Giga Metals: What Makes a Mine?
My final thoughts on Giga's recent PFS as well as its implications for how we evaluate mining projects.
tl;dr: I explain in detail my thoughts on Giga’s new PFS for its Turnagain project and why I think it has potential. I also use Turnagain as a vehicle reflect on the process of evaluating mining projects: What to take into consideration and the weighing of risk based on who is doing the evaluation.
Tickers mentioned: GIGA.V
Here it is at last. My long-form thoughts on Giga’s PFS. So sit down with a cup of coffee here and take a peek.
Table of Contents
Part 1: An Intro to Giga’s Turnagain
Introduction
Part 2: Pros and Cons
The Turnagain Advantages
The Criticism
Part 3: The PFS and my Reflections on It
PFS: The Numbers
My Thoughts
Part 4: Conclusion
Part 1: An Intro to Giga’s Turnagain
Introduction
Giga Metals recently released a PFS for its Turnagain nickel project in northern BC, and with it are looking to make a point on what makes a mine. This is because Turnagain possesses a unique set of characteristics – including a weakness critics argue defines it - that together form a remarkably interesting project that has been the source of some industry debate.
Regardless of any such debate, though, Giga continues to effectively advance Turnagain believing that it has got exactly what majors want. And it is hard to dismiss that out of hand in the context of Giga’s active and engaged current JV with Mitsubishi.
My goal here is indeed to discuss the Turnagain PFS, but I want to do so by framing it within a larger conversation on mining project evaluation – what it is, what it isn’t, what it includes, and how exactly it defines and measures success.
This is important, because the ultimate success of Turnagain centers on the answer to the question of what makes a mine? CEO Mark Jarvis and his team believes that there is an essential difference between how strategic partners (such as an OEMs) on one hand and private (even sophisticated) investors value in a mining project.
This difference comes about because their respective objectives as investors are not the same, so therefore their assessment, weighting, and evaluation methodologies also cannot be the same.
For private investors in the resource industry, the economics of the mine, naturally, weigh heaviest on any accounting of it. However, for strategic partners, the valuation is more complex, and there are considerations beyond pure profit for major companies looking to inhouse their nickel supply.
Giga’s assertion is that Turnagain is an awfully enticing project for anyone looking to secure vertical integration of a safe, stable, consistent, long-lasting, low carbon, battery-quality, nickel supply (which is to say, auto majors and OEMs).
And I am inclined to agree. Let me discuss:
Part 2: Pros and Cons
2.1. The Turnagain Advantages
In essentially all ways but one you could describe Turnagain as the ideal nickel deposit. I will try to be brief here (not looking good, tbh) by proposing these traits in list form:
Consider:
It’s world-class huge, with the M+I resource coming in at nearly 12.8 billion lbs of in situ Ni.
It’s in Tier 1 British Columbia, and reasonably close to multiple transit options.
On the land of two different first nations (the Tahltan and Kaska Dena] who are generally supportive of mining.
It’s got a smart team at the helm with success on the resume.
It has a JV with a major international battery manufacturer (Mitsubishi ring a bell?) who remains active, interested, and engaged.
The strip ratio is a tiny 0.4:1.
It’s actual geological and geometallurgical characteristics are highly consistent across the deposit, and all rock can be fed through the exact same process and achieve consistent recovery.
It has a remarkably simple flow sheet, particularly for a mine of this size.
The PFS Flowsheet It produces an exceptional, high-grade Ni-Co concentrate highly sought after by smelters.
One of the lowest carbon-emitting present or future nickel mines in the world.
The mine plan is solidly and realistically built, as evidenced by no cost increases from PEA to PFS.
Legitimate prospectivity to increase the resource potentially much, much further beyond the current mine life.
Even the weak Ni recovery rate (51%) isn’t that big of a deal in full context. For one thing, the deposit is so massive that even leaving behind half the nickel as waste doesn’t make a material difference. A 30+ year of mine life with further exploration potential certainly dulls any risk created by a low recovery rate. Note that this rate was the result of an intentional decision as Giga judged maintaining the simple, low-intensity flow sheet to be a key feature to their project.
