I exited around 20c and remain on the sidelines. I struggle to gain conviction in these types of positions before a DFS release because so much can go wrong with that release and more often than not they surprise to the downside. 

It is very difficult to ascertain whether inflation will have outpaced nickel price rises (which have subsequently pulled back) or vice versa, although I am leaning toward the former (cost input inflation > nickel price) with a CAPEX blowout. 

There was a great Zoom recording posted on HC recently with the CFO presenting at a conference in QLD. In that presentation, he was reasonably confident but also agreed that "it (financing) is a massive challenge and ...is keeping us up at night". 

A lot of the bulls took away the positive that another OEM might be signed soon (for the last of the Ni/Co offtake), but those comments also reminded me of SRL/CLQ and the way they were talking about financing prior to being unsuccessful. 

All in all, I'm going to stick with my strategy of staying on the sidelines until financing is secured (rightly or wrongly) as I think the risk is elevated at the moment even at the current valuation (~$180m MC).

SRL is at a ~$180m MC, NC1 is at a ~$70m MC, AUZ is at a ~$30m MC and ARL is at a ~$130m MC, so I think there is a downside to the valuation if we see a poor DFS or another delay. 

I'd say 5c (~$80m MC, 1.56b SOI) is possibly a 'safe' entry even if there was to be a delay or minor cost blowout as long as the company eventually secures financing and proceeds. That's based on the comparables above.

However, if the project remains, like SRL, awaiting finance for 3+ years, there's a massive opportunity cost where it may trade around that level until the status quo breaks. If there is a major cost blow-out all bets are off.

The chart remains in a short and medium-term downtrend. That scares me a bit as I've learnt my lesson too many times about the dangers of falling knives.

From the ASX nickel set, I retain the view that QPM is the standout company though (management + model) and most likely of the set (although certainly not guaranteed) to secure full financing that allows them to proceed to an FID ($1b+ AUD CAPEX funding is required).

QPM was one of my biggest ASX winners on Strawman and in real life (in percentage terms and absolute terms), so I continue to watch the story unfold.

Unfortunately, I believe QPM is a classic example of a chicken and egg problem at the moment.

This is an extremely CAPEX-intensive industry (unlike sectors such as lithium) and it is very likely that the CAPEX cost for QPM will come in over $1 billion AUD. That's going to be a high bar, regardless of the NPV and IRR (which will be strong).

To finance that, they will need to use a split of equity and debt (indicated to be 40%/60% respectively by management). So we are looking at $400m in equity and $600m in debt. By all reasonable metrics and conventions, the project requires a material chunk of equity as part of the funding mix. Raising that $400m in equity is near impossible with a traditional capital raise on-market when the market cap is only $200-250m. But, given CAPEX funding is the key upcoming risk, investors will wait before investing and thus the market cap stays low. It is, unfortunately, a circular issue.

The debt component should easily be secured from a consortium of banks (and NAIF), but raising $400m equity on market (or to a strategic partner) with a market cap of $200m is a mammoth task (SOI needs to triple from 1.5b to 4.5b). Even raising $400m with a $400m market cap is a mammoth task (SOI needs to double from 1.5b to 3b).

There is of course though a growing realisation however that there needs to be far better integration across the supply chain. My understanding is that for situations like this where the CAPEX ($1b+ AUD) is extraordinary relative to market cap, new models of financing need to be explored. SRL was/are looking at a model where they effectively establish a joint venture with a partner, plus establish a new project-level entity (owned by SRL) and proposed that the investment in the project level entity would take place at the NPV level (not the market cap level).

That approach has been unsuccessful so far across the last few years but is one method to raise a significant amount of funding without diluting shareholders to oblivion when at a low market cap to CAPEX ratio. If QPM took that path, it is unclear what level of project ownership QPM would end up with (i.e. joint venture 50/50 v 30/70). Stories like CXO were so amazing because the CAPEX ($90m AUD) to MC ratio was so favourable (low). But the lithium industry is an apples to oranges comparison.

Nickel hydromet is one of the most capital intensive processes in the mining industry. While that makes financing a challenge, it also reflects the supply-side challenges that the auto industry faces in securing new supply of nickel to build their electric vehicles.

In my view, automakers and battery makers will eventually have to vertically integrate and become JV partners with junior miners to be able to bring new supply to market, unless battery technology can shift away from nickel chemistries. The auto & battery industry can not rely on the financial markets to take this step of bringing juniors to market given the CAPEX intensity of the industry. But so far, none of the automakers are making the first step into unknown territory. It's why Dr SG refers to this industry as a "train wreck".

Across the nickel mining industry, there are very few projects that can be brought onstream within the next 5 to 10 years. Many of them face significant permitting timeframes and study phases before you could even consider having them financed. Conversely, China is building new capacity in Indonesia, but that capacity comes with some serious problems, such as deforestation and their plans to dump their waste directly into the ocean. Thus, QPM is certainly well-positioned with respect to these alternatives and from an ESG lens.

The next milestone is of course the DFS due for release mid-year. It will be interesting to see how the market reacts to that. Following the DFS, if financing is secured (debt & equity), I will most likely re-enter at that point (if the valuation is favourable on an EV/EBITDA multiple and EV/NPV ratio). But the risk of financing is certainly not something to dismiss. There's no guarantee that this project will become a reality: I learned that the hard way with SRL.

The financing risk remains the main challenge and I will remain on the sidelines until it is solved. No one has a crystal ball (I certainly don't) as to how this will play out, but that's why we all of us love investing so much, it is ultimately a game of odds and risk v reward.

