Noront update

Noront has updated its feasibility study.  “At current metal prices (August 31, 2012), the DCF indicates an after tax NPV(8%) of $233 million and an IRR of 18%.”  If you use the 3-year trailing average for metals prices, the NPV rises to $543M.  Noront’s current market cap is around $86M, so this stock could be undervalued.

Here is the press release:

Additional upside:

  1. Chromite.  One scenario is that Cliffs builds its chromite mine and eventually exhausts the Black Thor and Big Daddy deposits (2-3 decades from today).  Maybe before then, chromite prices rise and somebody decides to bring Noront’s chromite deposits into production.
  2. The feasibility study does not include inferred resources.  It is pretty likely that Noront’s nickel deposit extends downwards to depth.  Because it is really expensive to drill deep (more so because Noront’s deposits are in the middle of nowhere), it doesn’t make that much sense to explore for it right now.

Can the feasibility study be trusted???

Baosteel Resources and Resource Capital Funds may (or may not) have done due diligence on Noront before investing in Noront shares.  Historically, investment funds almost never perform good due diligence… you can find examples where these managers get burned (e.g. Baja Mining/Mount Kellett).  Companies with mining operations (like Baosteel) will likely do real due diligence on their investments.  However, I am not sure how foolproof it is to rely on the due diligence of others.

On the negative side, I would point out that regulators are pretty ineffective in Canada and that bogus technical reports are rampant.  (As I have written previously, the whole sector is awful.)  I don’t know how to verify these technical reports.  Firstly, I don’t have all the technical data.  Secondly, even if I did, I wouldn’t have the expertise to analyze it.  You would need a skillset in different fields: costing out infrastructure, resource estimation, mine engineering, metallurgy, etc. etc.

Factors that negatively affect the economics of the project are:

  1. Because the location is remote they will need to use fly-in/fly-out labour, which is expensive.
  2. All the acid-generating tailings will be stored underground.  This will be expensive since Noront will have to remove waste rock underground to create room for all the tailings.  However, this method of storing tailings is very environmentally-friendly and will create a safer mine (backfilling mined out voids reduces the chance of a mine collapse).
  3. Use of diesel generators increase the cost of electricity compared to grid electricity.

Factors that positively affect the economics are:

  1. As I understand it, the geometry of the deposit (it looks like a pipe) makes it cheaper to mine.  Dilution will be low, recovery will be high, and productivity (how fast you can mine) will be high.
  2. Noront’s press release states that it will only have to pay only a tiny fraction (7.5%) of the total cost of the estimated $600M all-season road.  Originally, Noront thought that it would have to pay for most of the cost of the necessary road infrastructure.

Politics (minor issue)

One issue with the Noront project is the politics.  The First Nations in the area do not trust the federal and the Ontario government.  This mistrust extends to mining companies.  In the beginning of 2010, they were trying to stop exploration drilling.  Part of this is because the federal government is patronizing and offensive in its treatment of First Nations.  For example, it tried to take control of the town of Attawapiskat’s finances, basically accusing them of corruption and financial mismanagement.  The community appealed this decision and the judge found no evidence of such misbehaviour.  Historically, politicians have been blundering on First Nations issues for decades (e.g. the residential schooling system).

Fundamentally, these communities are not economically viable.  There are no jobs and little economic opportunity.  However, the natural resource wealth in the area is valuable.  I believe that courts will find it unfair for natural resource wealth in the area to be appropriated with little benefit to these communities.  I don’t think they will favour colonialism.  It would make sense for the various levels of government (and/or the mining companies) to negotiate some type of agreement whereby First Nations receive benefits of natural resources on their lands.  If you look at what happened at Voisey’s Bay, conflicts there (legal and ‘extra-legal’) meant that it took around 7 years to reach an agreement.  I see a portion of Noront’s profits going towards projects that benefit First Nations, cutting into the NPV outlined in the feasibility study.

Development in the Ring of Fire will likely depend mainly on the actions of Cliffs Natural Resources and the Ontario government.  My personal opinion is that there will be a lot of delays in dealing with First Nations (maybe years).  The rhetoric from First Nations leaders shows that relations are pretty poor.  One leader says that he remains committed to laying down his life to block a bridge being built over the Attawapiskat River.  This suggests that some of the issues go beyond money.  They are unhappy that other people are (yet again) imposing things upon them against their wishes.

Big picture

The most important factor is whether or not Noront’s feasibility study is accurate.

My gut feeling is that the feasibility study is mostly accurate (though it could be slightly inflated).  Baosteel and Resource Capital wouldn’t be buyers if it was way off.  But the stock may not really be undervalued either.

The value of the deposit is highly leveraged to the price of nickel.  At current prices the project is somewhat marginal.  This is almost like a call option on nickel prices.  I believe that nickel prices will rebound because it has been incredibly difficult to find new sources of sulfide-based nickel deposits (the rate of discoveries has gone down dramatically).  Other than Noront and Inco/Vale, the juniors searching in the Ring of Fire and around Voisey’s Bay did not find a single nickel deposit even though hundreds of millions of dollars were spent in each region.  If you look at Vale’s laterite-based Goro project, the project has run into many delays and cost overruns and this will somewhat dampen the enthusiasm for future laterite-based nickel deposits.  Future projects will need to manage the metallurgical risks of the processing techniques used to process laterite ores (e.g. acid spills at Goro).  According to the USGS, 1,590,000 metric tons of nickel were produced worldwide from mines (i.e. ignoring recycling) in 2010 while 1,250,000 tons were produced in 2000.  This is only a 2.4% annual growth in supply.  I believe that low historical growth in supply combined with rapidly increasing costs as miners shift to laterite deposits will fuel a continued long-term bull market for nickel.  In the short term, Noront will likely raise a lot of capital and shareholders will face dilution before a mine becomes reality.

I am long this stock but it may not be a great idea.  This is a highly speculative position and the junior mining sector/casino is a massive destroyer of value.


Noront Resources Corporate Presentation 2012 – Wes Hanson, President & CEO – Obviously you should take this presentation with a grain of salt as Noront needs to raise capital and it is the CEO’s duty to shareholders to promote/pump the company.  There is definitely spin in how he talks about underground tailings storage and glosses over the fact that it is one of the most expensive ways you can store tailings.  He has some interesting comments on the design of the mine and possible future changes (e.g. adding a shaft if the deposit extends deeper).

*Disclosure:  Long Noront.

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