In June, I had the pleasure of visiting the Yukon, Canada’s most westerly Territory and the land of the midnight sun. The point of my visit was to partake in the 2018 Yukon Property Tour, which, this year, brought together 3 large groups of investors, analysts and media to see a few of the Yukon’s most promising projects and to participate in a full-day investment conference.

The tour took me to 6 different projects in 4 days, giving me a great perspective of the Yukon’s mineral potential and the people who are exploring and developing within it. In all, I came away very impressed and believe that it’s just a matter of when for most of the projects in terms of their development into Canada’s next mines.

Here’s a look at the Yukon by the numbers and a few specific things that I, personally, look at when gauging the opportunity for investment within a jurisdiction.

Enjoy!

 

 

Yukon – By the Numbers

Population – 38,630 (December 2017) –23% of the Yukon’s population is Aboriginal.

Capital City– Whitehorse (has an International Airport) – Population 29,962 or 78% of the Yukon’s total population.

Demographics – 0 to 19 years of age: 8,217, 20 to 64 years of age: 25,627, 65+: 4,784 – This is a great distribution of demographics for a developing Territory.

Unemployment – 2.7% (May 2018) – This is a great statistic; essentially, those who are able and want a job can find employment. The issue may be, and this is a great issue to have, finding enough workers in what I see as a bright future for growth, especially in the mining industry.

Largest Cities by population, outside of Whitehorse – Dawson City: 2,200, Watson Lake: 1,441, Haines Junction: 911, Carmacks: 549

Real GDP – $2,345.3 million (2016)

GDP by Industry (in terms of NAICS – 2016) – Public administration: 23.1%, Real estate and rental and leasing: 14.2%, Mining, quarrying and oil and gas extraction: 12.8%, Health care and social assistance: 8.4%, Construction: 7.7%

• With higher precious and base metals prices in the future, a lot of prospective projects have a very good chance of re-starting production (i.e. Alexco Resources), or developing their deposit into a mine, (i.e. Western Copper and Gold). Given the relatively small size of the Yukon economy, major projects such as Western Copper and Gold’s Casino Project will have a tremendous effect on the overall Yukon economy.
• The Government of the Yukon and the Federal Government make up a major portion of the Yukon economy, as you can clearly see from the GDP break down. For the success of the Territory, this has to change in the future.

Fraser Institute Ranking for Mining Investment Attractiveness 2018 – 13^th in the world

• The Yukon is a premier jurisdiction for mining and attained a score of 79.67, or 13th in the world, for mining investment attractiveness, according to the Fraser Institute’s 2018 rankings. The Fraser Institute uses a number of criteria for evaluating a jurisdiction, such as political stability, mining law, taxation and, arguably the most important, mineral potential.

NOTE: All statistics taken from the Government of the Yukon Statistics

 

 Aboriginal Land Claims and Self-Government

11 of the Yukon’s 14 First Nations have comprehensive land claim (Final Agreements) and Self-Government Agreements. It was in 1993 that the template, the Umbrella Final Agreement (UFA), was signed and used toward the negotiation of individual land claim agreements.

Source: The Government of the Yukon

 

With the settling of their land claims, each First Nation has the power to control and direct their own affairs. Most importantly for the subject of this article, they have direct control over the exploration and development of the mineral projects on their property.

The following First Nations have settled their land claims and are now self-governing:

• Champagne and Aishihik First Nations (1993)
• First Nation of Na-Cho Nyäk Dun (1993)
• Teslin Tlingit Council (1993)
• Vuntut Gwitchin First Nation(1993)
• Little Salmon/Carmacks First Nation (1997)
• Selkirk First Nation (1997)
• Tr’ondëk Hwëch’in(1998)
• Ta’an Kwäch’än Council (2002)
• Kluane First Nation (2003)
• Kwanlin Dün First Nation (2005)
• Carcross/Tagish First Nation (2006)

 

For most investors, First Nations involvement in mining projects is typically met with skepticism; given the history of some of the dealings around the world, this isn’t unfounded. However, each situation should be examined for its individual merits, as well as the history of the specific First Nations where the prospective investment may occur.

The Yukon’s First Nations are no different and, given the immediate history with mine development, such as Victoria Gold Corp.’s development of the Eagle Gold Project within the traditional territory of the Na-Cho Nyäk Dun First Nation, it would appear to me that mutual benefit from mining is the driving force behind the cooperation agreement.

Another great example of a mutually beneficial cooperation is the synergy that has been found between the Kluane First Nation and Nickel Creek Platinum. The Kluane First Nation provides many of the key non-technical services to the Nickel Shaw Project camp, such as a great cafeteria service, which I had the pleasure of trying!

Looking up at the Nickel Shaw Project Deposit

I think the bottom line is companies that begin their relationship early in the project’s life, work to maintain that relationship, and can prove that they are as concerned about the environment and the people who inhabit that environment will, ultimately, be successful in moving toward the end goal of developing an operating mine. When researching a company, these can be key things to look for and to ask about when interviewing management. Of course, nothing matches doing a site visit and seeing it first-hand.

 

 

 

 

Yukon’s Political Landscape

Currently, the Government of the Yukon is controlled by the Yukon Liberal Party, which is led by Premier Sandy Silver.  Generally speaking, the Liberal Party’s business philosophy is typically thought to be somewhat in the middle of the left-leaning New Democratic Party (NDP) and the right-leaning Conservatives.

In November 2016, the Yukon Liberal Party defeated the Yukon Party (conservatives), which was in power for many of the terms dating back to 2000. With a very low unemployment level and 80% of the population located in Whitehorse, politics in the Yukon are somewhat unique. Much like the rest of the country, however, issues surrounding the environment – carbon tax, power generation and housing – price and availability seem to be hot topics in the land of the midnight sun.

From an investment perspective, I’m always most concerned with left-leaning government power. Although, NDP governments have been in power in the past, the conservatives have dominated the leadership of the Territory for much of the last 20 years. Given this fact, I believe that past will be prologue in terms of the Yukoners’ general political philosophy, but it’s always something that should be watched.

 

Yukon Mining Alliance

Uniquely, to my knowledge, many of the junior and major mining companies with projects in the Yukon have formed the Yukon Mining Alliance (YMA) with the Government of the Yukon and the Canadian Northern Economic Development Agency.

The YMA’s mandate is to,

“promote Yukon’s competitive advantages as a top mineral investment jurisdiction and its member companies and their Yukon-based project.†~ YMA

In my opinion, this is a huge advantage of investing in companies with projects in the Yukon, because clearly the marketing and promotion of mining within the Territory’s borders is a major priority. Bottom line, narrative plays a big role in the success of junior mining companies, and with the added help of the YMA, Yukon-based companies have a distinct advantage working together to promote the Yukon mining jurisdiction narrative.

Personally, I have seen the YMA presence at a couple of the top mining conferences in Canada, such as PDAC and Cambridge’s Vancouver Resource Investment Conference (VRIC). The YMA is putting the Yukon on the map for interested resource investors, which, I believe, will pay off in spades as we move into the next leg of the bull market.

 

 

 

 

Infrastructure

In my opinion, the biggest knock against the Yukon in terms of risk to investment is the lack of infrastructure. With close to 80% of the Yukon population concentrated in Whitehorse, the need for roads, telecommunications and power infrastructure to the remote or uninhabited portions of the Territory hasn’t been a high priority or practical, given the cost. However, this is rapidly changing as it’s now abundantly clear that access to power, telecommunications and roads have become the major sticking points for a few of the Yukon’s most advanced mineral development projects.

Yukon / Northwest Territories Fibre Optic Line

As you can see in the image below, the thick black line represents the existing fibre optic line which feeds the Yukon with its high-speed internet access. With only one fibre optic line feeding the Yukon’s internet demand, the system was highly susceptible to disruptions due to the fibre cable being cut along the Alaska Highway.

 

Source: CBC News

To improve the reliability of the internet access, the Government of the Yukon initiated the$50 to $70 million North Canada Fibre Loop Project, which would connect the Yukon to the Northwest Territories’ (NWT) fibre network via fibre optic lines running north from Dawson City to Inuvik, NWT.

