Poseidon Nickel Looks More Undervalued On BHP Nickel Off Take Agreement

Oct. 02, 2014 7:33 PM ET
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Poseidon Nickel (ASX:POS) has closed a remarkable period in its history by engineering a nickel off take deal with mining majorBHP Billiton (ASX:BHP) hot on the heels of acquisitions of Black Swan and Lake Johnston from Norilsk.

Poseidon shares should rally strongly on the agreement.

The agreement would see ore from Mt Windarra to be toll treated at BHP's Nickel West Leinster concentrator. Nickel West will purchase all concentrate from the concentrator at an agreed rate for an initial 2 years and renewable for a further 2 years.

The supply of ore to be mined by Poseidon at Windarra will be hauled to Nickel West's existing concentrator at Leinster for toll treatment into a smeltable grade concentrate. Nickel West will purchase all of the concentrate produced.

Poseidon CEO, David Singleton said, "The signing of an offtake deal with Nickel West continues a series of strategic steps that we have been committed to over the last year.

"We have removed the capital funding risk for the company through the Black Swan acquisition, developed depth to the company with the acquisition of Lake Johnston, and provided a clear route to market through the offtake arrangement with Nickel West.

"We thoroughly believe, like most analysts, in the future of the nickel market, given renewed strength in demand for nickel and limited new supply, and believe that Poseidon is now well structured to grow into that market."

The agreement follows months of work by the two companies including an extensive test work programme to demonstrate the compatibility of the Windarra ore with material treated at Leinster.

Details of Ore Tolling and Concentrate Agreement

The OTCPA is for an initial period of 2 years, ending in February 2017, with first ore deliveries due no later than February 2015, subject to satisfaction of conditions precedent including the parties obtaining necessary regulatory approvals.

Nickel West has the option to extend the contract term by 1 or 2 contract years. The contract is for a minimum quantity of 350,000 tonnes of ore per annum and a maximum of 500,000 tonnes which can be extended to 700,000 tonnes by mutual agreement.

The ore will be mined at the Mt Windarra site and transported to Nickel West's Leinster facility for concentrating.

Poseidon will pay a treatment charge to Nickel West for every tonne of ore processed to be offset against payments by Nickel West for the concentrate produced.

The processing of ore at Leinster reduces the costs of commencing operations at Windarra to approximately $11 million plus working capital, from the previously reported figure of $290 million. The company is well progressed on funding options to support the commencement of ore deliveries in the timescales envisaged.

Analysis

In a coup for David Singleton, the agreement with mining goliath BHP, closes the loop for Poseidon after its recent acquisitions with a fast track to cash flows and earnings.

Reducing the cost of commencing operations at Windarra to $11 million plus working capital, from the previously reported $290 million, should ensure that funding is received.

Poseidon has previously signalled its intention to mine at Windarra and ship ore to the Black Swan plant that the company is currently purchasing from Norilsk Nickel.

Poseidon is in a position to have sufficient production capacity between its Mt Windarra and Cerberus ore bodies to deliver both to Nickel West and to Black Swan.

This provides a path to higher and faster earnings growth and is highly value accretive for Poseidon Nickel.

Given further strength in the nickel market and reduced supply, Proactive Investors has revised upward its 12 month price target for Poseidon Nickel to a range of $0.40 - $0.52 from the agreement with BHP.

Proactive Investors Australia is the market leader in producing news, articles and research reports on ASX "Small and Mid-cap" stocks with distribution in Australia, UK, North America and Hong Kong / China.

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