Exploration Targets from PFS Slide Dec There are multiple tailwinds for this project’s economics:
a. There are at least 53 mt of inferred resources currently classified as waste within the current pit design. That’s over 1.5 years of mining throughput that will almost certainly not end up as waste but is currently valued at zero.
b. Its tailings have been proven to sequester carbon in meaningful quantities, but any potential economic benefit has not been included in the PFS.
c. If carbon reduction incentivization continues (by either carrot or stick) Giga’s ultra low-carbon output will provide it clear and obvious price premiums.
d. If the global north/west continue to increasingly prioritize onshoring access to critical minerals, Giga will appreciate in value.
e. If the world comes even close to greening/electrifying to meet stated time frames, nickel has no choice but to drive upwards in price to achieve supply parity by unlocking projects such as Giga (I have explained before how immense an undertaking this level of supply will be to achieve.)
2.2. The Turnagain Criticism
So, pretty impressive right? It makes you wonder - what could possibly sour the pot on this tantalising project?
The answer in a word? Grade.
Doesn’t matter how you look at this project, the grade remains consistent and low – less than 0.21% Ni content over the whole deposit. So even though Turnagain is actually pretty cheap to mine - $9.09/t of ore over LOM according to the PFS, there just isn’t enough payable metal to create more than a narrow margin of error for net profit at current nickel prices. This is the crux of the issue with Turnagain. And it really isn’t very complicated. Low-grade bulk base/battery metal deposits are always generally a tough sell because they are extremely difficult to predict consistent profit margins far out into the future. I will share the headline numbers of the project in the section below for you to get a sense of them.
Part 3: The PFS and My Reflections On It
3.1. PFS: The Numbers
Notably – and genuine kudos to Giga here – the PFS numbers are actually better than the PEA, despite a couple years of inflationary environment separating the two. Again, I think this demonstrates the seriousness with which Giga has approached Turnagain. This isn’t a project that is papering over defects in an economic study with some handwavy estimates.
Giga has long stressed that their approach to Turnagain is an attempt to both emulate and attract the conservative, deliberate approach of potential majors. As Mark and Lyle both state – different potential partners are going to come at this project with their own numbers and projections in terms of nickel price and cash flow. The goal of Giga (and PFS lead engineering firm Tetra Tech), then, isn’t tweak it to highlight its potential, but rather the flipside - to make the cost variables as known and concrete as possible.
That being said, I don’t think I am surprising anyone who knows this story when I say the headline economics for Turnagain remain average. Here’s some charted headline numbers from the PFS:
And below I’ve restated some comparative content between the PEA and PFS to demonstrate the changes.
3.2. My Thoughts
Positive changes, but no real surprises. Some basic reflections:
Mark states – justly, I think – that the IRR hurdle these major base metal projects are judged by is roughly 10%. So Giga clears a fundamental standard by which to measure similar projects.
The post-tax NPV in a vacuum is decent - $574m - but the NPV:Initial Capital Ratio is a weak - 0.3:1 (where I like to see 2:1 as a “very good” ratio).
Critics may balk a bit at the elevated Ni price used ($9.75/lb) in the base case, but it is not a major concern for me. I don’t think this is the equivalent of pricing a gold project’s success at $2000. As Giga themselves state, $9.75/lb is comfortably below the 20 year (and 30, and 40, etc) inflation-adjusted average (and median) for nickel.
Payback period was not mentioned (full PFS still to come) but it is anticipated to see similar improvements as other indicators.
This is a great example of how the NPV of long-lived mines gets severely discounted under a dcf analysis. The value after about years 10-12 gets basically zeroed. For a 30 year project such as Giga, this can have a fundamental impact on how people view and value the project. For private investors, value is lost over the LOM, but for majors looking to secure access to generational nickel supply, it is just the opposite.
I want to see the sensitivity charts before I go to much deeper into this discussion. Full PFS can be expected in the next couple of weeks.