During my site visit tour, it was announced that this project was successfully completed and, thus, has brought a new age of reliability to the Yukon’s internet access. This project is a major milestone for the Territory and should provide a reliable base from which to build, moving forward.

 

LNG Power Generation

In 2017, 97% of the Yukon’s electricity was produced from 3 hydro-electric power generation plants. For a number of years, these hydro-electric operations were backed up by diesel generators, which kicked in during peak demand scenarios.

With carbon emissions and the overall price of power generation becoming bigger constraints to development, in 2014, the Government of the Yukon made the decision to green-light Yukon Energy’s plan to move to a liquefied natural gas (LNG) as a fuel for generating backup power for the grid.

The fracking revolution dramatically changed the supply to demand balance in the oil and gas world, causing a major swing upward in the availability of natural gas for the market. Thus, natural gas prices have hovered around their multiple decade lows for a while, now.

While natural gas is one of the cheapest and cleanest burning fossil fuels available, the issue has been economic transportation. To allow for a meaningful amount of natural gas to be transported over a significant distance, it’s currently converted into LNG.

The natural gas is extracted from the ground and then refrigerated to minus 162 degrees Celsius, turning it into a liquid and, thus, more amenable to economic bulk transportation.

Source: Yukon Energy

LNG Storage

A big step toward making LNG a viable option for developing mines in the Yukon could be the construction of an LNG storage facility. Currently, Ferus Natural Gas Fuels Inc., the LNG supplier to the Yukon, is working with Yukon Energy to gauge the potential of such a facility.

If the LNG storage facility were to be built in Whitehorse, it could not only feed the backup generators, but also act as a depot for future mines that incorporate LNG into their long-term energy plan.

Having a reliable power infrastructure is paramount to the success of large-scale mining operations. With a number of sizable development projects waiting for their opportunity to be developed into mines, in my opinion, the Yukon is headed in the right direction by pursuing an LNG storage facility.

 

 

Yukon Resource Gateway Project

On September 2, 2017, the Yukon received a major commitment toward its development when it was announced that the Canadian Federal Government would contribute $247 million to the Yukon Resource Gateway Project.  The $247 million represents just over half of the $469 million needed to construct a road from Carmacks to Dawson City.

In my opinion, the main reason for this major undertaking was Goldcorp’s Coffee Project, which sits roughly half way between Carmacks and Dawson City, and is in the process of being developed into Canada’s next producing gold mine. Additionally, Western Copper and Gold’s Casino Project sits in the permitting stage of development and looks to benefit greatly from this announcement, as the road will give access to what is now a remote location.

Further, the Government of the Yukon will contribute $113 million to the Gateway Project, leaving the remaining $109 million to the mining companies to fulfill. The construction of the road has begun and, given the comments from Western Copper and Gold representatives, should take roughly 3 years to reach their property from Carmacks.

I think there’s no doubt that this road will be a major turning point for the Yukon and its development into a destination for mining, because I believe it and possibly slightly higher metal prices are the only things keeping this area of the Yukon from being developed, right now.

Mineral Potential

In my opinion, one of the most compelling reasons for investment in the Yukon is its mineral potential. With a good portion of the Yukon still not accessible by road, much of the Territory is still yet to be explored and, therefore, presents a blue sky type of opportunity for those who are willing to go off the beaten path.

Yukon Geological Survey

Both the Federal and Territorial Governments clearly recognize both the potential and the large expense associated with mineral exploration and development and are, therefore, directing funding accordingly. One such Territorial organization at the forefront of this PUSH is the Yukon Geological Survey (YGS).

The YGS’s mandate is to ‘provide the geosciences information required for resource and land management for the benefit of Yukoners, by acquiring and disseminating geological and geo-hazard knowledge to support exploration, inform resource and land management planning, and engage communities, schools and the public.’

Additionally, it manages the Yukon Mineral Exploration Program (YMEP), which has been set up to promote mineral prospecting and exploration activities in the Yukon. The YMEP has a $1,600,000 funding level for the 2018-19 fiscal year and is accepting applications for prospective projects.

It’s initiatives such as this that are keeping the pipeline of prospective geological targets full and, therefore, of keen interest to investors.

Tintina Gold Province

One of the most prospective regions for mineral exploration in the north-western portion of North America is the 150,000 square kilometre Tintina Gold Province (TGP). TGP runs east-west across the middle portion of the Yukon and Alaska, and is roughly 200 kilometres wide in its entirety. The TGP is essentially bound by the Kaltag-Tintina fault system to the north and the Farewell-Denali fault system to the south.

TGP encompasses arguably the Yukon’s most famous geological region, the Klondike gold fields which lay just south of Dawson City.  As stated earlier, the Resource Gateway Project will open this region up to development and exploration. Companies such as Klondike Gold, Trifecta Gold, Goldcorp, White Gold and Western Copper and Gold will greatly benefit from the road access to theirprojects.

View from the helicopter while flying over White Gold’s Property

White Gold Core Shack – red circle signifies visible gold

 

 

Klondike Gold Rush

The Klondike Gold Rush began in August of 1896, as three prospectors, George Carmack, Jim Mason and Dawson Charlie, discovered gold in what they referred to as ‘Rabbit’ Creek, or what is now referred to as Bonanza Creek. With the discovery and the rush to stake their claim, word quickly spread of their discovery, and so spurred an historic gold rush in Canada’s Yukon Territory and the United States’ Alaska.

 

Source: Yukon Government Archive

It’s estimated that the Klondike Gold Rush attracted 100,000 people from all walks of life, testing their luck against the odds to find their fortune.  Many of the new American prospectors found their way north via ships boarded in Seattle.  Former ports, such as Dyea, Alaska, were accessible at high tide and allowed prospectors to begin the lengthy trip north toward the centre of the Gold Rush, Dawson City, which is roughly 700km north.

Source: Yukon Government Archive

Unfortunately, for the vast majority of newly minted prospectors, their dream of discovering a fortune never came to fruition; if it wasn’t the weather and the long trip to the prospective gold claims, it was the exorbitant costs that came with exploring and living in the north. In many of the articles I read while researching the Klondike Gold Rush, many estimated that costs were 10 times higher than what most of the people would have experienced in their former lives, living in Toronto, New York or Chicago.

Source: Yukon Government Archive

The Klondike Gold Rush is estimated to have produced $29 million in gold over its 3-year span. Additionally, the Yukon Geological Survey estimates that a total of 20 million ounces of gold has been extracted from the Klondike goldfields since 1896. Gold mining can be credited with spurring the development of much of Canada and America’s northern most territories and states. In my opinion, the Yukon holds tremendous mineral potential and will only increase its prestige within the mining community.

 

 

Selwyn Basin

Moving to the eastern portion of the TGP within the Yukon, you enter the Selwyn Basin, host to the famously rich, Keno Silver District, which has 214 Moz of historic silver production and is located north-east of Mayo. It’s also in the immediate vicinity of Keno City, one of the Yukon’s smallest communities with just 24 residents.

For those who may not know, Alexco Resource’s Bellekeno silver mine is located in the Keno Silver District, which began operation in 2011 and produced until its suspension in 2013. The Keno Silver District is not only famous for its past production, but its high silver grades, which range up to 1,000 grams per tonne, putting them near the top in the world.

Standing in Alexco’s Flame & Moth decline

ATAC Resource’s Rackla Gold Project, also in the Selwyn basin, is a standout, in my mind, given the Carlin Style gold mineralization which has been found on the property. With its typically cheap mining and recovery methods, Carlin Style gold mineralization has made Nevada one of the premier gold producing jurisdictions in the world. In recent news, ATAC released their maiden resource on their Osiris Project, which has an inferred resource of 1.685 Moz at an average grade of 4.23 g/t.

 

 

ATAC Resources – Rackla Gold Property

 

Finally, the Selwyn Basin is home to sedimentary exhalative (SEDEX) deposits (Pb-Zn-Ag), which, in terms of Fireweed Zinc’s Macmillian Pass Zinc Project, rank near the top of the world’s largest in terms of zinc and overall mineral content.

In my opinion, world-class mineralization potential awaits those exploring in the Yukon. As the infrastructure quality improves and cash begins to pour back into the mining sector on a whole, I have no doubt that the Yukon will play a major role in Canada’s mining future.