I've recently made the decision to sell the majority of my QPM holding, which was up 5x.

In a Kenny Rogers song, 'The Gambler', the American singer-songwriter highlights his encounter with a ‘gambler’ on a ‘train bound to nowhere’. If understood as counsel about life, the general advice of the song isn’t straightforward. However, it does highlight an important truth – that some of life’s most important decisions come down to using accumulated experiences and knowledge to make a judgement call based on probabilities.

Analogies with poker aside, Kenny is right. Indeed, “knowing” what to do and when with long-held positions is one of the most challenging and important aspects of successful investing. In the below note, I expand on my own investment framework for selling and put it into context with ASX:QPM. It was a difficult decision to make, but on the balance of probabilities, I think it was the right decision to make, for me.

https://www.tepinvestments.com/blog/knowing-when-to-hold-em-and-knowing-when-to-fold-em-asxapx-amp-asxqpm

Wishing all $QPM holders the best going forward. This is a project that would be good for both the economy and the planet, and Dr Grocott is one of the most impressive people I have ever met. Let's see how the story plays out.

First, a disclaimer: The below text is a transcription of what transpired at the QPM AGM. It may contain typos or other inaccuracies, although all due care has been taken to accurately replicate the proceedings of the meeting. I am sharing this text because I know that many investors were not able to attend the AGM and that listening to management, undertaking deep research and completing fundamental analysis (FA) is vital to achieving strong investment returns. I hope this information is of use.

I first invested in ASX:QPM at circa 1.5 cents in mid-CY2020, accumulating materially around 3c and again in the SPP at 8c. It has been a tremendous journey so far. Currently, bearish TA is in contrast to bullish FA, and so the main question is where does the discrepancy lie and why?

From what I have seen elsewhere in the markets, I think this situation is very much the lull that a lot of similar companies experience when approaching the release of the DFS study. A DFS rarely surprises to the upside and often surprises to the downside. However, I think in QPM's situation, even a surprise to the downside is still going to yield solid project economics (IRR, NPV), and so I'm not too concerned.

But, the typical trading pattern is probably a lull/decline here while the market waits to see the results of the financial study and then a massive ramp if the company succeeds with financing and moves past the FID into construction. It is definitely not guaranteed that QPM will make it past financing and into construction, but if they do manage it, often a company like QPM will be valued on a percentage of their NPV (net present value, which is essentially the sum of all future profits that the project is expected to generate).

The NPV is likely to come in at around $3 billion AUD (once the DFS is released) and so at the current share price/valuation (20c for a $270 million valuation), QPM is trading on around 10% of NPV. If financing is secured for the project, the level of risk to investors reduces dramatically and so QPM is likely to trade at a higher level of NPV at that point, probably around 30% of NPV for a $900 million valuation (~60-65c/share, not considering dilution).

So, all in all, if QPM succeeds with financing the project, there should be a lot more upside on offer. My personal take is that the National and State (QLD) Government is supportive, particularly with the rhetoric around jobs and growth and the value-added, green nature of the project. My best guess is that QPM should be able to secure around $200m AUD from NAIF (NAIF is a $5 billion development financier to infrastructure projects in the Northern Territory, Queensland and Western Australia) and around $500m AUD from a consortium of Australian and International banks, on the debt side. They will then need to fill the remaining gap (I think the project will cost around $1 billion AUD to build), from equity investment in the order of $300m AUD.

Of course, financing is (in my view likely) but is by no means guaranteed. The company remains a more speculative investment at this point in time although is significantly de-risked (particularly from a technical perspective) compared to this time last year. Please note that this is only my own personal view, which I am sharing to encourage debate, reflection and for informational purposes only.

It is very important to do your own analysis before making any investment based on your own personal circumstances. I am by no means a perfect investor and past performance provides no guarantee of future performance. With that said, please see below for the transcript of the Queensland Pacific Metals AGM.

Well done Stephen and team.

With every day that passes, I am more impressed and convinced by this outstanding management team and I don't use that word lightly. I'm grateful to have got in on the ground floor after speaking with Stephen during his first few weeks on the job and grateful for the impressive work being undertaken by QPM.

When a junior resources developer can lock in equity investment and binding offtakes with two bluechip customers, speculation of "is this real?" diminishes. Today’s binding off-take is equivalent to about $300 million in revenue per year once in production. Stephen continues to execute on his performance milestones like clockwork.

This project is now massively de-risked from a CAPEX funding perspective because future product payment is confirmed. Back at 6c in January, I set a short-term target of 20c and that target has now been hit. (https://hotcopper.com.au/threads/short-term-target-a-200m-market-cap-20c.5864510/). Moreover, we know there are more offtakes in the pipeline into Samsung and Europe...

Now it is time to cast our eyes forward to investigate what level of NPV this project will trade at once the DFS study is complete, once the project is in construction, and once the project is in production. I am going to estimate that it will trade at 0.2x, 0.3x and 0.5x EV/NPV respectively during those 3 stages.

This company has the potential to be a multi-millionaire-maker and I am grateful that it has now climbed to become my largest portfolio holding, surpassing Appen.

Congratulations to all long-term investors -- if you believe that this company can make it to production, then buckle your seatbelts because this ride is only just beginning. Having watched the sector for a long time somewhat skeptically (CLQ/AUZ/ARL etc), I believe that QPM is now the front runner... and the share price will begin to reflect this soon.

T.E.P.