Intercept Announcement

MCR announced yesterday 23/08/21 two new (somewhat impressive) drill results in their targeted exploration zone between their Durkin North and Long mines.

• 8.1m @4.2%, incl 3.7m@6.0% & 1.7m@4.5%
• 2.6m@3.7%, 0.3m@8.2%

As a result of this, the share price jumped from $1.24 on Friday's close to a peak of $1.36 yesterday, representing a ~10% jump.

My take on what this actually means

As discussed previously in this straw, part of my main thesis (specifically point 2) states: 

"Further drilling (such as between Durkin North and Long and at Cassini once underground access available) will lead to resource and reserve (R&R) uplift, extending life of mine (LOM), increasing project NPVs."

These drill results increase the probability of a successful mine and the expected value from a mine between Long and Durkin North, but not to a tune of 10% of MCR (~$50m).

If we look at previous MCR announcements, we can see a pattern of the share price jumping at announcements (more than the value added by the announcement), then dropping over time as investors forget. 

I have used this liquidity event to cash out some of my holding in my RL portfolio (position 5% --> ~1%) and intend to buy back in when the price subdues or before AGM/Full year results in Oct/Nov. 

Side note:

I note I am going against my previous stated sell thesis of selling when the price is 1 S.D above my target price (perhaps representing weak psychology?). I can rationalise ex-post this was too high, but I'm going to use this as a point of learning to see if I set my initial sell target too high, or am making a mistake by not following through on my initial rules. Would love any thoughts on this.

Mincor - ESG & EV Friendly Nickel: Priced to Perfection?

Having exited my Mincor position last month @$1.30, recent spikes due to annual report, new drill results, D&D conference, and BHP finally announcing their Tesla agreement have made me revisit this stock.

Thesis

Mincor has quality assets nearing production of "Class A" nickel, management with experience converting these types of assets effectively, is backed by industry expert shareholders, and is exposed to ESG & EV themes.

Share price rerating is likely to occur as:

1. Cassini enters production and Mincor becomes profitable
2. Further drilling (such as between Durkin North and Long and at Cassini once underground access available) will lead to resource and reserve (R&R) uplift, extending life of mine (LOM), increasing project NPVs.

Quick Overview

• Flagship greenfield Cassini mine to commence production March 2022
• Further exploration/drilling opportunities may lead to Resource & Reserve (R&R) uplift
• Strengths include:
  • Strong team with WMC alumni,
  • zero employee turnover in LTM despite hot labour market,
  • 15% ownership by Andrew Forrest's Wyloo, 8% competitor IGO, decent management ownership,
  • ~A$100m (4666tn) of Ni hedged, off-take & infrastructure agreements with BHP's Nickel West in place
  • ESG friendly operations producing "Class A" nickel (sulphide) with low carbon-intensive mining & processing, exposure to EV market
  • Strong balance sheet: $55m cash with $55m financing facility (BNP SocGen) @BBSY+3.6% indicating creditworthiness
• Key Risks (mitigants):
  • AISC significantly above DFS (have assumed AISC above management estimate for DCF)
  • Aud appreciation (unlikely given RBA targeting lower AUD and US FED discussing QE tapering)
  • Geopolitical tension (BHP (MCR offtake counterparty) finally announced their Tesla nickel supply deal, reducing Chinese exposure)
  • Nickel price deterioration (A$100m of Ni hedged @~AU$21,466, further with EV batteries moving to be more Nickel intensive (NMC 111, 622, 811) and greater range with limited Sulphide production horizon, likely undersupply in next 5y increasing price pressures - I have modelled using Bloomberg Ni LME forecasts however Sulphide sometimes trades at premium to LME and I suspect forecasts do not capture full upside)
  • Offtake renegotiation (As the BHP Kambalda concentrator is designed for Kambalda Ni Sulphide, and BHP have recently re-adjusted their concentrator for Cassini production, BHP likely promising certain quality of nickel products to Tesla, and it being not significantly more expensive to go directly to market around BHP with their Nickel (according to analyst report) I suspect Mincor has negotiating power at least equal to BHP)
• Blended valuation using 20% P/NAV, 20% EV/R, 60% DCF: $1.32

My strategy:

Purchase Mincor shares if they are 1 SD below my target price (SD based on LTM daily data).

Sell Mincor if:

1. Price is 1 SD above my target with no results due within 1 week
2. Key management personnel leave (Southam)
3. It becomes apparent no upside left in future exploration (ex: no further significant drilling results, sale of flagship assets)
4. I lose trust in management

Reconsider Mincor if:

1. Major holders (Forrest, IGO) sell significant stake
2. Currency risk:
   1. Unforseen currency shocks / significant forecast rerating
   2. RBA significantly change their policy stance and aren't keeping AUD artificially low (or US fed change heart RE: tapering) AND Ni price doesn't rerate higher
3. Significant environmental damage from mines (could possibly jeopardise finance facility, Tesla & BHP agreements)
4. Evidence of cultural shift (significant workplace safety issues such as was previously present in company, high employee turnover potentially evidenced by job ads directly or through Pit n Portal, breakdown of relationship with Ngadju body corporate such as through disfunctional Mining Operations Implementation Committee)

I've attached a slide deck some uni mates and I put together when we pitched this stock in May for a comp. Not for distribution. Also, slightly outdated but not much has changed.

Disc:

Order filled this morning at $1.205. Now hold <5% in RL portfolio.