 

 

 

Concluding Remarks

No investment is without risk, and for many companies within the junior resource sector, jurisdiction is the greatest risk. Personally, having researched the Yukon and now visited, I have to agree with the Fraser Institute rankings and believe the Yukon is a premier jurisdiction for mining investment.

In terms of the risk that I see with the Yukon, it’s mainly related to infrastructure and the time required to build it. In terms of investment, however, I like that the risk is associated with what I believe is a ‘when’ and not an ‘if’ question – it’s just a matter of time before the necessary roads, power and telecommunications are in place to move many of these projects forward.

I must note that there’s a good portion of projects in the Yukon that sit in close proximity to everything that is needed and, therefore, I caution anyone from painting all of the projects with the same brush.

The Yukon has world-class mineral potential and it’s attracting the world’s major mining companies, which, over the last few years, have taken either portions of a few of the juniors or have acquired the entire project for development into a mine.

With what looks to be a politically stable government and a good relationship with its self-governing First Nations, the Yukon is ready for investment, and I will be looking to invest in a couple of the companies that I believe present the greatest price to value propositions.

 

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Until next time,

 

Brian Leni  P.Eng

Founder –Junior Stock Review

 

 

Disclaimer: The following is not an investment recommendation, it is an investment idea. I am not a certified investment professional, nor do I know you and your individual investment needs. Please perform your own due diligence to decide whether this is a company, sector or jurisdiction that is best suited for your personal investment criteria. Brian Leni does not own any shares of the companies mentioned in this article at this time.

On June 14th I presented and was apart of a panel during the first day of the Mining Investment North America Conference. While at the show I had the chance to speak with Georgia Williams from the Investor News Network (INN). In the interview we discuss the upside potential and risks associated with investing in junior nickel companies and also a few points on how I think you can be more successful in the market. Enjoy!

 

Disclaimer: The following is not an investment recommendation, it is an investment idea. I am not a certified investment professional, nor do I know you and your individual investment needs. Please perform your own due diligence to decide whether this is a company and sector that is best suited for your personal investment criteria. I do own shares in FPX Nickel Corporation. Junior Stock Review and/or Brian Leni has NO business relationship with FPX Nickel Corp. or any other company mentioned within this interview.

What’s going to be the catalyst for the junior gold stocks to escape this sideways to downward movement? To me, the key to a momentum change is discovery. Although the market on a whole seems to be stuck in neutral, money has been injected into the best junior gold exploration teams, and because of this, I think it’s only a matter of time before we get a stellar drill hole, which will bring eyes and cash back to the sector.

Supply and demand fundamentals control the direction of markets over the long term, and when looking ahead at almost any metal’s supply fundamentals, I think it’s clear that we’re in for a metal supply crunch in the years ahead. Bull markets driven by supply destruction are very strong, mainly because it requires not only the discovery of new deposits, but those discoveries also have to be permitted developed, and that takes time.

It’s my contention that the next bull market in metals will be discovery driven, as the world’s major mining companies look to fill the supply gaps that are developing in most of their reserve and resource inventories.

In my opinion, buying the highest quality companies gives you the best possible odds of being right when the market turns. The company I’m going to share with you today, Northern Empire Resources Corporation, is, in my opinion, one of those high-quality companies, and they’re poised to discover and expand their resources at the Sterling Gold Project in Nevada.

Let’s take a look.

 

Northern Empire Resources Corp. (NM:TSXV, PSPGF:OTC Pink)

• DTC Eligibility for its common shares listed on the OTC market in the United States

 

MCAP: $86.4 million (at the time of writing)

Shares: 66,586,700

Fully Diluted: 77,139,302

CASH: $16 million

 

Management/Insiders: 7.9%

Institutional Ownership: 32.7%

Coeur Mining: 11.6%

Imperial Metals: 3.7%

 

Northern Empire’s People

Northern Empire is led by President and CEO, Michael Allen, who is a professional geologist by trade and has 20 years of experience in the mining industry. Allen has worked in various senior roles over the course of his career with Redcorp Ventures, Silver Standard Resources and, most recently, West Kirkland Mining. For those who are not familiar, West Kirkland Mining’s gold project is located in Nevada, giving Allen 8 years of jurisdictional experience, and should prove to be an X-Factor when it comes to developing and exploring for gold on Northern Empire’s Sterling Gold Project.

Additionally, Northern Empire has a strong Board of Directors, made up of individuals with extensive experience in the mining industry. The Board is led by Executive Chairman, Douglas Hurst. Hurst, a geologist by trade, has a great track record for developing mining companies into premier takeover candidates. Hurst was a founding executive of both International Royalty Corporation and Newmarket Gold Inc. Both companies were taken over, first International Royalty Corporation by Royal Gold for $700 million, and most recently, Newmarket Gold by Kirkland Lake Gold for $1 billion.

The Board is rounded out by people whose careers share a common characteristic – successful company building. Each member has been involved in at least one development success in their career, and to me, it’s clear that this is the main goal for Northern Empire; to develop their Sterling Gold Project into a premier takeover candidate.

The other Board members are as follows:

• Raymond Threlkeld has more than 32 years of experience within the mining industry. Threlkeld was Chairman of Newmarket Gold which, as previously stated, was purchased by Kirkland Lake Gold. He was also involved with Western Goldfields which was purchased by New Gold in 2009.
• John Robins, a professional geologist by trade with 30 years of mining experience. He was a founder and Chairman of Kaminak Gold, which was purchased by Goldcorp for $520 million in 2016.
• Adrian Fleming, a geologist by trade with over 30 years of experience in the mining industry. Fleming was President and Director of Underworld Resource Inc which was acquired by Kinross in 2010.  Fleming was an early mentor in Michael Allen’s career when they both worked on the Hope Bay Gold Project.
• Jim Paterson with 20 years of experience on the financial side of the mining business, and the founder, CEO and Director of Corsa Capital Ltd.
• Darryl Cardey and Jeff Sundar both have several years of experience within the mining industry and were a part of the successful development and sale of Underworld Resources.

 

 

Nevada, United States

Northern Empire’s 100% owned Sterling Gold Project is situated roughly 160 km northwest of Las Vegas, Nevada and encompasses a total of 14,109 acres over 4 contiguous claim blocks.  Nevada is situated in the western United States and has a long history of mining dating back to the 1840s. Although mining began over a 150 years ago, Nevada’s real fame in the gold mining industry didn’t come until the 1960s when ‘Carlin Style’ or sediment-hosted disseminated gold deposits started being mined.

 

Why did Carlin Style gold deposits take so long to be mined? Simply, nobody saw them. Unlike the outcropping gold bearing epithermal veins that were discovered by early prospectors, Carlin Style gold is very fine grained and not visible to the naked eye.  Since the 1960s, Nevada has produced around 20 million ounces of gold, making it truly a world-class destination for gold mining.

Given this, it comes as no surprise to me that the Fraser Institute issued a mining investment attractiveness score of 85.45, ranking Nevada 3^rd in the world. The Fraser Institute’s score is based on a mixture of criteria, which includes, but is not limited to, the jurisdiction’s legal system, taxation regime, quality of infrastructure, political stability, and arguably most importantly, the jurisdiction’s geological potential. In my opinion, in terms of mining investment, it doesn’t get much better than Nevada.

 

Sterling Gold Project

The Sterling Gold Project has a Global Resource of 23,811,800 tonnes at 1.29 g/t for 985,000 ounces of gold and can be broken down into two key areas; the Sterling Mine, which is in the southern portion of the property, and the Crown Block, which resides in the north.

 

 

Sterling Mine

The Sterling Mine is a past gold producer with the surrounding area having historical ties that extend back to 1906, with the Panama Mine operating until 1940. The region then saw limited exploration until 1980 when the Sterling Mine began production. The Sterling Mine consists of 3 separate open pits and 2 underground mines, which produced 194,996 troy ounces from 853,984 tonnes of ore for an average grade of 7.44 g/t, over its 20 years in operation.

The Sterling Mine’s deposit mineralization is Carlin Style and is amenable to heap leaching. In the past, the open pit and underground mined ore was placed onto heap leach pads and, without crushing, gold recoveries averaged 88%.