So, what to make of all this? To be honest, Giga has been a useful exercise for me in wrapping my head around how different investors might value the same project differently. As a thought exercise, then, consider the following:
You are an automaker or OEM who is looking to vertically integrate nickel supply into your supply chain. What do you, a major company planning for decades of industrial production and automobile manufacturing, want to see in a hypothetical nickel project? What’s your ultimate objective with whatever project you select? Where is your central revenue and profits meant to flow from?
Put another way, I ask you this question: Are OEMs and other potential partners in the nickel production business or the battery manufacturing business? If they are in the nickel production business, then $/t profit margins are of course of overwhelming importance in their evaluation methods.
However, OEMs and auto majors quite clearly are not in the nickel business. Instead, their desire to secure nickel supply is as the means to a different end for them. Therefore, these companies have other considerations than pure profit when it comes to selecting their ideal nickel project to partner with and develop into production. I really don’t think that these companies are in-housing their nickel supply because they suddenly want to run off and become miners. Rather, I think it all about securing a stable, predictable, sustainable resource to build the foundation of their actual business model – and revenue and profit - on.
So instead of focusing purely on classic (otherwise critical) economic indicators, I would argue that these companies are looking for projects that satisfy a much more diverse range of requirements and standards.
Suddenly, things like jurisdictional stability, simplicity and consistency of geo and geomet characteristics, consistent production, extremely low carbon and environmental degradation risks, and other similar considerations begin to rise in prominence.
So, to me, that list of positive characteristics I started with up top must indeed loom large in the eyes of potential major partners. Because Turnagain is exactly all the things they would want in a project. Consistent. Predictable. Simple. Narrow bands of probable outcomes. Safe jurisdiction. Green and low-carbon.
But don’t take my word for it. Again, I return to Mitsubishi. Their announced JV with Giga is not even 3 years old. Mitsubishi no doubt was acutely aware of all the advanced nickel projects that could serve as prospective partners when doing their DD. And that process ending up with them picking Giga. That no doubt wasn’t an accident or done flippantly. And nor was it a case of Mitsubishi not getting first choice. Their Turnagain JV with Giga was the first of what is now a trend of large, low-grade Canadian nickel projects JVing with major international strategics. Therefore, I think the very existence of Mitsubishi’s active and enthusiastic partnership commands people to take a proper look at Turnagain. What is a project like Giga worth to Mitsubishi and other majors?
Part 4: Conclusion
So no, Giga doesn’t have the strongest case based purely on economics, and it never will. But to me, that seems a little too reductionist an approach to understand its true value. If you ask me “will Turnagain become a mine” I answer pretty confidently yes.
It then becomes a question of “will there be positive outcome for current shareholders” and here too I like Giga’s chances. Maybe Giga doesn’t end up commanding the valuation multiples of higher-grade deposits, but it doesn’t have to for it to be a success for current investors. To me, the risk:reward potential of Giga, when everything is put into balance, is undeniably enticing. At just C$25m market cap, with booked reserves, there is a lot of failure baked into the share price of Giga currently.
Mark Jarvis figures it will take about $50m to get Giga to a construction decision, so that’s his price tag for the next JV partner looking to buy in. And it is deal time. Mark has already hit the road internationally to shop the PFS to potential buyers. Just like the Mitsubishi JV gave a bit of a valuation measuring stick, we will see what majors think of the project using their pocket book soon. Indeed, Mark is hoping to get one signed within the next 6 months or so.
Yes, traditional wisdom cautions against relying too heavily on rising spot price to justify an investment in a resource play. But
If you’re a nickel bull,
If you believe green energy revolution is just getting started,
If you believe onshoring and “friendshoring” access to critical minerals is only going to increase in importance, and
If you believe low carbon emission mining projects will eventually see a premium attached to them,
then Giga is absolutely worth your time and consideration. So it is for all these reasons which I believe Turnagain a strong nickel project, and Giga a strong investing opportunity.
If you’re actually reading this, congratulations on your endurance. Let me know what you thought!
Thanks,
JRI
