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Valuation of $0.050
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Added 7 months ago

QPM is undertaking a cap raise.

It is probably a smart move by management - to cash up and batten down the hatches and then return to the financing challenge once rates start to come down again and the macro environment is more favorable.

But, the lower the share price goes the more difficult CAPEX financing becomes. QPM is in a very difficult position. And to no fault of the team, I should add. Terrific management team. But nickel hydromet is extraordinarily CAPEX intensive and the macro environment makes their ambition to finance this project near impossible, for the time being.

The CAPEX bill stands at A$2.1b as at Dec 2022 with total indicative debt financing commitments secured equal to A$900m. I don't think it is possible to fund this CAPEX using debt alone - they will need a 60/40 or 70/30 (at best) debt-to-equity ratio.

Additionally, another risk is that many of the battery makers are moving away from nickel in a big way, it may not even be in the next generation of batteries.

All in all, I'd put the probability of securing financing in the next 12 months at a sub 5% chance. It looks like a great project on paper until you work out that debt at 7-12% (best case) is going to sink any company with $1bn+ CAPEX greenfield projects.

Low capex companies are the place to be at the moment. Even better, cash-flow-positive companies with pricing power are where I want to park my money.

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#Trading halt
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Last edited 7 months ago

QPM has entered a trading halt pending the announcement of a capital raise.

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#Bear Case
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Added one year ago

Concern isn't that the project won't go ahead since project has full offtakes and financing and is probably at the high end of capex, accounting for the high inflation environment. Main worry is the cost of capital and project schedules.

Have noticed lots of retail holders as well.

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#Considerations
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Added 2 years ago

Hey @tbra97 I don’t have any great insights to offer on QPM sorry, it has always been a bit of a speculative play for me and my position in my real portfolio is not as big as the strawman one. 


I accumulated my position between 3.6 - 8c and trimmed some at 20c. I noticed it had shown up in monthly letters recently of a few resource specific funds more recently which increased my confidence. That combined with what looked like exaggerated selling which may have been in part tax loss related is why I thought it looked a decent bet at 12.5c

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#Considerations
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Added 2 years ago

@ArrowTrades I've been stalking your recent purchasing of QPM and that it's been a 12+ month SM portfolio holding of yours around similar and higher levels.


Curious to hear some ideas from you if at all possible. I retain a small holding IRL from about 15c and have taken advantage of bounces and pullbacks. With money on the sidelines I'm considering a heavier weighting of QPM than I've held in the last 12 months but plenty of other options around as well.


Not personal advice, clearly but I am definitely curious to hear some of your thoughts on recent allocations.

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#Latest Thoughts
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Added 2 years ago

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.

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#Financing: A Chicken&Egg Probl
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Added 2 years ago

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.

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#Framework for Selling
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Added 2 years ago

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.

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#AGM Reflections
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Added 2 years ago

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.

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Valuation of $0.235
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Added 2 years ago

Moving average down price range:

Buy at $0.215

Sell at $0.26

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#Bull Case
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Added 2 years ago

#tailwinds

Nickel added to the USA’s “list of critical minerals” which positions Australia nicely to service their demand

https://www.afr.com/world/north-america/australia-well-positioned-to-supply-critical-minerals-to-us-20211109-p597bg


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#Bull Case
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Added 2 years ago
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#Bull Case
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Last edited 3 years ago

Political Tailwinds:

If you cast your mind back to the last federal election, climate change was hot on the agenda and it was feircely debated in the pre-election campaigns. There were buses of climate change advocates travelling the country attempting to deliver their message. This was well received in some areas, and in other towns not so much. In North Queensland for instance, these campaigners where essentially chased out of town. Why? Well if you'd listened to the successful candidates of those seats, they stated that there was so little industry in parts of NQ, including Townesville, that if you took away mining or mining related industry, there would be very little job and economic growth prospects left.  People were crying out for jobs and others were trying to take these opportunities away from them. This formed the basis of their entire campaigns at that time. As such, it doesn't suprise me that the TECH project has strong political support and given the context it makes sense to me that they would help to push it through. From an investor point of view this de-risking makes it particularly more attractive, at least while we have the same government.

Note: this is not a political post per se, it is to highlight significant tailwinds for the company as it pertains to investing. I am in no way interested in a politically charged  discussion on strawman or otherwise. 

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