Giga Metals: Revisiting This Nickel Optionality Play

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About: Giga Metals Corporation (HNCKF), Includes: CBLLF, NILSY
by: Silver Coast Research
Summary

Giga Metals Corp. (formerly, Hard Creek Nickel Corp.) is engaged in the exploration and potential development of the Turnagain nickel-cobalt project in British Columbia.

Turnagain is one of the world's largest undeveloped nickel sulfide deposits. However, the low grades mean that the project requires high nickel prices to be economic.

Nickel prices have soared in the last few weeks - whether this can last will have a major bearing on Giga Metals' prospects.

This is a typical optionality play, with downside risk but also multi-bagger potential should the project be developed.

TSX Venture: GIGA

OTC: OTCPK:HNCKF

Frankfurt: BRR2

Market Cap: C$19M

Back in 2018, I introduced Giga Metals Corp. ("Giga"), a Canadian explorer looking to develop the Turnagain nickel-cobalt project in British Columbia. Giga is definitely not the kind of company in which conservative investors should park their hard-earned money. Instead, this stock is akin to a call option on the nickel price.

The recent surge in the nickel price, triggered by Indonesia's decision last Friday to expedite an ore export ban, has started to wake up the shares. Giga is still an all-or-nothing stock, and the project is at an early stage, but there could be significant upside potential ahead if the nickel rally continues.

Giga Metals Source: company's website

Turnagain in a Nutshell

Investors can refer to my initial article and the corporate presentation for some background on Giga's Turnagain project. In short, Giga has a massive nickel sulfide resource, albeit a low-grade one at about 0.2% nickel on average:

Turnagain Mineral Resource Source: corporate presentation

Nickel sulfide is a desirable type of ore as it can be processed into the high-purity Class I nickel required by EV batteries. Given the low grades, however, Turnagain requires rather high nickel prices to be economic, with a base case at US$8.5/lb used in the Preliminary Economic Assessment (PEA) from 2011, whose key metrics are set out below:

Giga Metals Turnagain 2011 PEA summary

Source: corporate presentation

Due to a challenging environment for nickel during the 2013-2016 period, the project basically fell into oblivion. However, since H2 '17, sentiment has improved somewhat in the nickel space, as global inventories started to decrease and as the EV story began to develop, with EV batteries a small but rapidly growing share of the market. As a result, Giga's management has been busy revitalizing the project. Trade tensions over the past 12 months brought fresh challenges to the nickel price; however, recent developments saw prices soar above US$8/lb, within touching distance of Giga's base case:

Nickel 5-year price chart Source: InfoMine.com

The optionality provided by Giga is obvious when one compares the current market cap of about US$15m with the project's after-tax NPV@8% of US$724m. The leverage to nickel prices is clearly illustrated by the PEA's sensitivity analysis (please note that the NPV in the below table is pre-tax):

Giga Metals Turnagain 2011 PEA_sensitivity Source: company's PEA

The IRR as per the PEA (16% pre-tax in the base case) is not spectacular, due mainly to high Initial Capex. Bringing down these initial costs is something the company will be looking to achieve in the upcoming Pre-Feasibility Study. In truth, the project is still at an early stage, but recent market developments could provide a favorable backdrop for the next steps.

No High-Grade Ore, But Positive Market Developments

In my initial article on Giga Metals, I described the stock as a lottery ticket, one that offered two chances:

  1. Giga's 2018 infill drilling program targeted a potential high-grade zone (massive sulfides). If such a zone could be found, the economics of the project would be enhanced considerably, even in a moderate nickel price environment.
  2. Even if high grades couldn't be found, the nickel market fundamentals were supportive, and under the right conditions, rising prices could make the project more economic. This was predicated, specifically, on EV adoption creating a need for more Class I nickel.

Unfortunately, for Giga and its shareholders, there was no immediate gratification from the 2018 drilling program. While the results released earlier this year will help improve the resource model for the Pre-Feasibility Study, no high-grade zone was found.