The Sterling Mine does have an existing pit constrained inferred resource of 3,081,000 tonnes at 2.57 g/t for 254,000 ounces of gold. The ‘pit constrained inferred resource’ refers to the estimated economic surface resources found within a 45-degree constant slope pit shell.

Additionally, there’s a non-pit constrained inferred resource of 350,000 tonnes at 3.38 g/t (1.7 g/t cut-off) for a total of 38,000 ounces of gold. The non-pit inferred resource represents mineralization that could potentially be of economic interest, if selective underground mining of the mineralized zone, below the projected pit shell limits, was carried out.

NOTE: The Sterling Mine pit constrained inferred resource grade of 2.57 g/t is fantastic, especially if you consider that it’s amenable to heap leaching for the extraction of its gold. This is a great example of the upside potential at the Sterling Gold Project, as Carlin Style gold mineralization that’s mined in an open pit and has good grades can be very profitable!

 

Gold Production at the Sterling Mine

A major advantage to the past producing Sterling Mine is that its infrastructure is in place and ready for operation. In the photo below, you can see the layout of the processing areas: The active leach pad, the permitted leach pad, processing ponds and processing facility.

Additionally, from the satellite photo below, you can see the layout of the permitted open pits, Burro, Sterling and Ambrose. In the top right of the image is the processing area, as shown above. Finally, the 144 Zone portal, in the bottom right, gives access to the historical underground workings.

 

With the necessary permits in hand, Northern Empire has greater control over their production start date, which is an enviable position for most gold exploration and development companies. Moreover, as an investor, the fact that Northern Empire has the necessary production permits in hand is a huge plus, because it reduces the overall risk associated with the Project.

 

Sterling Mine Exploration Potential

While having the production permits and an inferred resource are the basis for what looks to be a promising future for Northern Empire, the most exciting part of their story, in my opinion, is the exploration potential of the property.

Exploration and infill drilling on the Sterling Mine will focus on the 2017 high grade drill holes that sit on the pit shell edge, as can be seen in the satellite photo below.

 

As well, in the computer-generated Sterling Mine model image, you can gain a better perspective on the 3 dimensional open pit shell and the location and orientation of the Burro Fault, which is thought to be one of the most important structures for the deposit.  Other minor faults in the area trend north to north-northeast and are important in terms of the future exploration of the Sterling Mine area. As the Technical Report states,

“they are significant because they are intimately associated with mineralization, and were almost certainly conduits for hydrothermal fluids.” ~ Technical Report – pg.7-8

 

 

PUSH: Watch for drill results from the Sterling Mine. Further proof of continuity in the existing inferred resource and successful step out drilling will be major gains for the company.

 

The Crown of Northern Empire

The Sterling Gold Project’s north end is occupied by the Crown Block, which is further broken down into 4 main targets: Daisy Deposit, Secret Pass Deposit, SNA Deposit and Shear Zone. The target mineralization which is found in the Crown Block is concentrated around the same detachment fault structure that hosted Barrick Gold’s past producing, roughly 2.3 million ounce Bullfrog gold mine.

The gold within the Daisy and SNA Deposits are carbonate-hosted and classified as Carlin-Style, while the Secret Pass is volcanic-hosted and classified as epithermal.

 

 

 

Daisy

The Crown Block’s Daisy Deposit is a past producing open pit gold mine (Glamis/Rayrock), having produced 104,000 ounces of gold between 1997 and 2001. As listed in the Sterling Gold Project’s inferred resource table, Daisy has an inferred resource of 5,362,000 tonnes at 1.34 g/t for 222,000 ounces of gold.

High grade surface samples, up to 15 g/t gold, and 2017 drilling suggest there is potential for expansion of the Daisy Deposit resource. Examining the satellite photo below, you can see the highlighted 2017 drill intercepts – holes D17-002, D17-001 and the 2018 drill intercept from hole D18-003C – and the location of high-grade surface samples which are represented by the purple squares.

 

PUSH: 10 holes are planned for Daisy Deposit in the 2018 drill program. As mentioned above, one stellar drill intercept has already been released, assaying 1.41 g/t over 123.93m, a great result. Watch for more drill results from Daisy in the weeks ahead, as Northern Empire looks to expand the Daisy Resource down dip.

Daisy Deposit Cross-Section – Open Down Dip to the north

 

 

Secret Pass

The Secret Pass deposit, like Mother Lode, is volcanic-hosted with disseminated gold mineralization and has a current inferred resource of 11,143,000 tonnes at 0.93 g/t for 335,000 ounces of gold. 2017 drilling on the Secret Pass Deposit was highlighted by SP17-001: 82m @1.26 g/t Au and SP17-002: 30.48m @0.55 g/t Au. Additionally released on March 20^th 2018 – SP18-003C: 70.0m @1.79 g/t.

All three drill holes can be found on the satellite photo of Secret Pass below, including the location of pending and proposed drill holes for 2018. With the purchase of additional claims south of the deposit, Northern Empire will be able to pursue hole D-164, which returned a huge intercept of 56.39m at 3.13 g/t.

PUSH: 15 holes are planned for the Secret Pass deposit in 2018. Watch for drill results in the weeks ahead, as Northern Empire looks to expand the resource both laterally and at depth.

 

SNA Deposit

The SNA Deposit is a past producing mine and was formerly referred to as Sunday Night Anomaly from 1991 to 1995. The SNA Deposit hosts Carlin Style gold mineralization and has an inferred resource of 3,875,000 tonnes at 1.03 g/t for 126,000 ounces of gold.

Interestingly, the SNA Deposit lies in close proximity to Corvus Gold’s Claim boundary, and more importantly, their Mother Lode open pit. In the satellite image below, you can see Corvus Gold’s claim boundary outlined in orange, along with Northern Empire’s SNA Deposit toward the bottom right.

In Corvus Gold’s 2017 drill program, they hit 51.8m of 1.86 g/t gold which included an interval of 19.8m of 3.43 g/t. The reason I mention this is because the hole was located roughly 8 meters from the claim boundary with Northern Empire. As you can see in the satellite image, Northern Empire’s property completely surrounds Corvus Gold’s Mother Lode deposit and needless to say, makes this is a very intriguing target area with a lot of potential for Northern Empire!

PUSH: +16 holes are planned for the SNA Deposit in the 2018 drill program. Watch for drill results as Northern Empire attempts to expand upon the SNA deposit resource.

 

Concluding Remarks

As I mentioned in my introduction, I believe that placing yourself in quality companies is the way to succeed in a business where the odds of success are typically stacked against you. That said, quality doesn’t mean they’re free of risk.

In terms of Northern Empire, I believe the biggest risk is an unsuccessful drill program in 2018, which would result in minimal to no improvement in their existing inferred resource. In this worst case scenario, I don’t see much upside from today’s current market cap.

While there’s always a chance of coming up empty handed when exploring, I think there’s a far better chance that their resource will increase, and with permits in-hand, Northern Empire’s Sterling Mine is ready to go.

Recapping Northern Empire’s strengths:

• Good management team with extensive experience exploring and developing gold projects in Nevada.
• The Fraser Institute ranks Nevada 3^rd in the world for Mining Investment Attractiveness.
• Northern Empire is in possession of all the necessary production permits to restart the Sterling Mine.
• The Sterling Mine potential production scenario should be low cost, as the Carlin Style gold mineralization will be mined from an open pit and is amenable to heap-leaching.
• Great exploration potential within the Sterling Mine and the Crown Block’s 4 main target areas: Daisy Deposit, Secret Pass Deposit, SNA Deposit and Shear Zone.  15,000m of drilling planned for 2018.
• Existing inferred global resource of 985,000 ounces of gold at 1.29 g/t.
• CASH – $16 million!!

I am invested in Northern Empire and am looking forward to news flow over the coming months.

 

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Until next time,

 

Brian Leni  P.Eng

Founder – Junior Stock Review

 

 

Disclaimer: The following is not an investment recommendation, it is an investment idea. I am not a certified investment professional, nor do I know you and your individual investment needs. Please perform your own due diligence to decide whether this is a company and sector that is best suited for your personal investment criteria. I do own shares in Northern Empire Resources. All Northern Empire Resources’ analytics were taken from their website and press release. Northern Empire Resources is a Sponsor of Junior Stock Review.

