Morgans extremely bullish on Poseidon’s march towards production

With Poseidon Nickel on the cusp of becoming Australia’s next nickel sulphide producer, one of the country’s largest broking houses has reaffirmed the strong potential it sees in the emerging producer.

Poseidon Nickel (ASX:POS) has been busily ticking the boxes as it closes in on the highly anticipated final investment decision (FID) for the restart of its Black Swan nickel project in Western Australia.

The company is in final negotiations regarding offtake and debt financing, having whittled the shortlist down from over 30 interested parties to two, and a resource update is expected within the next couple of weeks.

This solid progress has prompted Morgans to assign a valuation of $484m, or 10c per share – more than double the current share price and reaffirm the strong potential it sees in Poseidon.

Poseidon Nickel (ASX:POS) share price chart

“POS is attractively positioned as a potential near-term producer of highly saleable, smelter grade nickel concentrate, with real optionality to increase the production rate to nameplate 2.2Mtpa under the expansion project, currently being studied, to produce a rougher concentrate product,” Morgans analyst Kyle Williams said in his latest research note.

The results of a bankable feasibility study (BFS) on a 1.1Mtpa operation released in November last year demonstrated the Black Swan project in Western Australia could produce a high-grade nickel sulphide concentrate and be a profitable operation.

It is expected to process 5 million tonnes of feed over about four years to produce 200,000 tonnes of high-grade concentrate containing 30,000 tonnes of nickel.

The 1.1Mtpa scenario is forecast to deliver free cash flows of $333m with a pre-tax net present value (NPV) of $248m and an internal rate of return of 103% at a nickel price of around $US10 per pound, or about $US22,046 per tonne and an exchange rate of 0.67.

The Black Swan project is highly leveraged to the improving nickel price outlook.

Black Swan can produce a high-grade nickel concentrate with ~15% nickel, less than 6% magnesium oxide (MgO) and an iron to magnesium oxide ratio of 5:1 – which is highly desirable for conventional nickel smelters.

“The Black Swan 1.1Mtpa BFS confirmed robust project economics with production scheduled to begin in mid-CY2024 based on the FID being made late June/early July 2023,” Williams said.

Advantages on several fronts

The first of the key advantages for Poseidon, according to Williams, is the established mining and processing infrastructure.

“The existing Black Swan concentrator requires a relatively low refurbishment cost, therefore reducing the development risk and allows for near term production potential,” he said.

Meanwhile, an expansion to 2.2Mtpa would substantially increase the production profile and extend the life of mine to eight years.

Then there is the significant interest from various parties in securing nickel offtake and contributing to development funding.”

Williams emphasised that significant investment within the WA nickel industry toward development assets in recent years was a clear indicator of the robustness in the sector and the strong pricing outlook.

“POS has been in discussion with potential offtake partners throughout the BFS process with indicative terms from a number of parties including smelters and traders,” he said.

Poseidon is aiming to have signed contracts in place with the successful offtaker/financier in late June/early July.

Another factor in the company’s favour is that the Black Swan mine has historically produced smelter grade nickel concentrate, which Williams says means the metallurgical risk associated with the 1.1Mtpa restart project is considered low.

“POS achieved strong outcomes from metallurgical test work in 2022 involving the addition of rougher concentrate regrind stage in the processing flowsheet and blending in Silver Swan Tailings confirmed a marketable nickel concentrate product,” he explained.

Poseidon is continuing to progress metallurgical testwork for the 2.2Mtpa expansion project to provide potential customers with samples for downstream processing.

Managing director Peter Harold said in a recent update the attraction of the expansion project was that annual production of nickel in concentrate could increase and the mine life could be extended due to the ability to treat talc carbonate material, which is not included in the current reserves.

“The key to unlocking the value of the talc carbonate material is finding the most attractive customer for the proposed product which is a major focus of the expansion study,” he said.

Strong catalysts for a share price re-rating

Morgans highlighted several drivers for a potential re-rating in Poseidon’s share price.

First is the impending resource update for Black Swan.

Poseidon recently completed a resource drilling program aimed at upgrading a significant component of the Inferred JORC resource within the proposed open pit shell to the higher confidence Indicated JORC resource category.

The higher confidence level allows for these resources to be converted to reserves.

Any increase in the reserves of the Black Swan open pit is likely to result in a longer mine life which will further enhance the project economics.

Other catalysts, according to Williams, would be any updates on offtake and project debt financing terms ahead of the scheduled FID, and the release of the feasibility study for the expansion project results later this year.

This article was developed in collaboration with Poseidon Nickel, a Stockhead advertiser at the time of publishing.

This article does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.