On the nickel market front, however, recent developments have been very supportive. Despite the trade war's negative impact on base metals, nickel has been on a tear since July:

Nickel prices chart

Source: kitco.com

H2 '18 was marked by negative sentiment, with trade jitters compounded by an announcement by China's steel giant Tsingshan that they would build a HPAL (High Pressure Acid Leach) nickel plant in Indonesia for a fraction of the costs usually associated with such projects. The nickel obtained from laterite via the HPAL process is suitable for batteries, meaning that such plants compete directly with nickel sulfide projects such as Giga Metals'.

Fast-forward 6 months, however, and it looks like Tsingshan's project will be much more expensive than initially envisioned, like many HPAL projects in the past. This is one factor that helped nickel prices in recent weeks.

Another factor was continued strong demand from China, due to increasing stainless steel production, especially the types that consume the most nickel (such as the 300 series which uses up to 8.5% nickel). As Antaike's chief nickel analyst Xu Aidong explained to Reuters:

Prices fell due to the forecast of large amounts of nickel pig iron coming from Indonesia and from the Chinese domestic market, and forecasts that the stainless steel market was weak. But now we know (China's) stainless steel output in the first half of 2019 increased 10%.

But the main factor, by far, behind the recent surge in the nickel price was Indonesia's decision to expedite a ban on nickel ore exports (most of which go to China). The ban, which aims to force local producers to move up the value chain rather than simply export the ore, will come into force at the end of this year, instead of the initial 2022 deadline. This is what triggered the break-out in the nickel price last Friday. It remains to be seen whether this will have a lasting impact, as Indonesian nickel pig-iron and HPAL production should keep growing as a result. But at this point, the price action is very bullish for nickel producers and for Giga's prospects.

Next Steps for Giga Metals

Let's be clear: Giga is still a long shot, and if everything goes well, production would start in 2023/2024 at the earliest. This is, however, the time when Class I nickel is expected to feel a material impact from EV adoption. To advance the project, the next steps include a Pre-Feasibility Study, permitting, and financing.

  • Improving the project's economics

A major weakness of the Turnagain PEA from 2011 is the significant amount of Initial Capex. Investing US$1,357 in upfront capital for an NPV @8% of US$724m is not an attractive proposition. Giga's management intends to cut this Initial Capex in half in the upcoming Pre-Feasibility Study:

We're trying to design a smaller startup than we did before. We're trying to get our capex down to between five hundred million to seven hundred million dollars.

Giga Metals' CEO Mark Jarvis, MetalsNews.com interview

  • Finding partners

In parallel, the company has been looking for partners. A streaming deal was signed with Cobalt 27 (OTCQX:CBLLF) in 2018, but what the company really needs is commitments from potential clients. Off-take deals or strategic partnerships with auto manufacturers is the way forward for Giga. The company intends to capitalize on its location in a safe jurisdiction, and the much more environmentally-friendly nature of its nickel sulfide metallurgy compared to the energy-intensive HPAL competition.

  • Time-frame

The short-term priorities are the Pre-Feasibility Study and the discussions with potential partners. After that, the permitting process will start and Giga's management expects to complete it, and a Definitive Feasibility Study, by 2021/2022. Assuming a 2-year building phase, production would start by 2023/2024. Of course, this is a rather optimistic view as there can be plenty of obstacles on the road, even more so if the permitting process proves tricky. As with strategic partners, however, Giga intends to promote the rather environmentally-friendly process contemplated, and the contribution of its nickel to an electric, low-carbon future.

Takeaways

Conservative investors looking for exposure to rising nickel prices should play the industry leaders such as Norilsk Nickel (OTCPK:NILSY), recently discussed in this report by Laurentian Research. For investors looking for optionality, however, the Giga Metals story is intact. Giga is, of course, an all-or-nothing stock: a multi-bagger if the project comes to fruition, and a permanent loss of capital if it doesn't. Upcoming catalysts, besides nickel price action, include the Pre-Feasibility Study (if it does bring down Initial Capex) and potential strategic partnerships.

Disclosure: I am/we are long NILSY, GIGA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The opinions and views expressed in this article are for information purposes only and should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation to buy, sell or hold any security, investment strategy or market sector.