 

 

 

 

 

 

 

The 2018 edition of PDAC did not disappoint! Attendance was up from last year and, overall, the mood from most was cautiously optimistic. In my view, this is a good place to be, considering the current overall market dynamics. In my opinion, there’s definitely interest and money waiting to be deployed into the sector.  The criteria for that money to enter the resource market must be understood before being able to answer or hypothesize when the direction of the resource market as a whole will change.

PDAC introduced me to a few stories that, I think, have a lot of upside potential even if the next leg up in the resource bull market is still months away.

 

Is 2018 the Year for Mergers and Acquisitions in the Base Metals Sectors?

Before attending any investment conference, I always write out a list of goals or takeaways that I want to achieve by the end of the conference; presentations I’d like to watch, companies I’d like to speak with, people I’d like to meet, and things I’d like to learn or better understand.

For PDAC this year, I had a clear set of goals that was headlined by speaking to the major mining companies about the current base metals markets and what might be the catalyst for mergers and acquisitions (M&A). For those who are not familiar, major companies are not usually present at most resource investment conferences, making PDAC very unique in this regard.

What are the catalysts for M&A in the base metals markets? None of the major companies would come right out and give me a straight answer or list any criteria for an increase in M&A activity in the base metals market. While I figured this would be the case, going into the conference, I asked the question anyway; it’s complex enough that it leads to a lot of good discussion.

Here’s a short list of commonalities from their answers:

• Profits – with the currently strong base metal spot price, most companies are generating good cash flow and believe prices will be higher in the future. My inference from this statement is ‘my balance sheet looks great, I’m in no rush to put any wrinkles on it by way of M&A. Additionally, by not developing any further supply, the price will remain high and we will continue to make profits.’
• Risk – Greenfield/brownfield development projects have a lot of risk. This sentiment may have been the most pronounced with all of the major companies. ‘Why should I invest in a Greenfield/brownfield development project when I can put the same amount of money into an asset I already own and understand?’
• Lack of quality acquisition targets – Each major company said that they are always looking for possible acquisition targets, but don’t see a lot of high quality projects out there. I view this comment in a number of different ways. First, I don’t disagree, the picking of truly world-class projects is small, and most likely only getting smaller in the future, until we change our criteria for what is world-class. Second, rising metal prices bring a lot of the 2^nd tier projects into profitability, and may be the rose coloured glasses that are needed to spur M&A.

Although the major companies appear to be very confident that M&A isn’t a priority at this point, it’s my thought that it will only take one company to make a move and acquire one of the tier 1 projects and the flood gates will open as everyone else scrambles to buy up what’s left.

For me, I’m willing to wait and am looking to buy quality companies whose value is greater than their price, giving me the best possible odds of success. “When” questions pay, it’s just a matter of time.

 

Concluding Remarks

While I remain bullish on all metal prices, I’m increasingly becoming more selective in the junior companies with which I invest my money. The last year has proven to me, once again, that even though market fundamentals of a given commodity can be screaming for bull market, it doesn’t have to happen right away. Being a linear thinker is a good thing, but can be fraught with frustration and losses if mixed with a short-term view; the market can remain irrational longer than most of us can remain solvent! Therefore, for me, being highly selective in the companies with which I invest gives me the confidence to ride out the short waves of volatility and, ultimately, profit when the market confirms my bullish thesis.

One last thing, there’s nothing wrong with taking profit when it’s there!!

 

 

Don’t want to miss a new investment idea, interview or financial product review? Become a Junior Stock Review VIP now – it’s FREE!

 

 

Until next time,

 

Brian Leni  P.Eng

Founder – Junior Stock Review

 

 

Disclaimer – The following is not a recommendation, it is an idea. I am not a certified investment professional, nor do I know you and your individual investment needs. Please perform your own due diligence to decide whether attending an investment conference is suited for your personal investment needs. Junior Stock Review does not guarantee success from attending PDAC or any other investment conference. I have not been compensated to write this article, however Junior Stock Review is a media partner of PDAC International Convention 2018.

In Part 1 of this report, we discussed the nickel supply fundamentals and identified important factors that can help to indicate where nickel supply is headed. To refresh your memory, here are a couple of the most important factors:

• The partial Indonesian ban on nickel exports should continue as the country looks to develop its smelting industry.
• The Philippines have suspended or closed roughly 50% of its annual nickel production due to environmental concerns. In 2016, the Philippines were the world’s largest nickel producer, given the current direction of government policy, and the fact that their nickel output is down 24% year-over-year in 2017, this will not be the case in 2017.
• Analysts from Scotia and RBC Capital Markets expect nickel supply to grow at 2% per annum until 2020.
• Total global nickel inventories are trending downwards, falling 15% to below 500,000 tonnes, since hitting a high in April of 2016.

Source: RBC Capital Markets

Let’s take a look at nickel demand, by first examining the refined production, which includes LME-grade nickel and host of intermediate nickel products such as NPI, nickel concentrate, ferronickel, nickel sulphate and more.

 

The Refined Nickel Supply

Source: RBC Capital Markets

 

The global refined nickel supply for 2016 was around 1.9 million tonnes, which was 48,000 tonnes below the global demand. Of the 1.9 million tonnes of refined nickel, 44% is produced by former Eastern Bloc countries.  Given their less stringent environmental laws and overall lower cost structure, the former Eastern Bloc countries dominate the nickel ore refinement industry.

The global refined nickel capacity is estimated to be around 3.2 million tons. Putting it into perspective, current mine production is sitting at around 2.25 million tons, which is roughly 30% of the global refined capacity. However, note that the bulk of the capacity is in China and their figures, in my opinion, should not be taken as 100% valid.

The future of the global refined nickel industry will be shaped by a few key developments over the coming years.

 

Indonesian Ban and its Effect on Refinement

As discussed in Part 1, the global landscape for refinement changed in 2014 when the Indonesian government banned the export of its nickel ore in favour of promoting investment in refinement facilities within its borders.

Indonesia’s nickel refinement capacity has spiked dramatically since 2013, moving from around 10,000 tons in 2013 to over 100,000 tons in 2016. This new capacity mainly replaces capacity in China, as China’s refined nickel production has fallen by around 7% since the export ban.

 

The Environment vs. Metal Refinement

Currently, China has suspended the use of heavily polluting smelting operations in both the nickel and zinc industry. This is proof that air quality is becoming a leading political issue, even in states which typically buck the current political trends of the rest of the world. Time will tell how this will play out in the nickel market, especially in the face of what looks to be growing demand.

Interestingly, much of the nickel demand in the future is projected to come from electric vehicles (EV). The irony of the EV movement, in terms of it being non-carbon emitting, is the fact that the vast majority of the materials which make up the EV are all mined and refined, which is exactly what some countries are trying to curtail. I suppose you can’t have your cake and eat it, too.

 

Nickel Production Cost Curves

A cost curve is a graphical analysis which plots production capacity versus the costs of the entire industry. The cost curve is an important piece in the analysis of commodities as it allows the curious investor to see how the current spot price of the chosen metal fits in with the current cost of production across the sector.

Companies that find their cost of production in the lowest quartiles of the cost curve are those least likely to be affected by low spot prices. The nickel market has been plagued with low spot prices for a number of years, due to excess supply, but as we saw last year, this is changing.

RBC Capital Market’s cost curve for the nickel industry reveals that the 75th percentile of the industry’s cash cost is $5.05 USD/lbs, meaning that 25% of the world’s nickel producers will have negative cash flows as a result of $5.05 USD/lbs spot price.

Generally, for a healthy market, analysts look to the 90th percentile of the cost curve to suggest an sustainable price. In terms of the nickel market, the 90th percentile represents a cost of production of $7.85 USD/lbs.

Compared to today’s nickel spot price of around $5.17 USD/lbs, that is a 50% increase to reach a level in which 90% of producers will be able to produce nickel at a profit.

 

 

 

A Conversation with Martin Turenne

As in Part 1, I had the chance to ask FPX Nickel Corp. CEO, Martin Turenne, a series of questions pertaining to the global nickel market. Highlights from our interview will be shared throughout the report.

