likelier to become a mine and thus provide meaningful returns for shareholders.
In conclusion, deposits (such as Giga’s Turnagain project) that check the boxes for major buyers (like Mitsubishi) – that is to say, green/low carbon, predictable and consistent grade, low strip-ratio, clean metallurgy, stable jurisdiction, long mine life – I believe provide a uniquely powerful, leveraged exposure to Nickel. Therefore, if you are bullish (like I and many others are) on Nickel, Giga Metals is a company well worthy of your time and investing due diligence. With an imminent PFS, any improvements made to a project as sensitive to economics as this will be keenly felt. I await it eagerly and the opportunity to compare and contrast the PEA and PFS.
(For project financing sensitivity chart and costing breakdowns, please see tables from 2021 PEA below. Note that they will soon be obsolete with the upcoming PFS.)
https://www.electrive.com/2023/06/14/eu-parliament-approves-comprehensive-battery-market-regulation/