FPX Nickel Corp. (FPX:TSXV)

MCAP – $16.1 million CAD (at the time of writing)

CEO – Martin Turenne

 

Question #1

Brian: In every industry, the success of a company or sector is based around the delta between the cost of production and the selling price, or more simply, the amount of profit. Given that the current nickel price is roughly $5.17 USD/lbs, roughly 25% of the nickel industry’s producers are not making money.

In your opinion, what are the 3 biggest factors affecting the nickel spot price, and will their resolution lead the nickel spot price up to what many analysts believe is the key long-term price for nickel producers, roughly $7.85 USD/lbs?

Martin: The overall theme driving the price higher is the fact that nickel demand is exceeding supply, and will continue to do so well into the 2020s. The first reason for that is strong demand growth. In 2016, nickel demand was 6% higher than the previous year, which was by far the highest demand growth among the major base metals. I expect to see continued demand growth in that range for the next several years.

The second reason has to do with nickel supply growth, which is going to be relatively weak. Because nickel has been so badly beat up, and because there has been so little investment in nickel exploration and development, there just aren’t many new projects which can be brought into production in the next five to eight years. I’d argue this is a more acute issue for nickel than it is for metals like zinc and copper, which have attracted far more capital in recent years.

Finally, I think you will see operating costs increase in the coming years. In the past several years, operating costs in the mining industry have been declining mostly due to a strong U.S. dollar and lower energy costs. Going forward, a decrease in the U.S. dollar or increase in oil prices will lift the nickel cost curve, and thus lift the nickel price.

Nickel Demand

So far, we’ve covered the global nickel mine supply/production figures and also taken a look at global nickel refining numbers and the factors affecting their markets. The last piece of the puzzle is nickel demand, the how and why it’s used in society and where I believe it’s headed.

It isn’t a stretch to say that nickel is one of the most important industrial metals in the world. It’s used in construction, power generation/storage, food preparation, cell phones and vehicles. Nickel has a unique blend of properties such as corrosion resistance, high strength, and toughness.

 

World Nickel Consumption

Source: RBC Capital Markets

 

 

Question #2

Brian: 2/3 of refined nickel is consumed by stainless steel, the remainder is broken down into much smaller demand sources. This demand pattern has existed for refined nickel consumption for a while now.

How do you view the future of refined nickel demand? Will stainless steel still be the dominant consumer or are there other sources of consumption which may begin to play a bigger role? Please explain.

 

Martin: Among all the major base metals, nickel had the best growth profile in 2016, with demand rising 6% compared to 2015 demand. Going forward, analysts are predicting annual demand growth in the 2-3% range, which in my view is too conservative. Stainless demand will continue to play a dominant role in nickel, but the growth associated with electric vehicle (“EV”) batteries will be the big story over the next decade. Right now, EV battery nickel demand is approximately 70,000 tonnes per year, or only about 3% of total nickel demand. Going forward, Roskill predicts that number could reach 400,000 tonnes per year by 2025, which implies an average demand growth rate of 2% per year for nickel from EV battery demand alone. From today’s levels, I can see nickel demand growing 5% per year for the next several years, which would likely push the nickel price well above the current consensus number.

 

 

Stainless Steel

As you can see, 2/3 of refined nickel is used in the production of stainless steel, while a further 15% is used in the manufacturing of other ferrous and non-ferrous alloys.  Stainless steel is an alloy of traditional steel and the combination of nickel and chromium, typically with 8 to 12 percent nickel content.

Stainless steel’s uses are numerous, ranging from cookware to appliances, building materials and high-tech applications. The stainless or corrosion resistant properties are homogenous or consistent across the entire section of steel, giving it a huge advantage against the other corrosion resistant materials which are mainly coatings.

From a food preparation or eating perspective, there currently isn’t any other material that can withstand the temperature ranges, pHs, bacteria exposure or repeated usage like stainless steel.  Utensils, cookware, appliances and food prep surfaces all use stainless steel as the preferred material of choice.

 

The Use of Stainless Steel in Marine Infrastructure Construction

Stainless steel may get a huge boost in the near future as a few of the southern States (US) look to increase the grade of rebar used within all of their marine construction. For those who don’t know, my background is in steel manufacturing. I was General Foreman of operations at a rolling mill which produced rebar, angles, channels and flats.

Typically, concrete / rebar construction is designed with a 25 to 50 year life span, however, marine construction, in particular, has come under scrutiny for not being robust enough, which has prompted some States to look at increasing the construction specifications for the materials used in marine construction. For rebar, this means higher grade requirements and possibly being restricted to only corrosion resistant steel.

Currently, epoxy coated rebar is used for applications that require corrosion resistance, however, epoxy coatings have been known to crack, allowing for moisture to begin its oxidation of the steel.

Also, galvanized steel is an option for this application, as it, too, provides a corrosion resistant coating to the rebar. However, like the epoxy coating, it’s susceptible to wear and damage and a worn or damaged zinc layer leaves the under body of the steel product  vulnerable to moisture.

Without a doubt, construction is moving toward more stringent regulations for the structures being built in our cities. I believe one of the big winners of this movement will be the strong corrosion resistant materials, which are headlined by stainless steel.

 

Electric Vehicles

Arguably the largest catalyst for a major increase in nickel demand is the rise of electric vehicles or, more specifically, the use of batteries in our vehicles. As we discussed in the factors affecting the mining and smelting of nickel, the environment is a major political issue, one that is currently centred around clean air.

Governments around the world are pushing us toward a goal of reducing the amount of carbon we emit into the atmosphere. One of the first industries to feel this disruptive wave is the automotive sector, which has seen government subsidies for electric vehicles (EV) propel companies such as Tesla into the forefront of both the automotive industry and popular culture.

The culmination of these events has sent all of the other major automotive companies spinning as they try and catch up to a growing segment of the market.

 

Batteries

While nickel is used in a variety of ways in vehicles, by far its biggest use is within an EV, where it’s used in the batteries.  Currently, the misnomer is that a lithium ion battery is primarily made up of lithium, but the fact is, it isn’t. Lithium ion batteries contain more nickel, cobalt and manganese than they do lithium.

Nickel’s current use within the EV market is very small, especially when compared to global nickel demand. However, it’s the potential that we must gauge when it comes to nickel demand in batteries, not the EV market’s current consumption.

 

Lithium Ion Batteries

Depending on the application, currently, what makes up the cathodes for the most common lithium Ion battery is nickel, manganese and cobalt (NMC), or nickel, cobalt and aluminium (NCA) and an anode typically composed of graphite. To note, the cathode does contain other materials such as lithium, but in smaller quantities than the big 3.

For those unfamiliar with how batteries work, here’s a quick summary; there are three basic components to most batteries: cathode, anode and electrolyte. A chemical reaction causes a charge difference between the anode and cathode. This charge difference allows the electrons (electrical current) to flow between the anode and cathode and, in the process, the electrical current powers the piece of equipment to which the battery is attached.

A number of sources, including the Battery University, confirm that the NMC battery is the battery of choice when it comes to power tools and other electrical power trains. The cathode chemical composition is chosen on 4 key criteria: stability of materials, energy density, specific energy and cost.

Today, NMC batteries are typically found with compositions of equal parts, denoted 1-1-1, but have started to be made in ratios as high as 8-1-1. Due to higher cobalt prices and security of supply, the percentage of nickel is beginning to move higher.

Interestingly, depending on the applications, cobalt can be reduced and still maintain acceptable performance, as the higher percentage nickel batteries have higher energy densities and longer life spans, although, they produce a lower voltage.

Lastly, it should be noted that roughly only 50% of the current nickel mine supply is suitable for battery use, as the low-grade nickel products are inadequate for battery manufacturing. Given that nickel mine supply growth is mainly in NPI and FeNi, which are low grade products, it would appear that available supply for the emerging battery market is fixed at its current production rate. Considering this fact, it is apparent that a growing battery sector will certainly have an effect on the nickel market.

 

 

 

Projected Nickel Demand Via EV Batteries

Worldwide, Statista says that since 2014, on average, there have been 73.7 million cars sold each year. According to Inside EVs, in 2016, 777,497 EVs were sold worldwide. Considering that just 5 years previous only 17,425 EVs were sold, this gives us a Compound Annual Growth Rate (CAGR) of 88.33%.

Therefore, using the EV CAGR and projecting out until 2021, you get a demand of 18.4 million electric vehicles.

Now that we have determined the possible future demand for EVs, it is possible to calculate the amount of nickel which these EVS will require. To do this, I will use a figure published by Glencore on their twitter account, which states that,

“Every new #electricvehicle – from its motor & batteries, to the charging point will need c.160kg of copper, 11kg of cobalt & 11kg of nickel.” ~ Twitter – Sept. 7, 2017

Clearly Glencore is using a NMC battery configuration of 1-1-1, which I believe should give us a conservative estimate of future nickel demand.

 

Therefore, if 18.4 million EVs are sold in 2021, the amount of nickel demand is calculated by:

18.4 million EVs x 11 kg Ni/EV = 202,400,000 kg of Ni

202.4 million kg of Ni x 1/1016.05 kg = 199,203.4 tonnes of Ni

199,203.4 tonnes of Ni / 1,957,000 tonnes of Ni (2016 mine production) = 10% of 2016 mine production

 

This is just a rough calculation with a couple assumptions, however, it does give us perspective on how powerful and disruptive this clean air policy trend can be.  If the nickel market was hit with 199K tonnes of high grade nickel demand in the next few years, it would put tremendous pressure on the market, and in my opinion would result in higher nickel prices.

Dramatic price spikes in the nickel spot price will cause battery manufacturers to look for alternatives to nickel. This won’t happen overnight, but it’s pertinent to expect battery improvements along the way that may reduce or eliminate the amount of nickel used within the battery composition, just as manufacturers are reducing the cobalt portion of the batteries to compensate for higher cobalt prices.

 

Concluding Remarks

 

Question #3

Brian: Putting it altogether, there are a few key aspects of the nickel market which need to be watched in order to gauge where the nickel market is headed in the near term. That said, still contend that the future is bright for nickel.

Can you give us one final concluding comment on the nickel market, how you believe the narrative plays out and, ultimately, where the nickel market is headed in the next 12 months?

 

Martin: The spot price has made a huge move since mid-June, going up 35%, but since the base metals marked their bottom in January 2016, nickel is still lagging the price moves made by copper and zinc. Going forward, I expect to see nickel continue to play catch-up with those metals, largely because demand continues to exceed supply by a large margin. If we assume continued, steady mine production from Indonesia and the Philippines, the nickel market will continue to be in deficit and the spot price should be supported. But, if we see any further actions to restrict production in those countries, there’s potential for another explosive move upward. In either case, FPX Nickel is very well-positioned to capitalize on an increasing spot price with the ongoing advancement of our Decar project in British Columbia, which we believe is the finest development-stage nickel asset in the world.

 

 

It’s my contention that nickel will continue to play a major role in our everyday lives, as its uses continue to grow. Let me summarize my thoughts in a few key points:

• Watch the actions of the Philippine government closely, as their choice to ban nickel ore exports and/or suspend/close mining operations within its borders will have major implications on the nickel ore supply.
• Government environmental policy, particularly that associated with air pollution, will affect the nickel market in two ways: First, it will constrain supply as both the Philippines and China suspend/close operations. Second , it will create demand for nickel via the emerging EV automotive sector.
• Infrastructure building regulations will only get more stringent as government looks to extend the life spans of their structures past 50 years. Corrosion resistant steels will play major roles in this trend, with stainless steel leading the pack.
• Current nickel spot prices leave 25% of the nickel producers in negative cash flow. If this trend continues, producers will go out of business and supply will fall further. A rise in the nickel price isn’t necessarily imminent, but it’s inevitable.
• Global nickel inventories are falling, but are still high relative to current production. Watch for continued drops in inventory levels, as it is my guess that the Philippine government will move forward with their decision to ban nickel ore exports.
• High-grade nickel demand is set to grow in the future, as the EV market continues to grow worldwide.

While there are a few key aspects to watch, I still contend that the future is bright for nickel and will be looking for opportunities to invest ahead of the crowd.

 

Until next time,

 

Brian Leni  P.Eng

Founder – Junior Stock Review

 

 

Disclaimer: The following is not an investment recommendation, it is an investment idea. I am not a certified investment professional, nor do I know you and your individual investment needs. Please perform your own due diligence to decide whether this is a company(s) and sector that is best suited for your personal investment criteria. Junior Stock Review does not guarantee the accuracy of any of the analytics used in this report. I do own FPX Nickel Corp. shares. I have NOT been compensated to write this article.

 

 

 

In Part 1 of this series on Zinc’s Bullish Narrative, I covered the supply side of the zinc market. Here, I’ll take a look at world zinc demand. Demand for zinc concentrate begins with the smelters and is where I will start.

 

Smelting

Smelting is integral to the zinc supply chain because, generally speaking, the end use manufacturers can’t use the zinc concentrate that’s created by the miners.

NOTE: Check out this video on zinc smelting

There are two methods for smelting the zinc concentrate:

• Pyrometallurgical
• Hydrometallurgical (Electrolytical)

Before the concentrate can enter one of these two smelting methods, it must be roasted or sintered. Roasting is used to remove the sulphur from the concentrate, which can represent anywhere from 25 to 30% of the concentrate.  The concentrate temperature is brought up to 900 degrees Celsius and the zinc sulfide converts into zinc oxide. The sulfur then combines with oxygen and forms sulfur dioxide. Once the sulfur is removed, the concentrate can now be processed using either the pyrometallurgical process or the hydrometallurgical process to produce the near pure zinc.

NOTE – There are 3 types of roasters: Multiple hearth, suspension and fluidized bed.

 

Hydrometallurgical Process

90% of zinc is produced via the hydrometallurgical process. Here are the steps used in the process:

1. Leaching – sulfuric acid is used to dissolve the zinc oxide, while leaving most, but not all of the other metals un-dissolved.
2. Purification – the cementation process is used to purify the zinc further, with the addition of zinc dust, any of the remaining metals can be precipitated out.
3. Electrolysis – an electrical current is sent between lead alloy anodes and aluminum cathodes, causing the zinc to come out of solution and deposit onto the cathode.
4. Casting – the close to pure zinc is then removed from the cathode, dried, melted and finally casted into ingots. Zinc ingots typically range in purity from high grade 99.95% to special high grade 99.99%.

 

Pyrometallurgical Process

Due to the energy intensive nature of this process, only a few places in the world use the pyrometallurgical process. Zinc is refined in this process within an Imperial Smelting furnace. Because this process is rarely used I won’t go into any more detail.

 

Smelting Capacity

Source:  International Lead and Zinc Study Group

As with zinc mine production, almost 50% of available smelting capacity is found in China. China is the hub for zinc smelting for a numbers of reasons, which include the following; lower pollution and safety standards, proximity to end use manufacturing facilities and, finally, has a population which is increasingly headed towards urbanization, creating huge demand for zinc construction materials.

On a global scale, smelter capacity is forecasted to increase slightly to around 16 million t/y over the next 5 years from its current 2016 base of around 15 million t/y. Over the next 5 years, China is showing the most promise for expansion in smelting capacity as the rest of the world appears set to only replace the capacity that they are scheduled to lose over the same period.

Smelter Closures are led by Padeng’s Tak smelter, located in Thailand, which is set to close once the nearby Mae Mod Mine is depleted of its ore. This will remove 110,000 t/y capacity from the smelting market. Also, closer to home, the zinc recycler, Horsehead, headquartered in Pittsburgh, Pennsylvania, is just emerging from Chapter 11 Bankruptcy , eliminating its outstanding debt with a new deal. That said, their Mooresboro smelter has a lot of technical issues to work through before it can be restarted, so until that happens, it must be considered lost capacity.

The loss in capacity will be filled with some expansion of existing smelting operations. A couple of the larger planned expansions are: Penoles’ Torreon smelting operation, which is set to expand its operation somewhere in the order of 100K t/y over the next 5 years. Also, but on a smaller scale, Boliden’s Odda and Vendanta’s Skorpion look to expand their capacity in the next 5 years.

In all, much like zinc mine production that’s outside of China, the impact of the new smelting capacity will be mostly nullified by the amount of smelter closures or production reductions. If there is to be growth in smelting capacity, it will come from China.

NOTE: I’ve found it difficult to find and confirm information on the Chinese zinc supply and demand fundamentals from sources that I trust.

 

 

Zinc Uses

Zinc is a metal which plays a significant yet inconspicuous role in our everyday lives. Its most desirable attribute is the fact that it’s resistant to corrosion. Through the galvanizing process, industries have leveraged this attribute to improve the quality of their products and, thus, deliver tremendous value to their customers.

Most of us commute to work in a mode of transportation that likely has a galvanized body.  Or, we live in a home with a galvanized steel roof or building exterior.

Source: Zinc: Essential for Modern Life – International Zinc Association ~ pg.12

Other than its corrosion resistance, zinc is also in demand for its calenderability, abrasive resistance, cast-ability, and room temperature mechanical properties. Each of these properties have a different application within industry.

 

Galvanizing

Zinc’s most common use is in the galvanizing of steel. While the zinc barrier created in the galvanizing process creates a barrier between moisture and the underlying steel, the zinc does itself break down in the presence of moisture, albeit at a much slower rate than steel. Thus, the thickness of the zinc coating will dictate the life of the corrosion protection.

The International Zinc Association provides the following example of the effectiveness of galvanized steel within the automotive industry,

“The use of galvanized sheet for automotive body panels allows today’s automakers to guarantee up to 12 years’ corrosion resistance, while adding only a fraction of a percent to the cost of the vehicle. The cost-benefit ratio represents outstanding value for the consumer.” ~ IZA

• While the galvanizing of rebar for construction purposes exists today, it may get a huge boost in the near future as a few of the southern States in America look to increase the grade of rebar used within all of their marine construction. For those who don’t know, my background is in steel manufacturing. I was General Foreman of operations at a rolling mill which produced rebar, angles, channels and flats.
• Typically concrete / rebar construction is designed with 25 to 50 years life span, however, marine construction, in particular, has come under scrutiny for not being robust enough, which has prompted some States to look at increasing their construction specifications on the materials used in marine construction. For rebar, this means higher grade requirements and possibly being restricted to only corrosion resistant steel.
  • Currently, epoxy coated rebar is used for applications that require corrosion resistance, however, epoxy coating has been known to crack, allowing for moisture to begin its oxidation of the steel.
  • Stainless rebar is an option, as high nickel/chromium levels provide the steel with corrosion resistance, but require specialized rolling mill layouts to accommodate its production.  If stainless rebar were to be mandated, eventually some efficiency would be made to reduce its higher production costs.
  • Galvanized rebar is a very promising prospect as a galvanizing line could be added to the end of most rebar mills without a major cost in CAPEX or in process changes, unlike stainless. The knock on galvanizing is that it’s only a surface coat, which does corrode over time. That said, an appropriate zinc coating could meet the 100 year life span requirements.

For the reasons outlined, galvanized rebar could play a major role in marine construction’s future and further drive zinc demand.

 

Sheet or Rolled Zinc

• Zinc is melted and continually cast into ingots. Present day casting equipment will deliver an ingot in the near net shape of the final product, thus drastically reducing the amount of time and the number of rolls needed to reduce the ingot into its final finished product dimensions.
• Zinc’s chemical and mechanical properties make it a go to metal within the construction industry.  Specifically, using it in applications which take advantage of its corrosion resistance, such as roofs or exterior wall material.
• A roof or building wall constructed using the sheet or rolled zinc has a typical life span of upwards 100 years. This life span provides the customer with superior bang for their buck, and because approximately 90% of the material is recycled, it reduces the amount of waste sent to landfills.
• I believe corrosion resistant building materials, such as those which use zinc, will be in growing demand in the future.

Die Casting

Zinc’s mechanical properties make it ideal for die casting. Its strength and stiffness allow for thin-walled sections to be cast, reducing the casting time, the amount of zinc needed to produce the product, a reduction in tooling costs, and allows for a less complex assembly of the product being manufactured.

Brass

Brass is a combination of zinc and copper which, depending on the concentration of each metal, can have very different properties. Most commonly, brass is strong, machineable, tough, conductive and corrosion resistant. Brass’ uses range from pump parts to clock components, bushing material, and a variety of marine applications. The variety and number of uses explains why brass makes up 9% of zinc’s demand.

Zinc Dust

Zinc dust is a fine gray powder, which can be used within paints to leverage zinc corrosion resistance. It can be a cheaper option than buying galvanized steel, but isn’t as effective as the galvanized product.

Fertilizers

While currently accounting for only a small portion of zinc’s uses, zinc fertilizer is on the rise, as organizations like the Zinc Nutrient Initiative produce research on the positive effects that zinc fertilizers have on crop yields around the world. By increasing a plant’s water uptake ability, zinc improves the plant’s resilience to drought and pathogenic infections and, thus, increases crop yields.

Demand for Uses

A growing trend in the world is the urbanization of the population which, in countries like China, is happening at a rapid pace. The urbanization of the population leads to a whole host of demands, but most importantly in context to my commentary on zinc, is building materials.  Whether it be for city infrastructure or for residential building projects, corrosion resistant materials use is on the rise, as more and more homeowners seek to extend the lives of their homes and vehicles.

 

Zinc Alternative

At some point in the future, the zinc price will either force manufacturers to find an alternative material, or economics will allow manufacturers to use a superior substitute.

One building material substitute could be stainless steel; its corrosion resistance is not a coating but found throughout the metal, and it’s strong, both of which make it ideal for use with infrastructure that requires longevity. For roofing material, stainless has a higher melting temperature leaving it less susceptible to damage in house fires. Also, it’s more dent-resistant and will not deform under foot or in a hail storm which, depending on the climate in which you live, could be advantageous.

Aluminum and magnesium alloys could replace zinc in casting, as they have some similarities in mechanical properties, but it really depends on the end use as to whether the zinc can be replaced economically.  In some cases, plastics may even be used to replace zinc.

Fertilizer is a very small part of zinc demand, but in a situation where the price is elevated, my guess is that farmers simply won’t use it. In a world with a “warming climate,” droughts may become all too common and, therefore, we may see more farmers changing their view of the use of zinc-rich fertilizers.

A quick glance at a few replacement metal prices: Stainless steel – depending on the grade and how it’s manufactured, the price can range between USD $2000 to $3000 per tonne; Aluminum – LME cash price USD $1937 per tonne; Molybdenum – LME cash price USD $14,750 per tonne; and finally, plastics — there can be a wide range of prices depending on chemistry.

 

 

Supply and Demand Comparison

Source: International Lead and Zinc Study Group

As you can see in the graph, demand out-paced both the refined metal and mine production in 2016 by 286K and 724K, respectively. From the supply side, 2017 is looking much like 2016, except the deficit between demand and supply appears as though it could get even worse as the mine closures and production losses add up in the immediate future.  The main wildcard on the supply side commentary is Glencore’s 500K of missing capacity, which could come back online at any point, but like Nyrstar’s Middle Tennessee operations, will most likely take 6 to 12 months to hit full production.

Nevertheless, in the zinc market’s current state, I think we’re in for higher prices at least until some point in 2018, when Glencore and some new production capacity can possibly send some doubt or correction into the zinc price.  In the meantime, could the $3000 per tonne level be achieved? I don’t see why not.

Source: International Lead and Zinc Study Group

 

Zinc’s bullish narrative is based on falling supply; prices must rise to bring on more production and to force end use manufacturers into using other metals for their products and, thus, erode the currently steady zinc demand profile.

 

In the weeks ahead, I’m going to take a closer look at the zinc exploration and development companies, which I believe are in a great position to provide us with good speculative value during this zinc bull market.

 

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Until next time,

 

Brian Leni  P.Eng

Founder – Junior Stock Review

 

Sources:

Australian Atlas of Minerals Resources, Mines & Processing Centres

CEO.ca – #zinc

Geo Science World

Geology for Investors

International Zinc Association

University of Tasmania

U.S. Geological Survey

Zinc Die Casting

 

Disclaimer: This is not an investment recommendation, it is an investment idea. I am not an investment professional, nor do I know you and your specific investment criteria. Please due your own due diligence. I have NOT been compensated to write this article and do NOT have a business relationship with any of the companies mentioned in this report. I do NOT own shares in any company mentioned.