Jervois Mining: Moving Up The Value Chain In Preparation For Increasing EV Adoption (OTCMKTS:JRVMF)

Investment Thesis

Investors were expecting an update on the Bankable Feasibility Study for the Jervois Idaho Cobalt Operations this month and that arrived with an after-tax 8% NPV of $95.7m. On the same day the company announced the acquisition of a Nickel and Cobalt refinery in Brazil that will allow them to process their Idaho Cobalt concentrate and potentially unlock up to $140m in the form of reduced capital costs from their Nico Young project in Australia. Jervois is uniquely positioned to capitalize on the growing move to electric vehicles and the desire for ESG mining of needed battery materials. Jervois trades at an attractive valuation relative to the completed NPV studies on their assets and has significant upside exposure to increased metals pricing for cobalt and nickel. Management is creatively executing on their vision for the company. I recommend that risk tolerant investors add Jervois to their portfolio.

Source: Jervois Mining Investor Update

Update

Jervois Mining (OTCQB:JRVMF) has had a busy and exciting month since my last update. Management completed the anticipated Bankable Feasibility Study for its Idaho Cobalt Operations and surprised the market with a creative and valuable move up the supply chain for battery metals via its acquisition of the Sao Miguel Paulista cobalt and nickel refinery in Brazil. Jervois is now well positioned to provide key battery metals to the market to help fuel the move to electric vehicles.

Heavy News Day

Jervois made two significant announcements on September 29, 2020. First was the expected update on the Bankable Feasibility Study for its Idaho Cobalt Operations project. The 8% NPV valuation of the project came in at $95.7m after capital costs of $78.4m assuming cobalt price of $25. This provides some certainty around the value of the Idaho project at this point.

Jervois also made a more surprising announcement which was the agreed acquisition of the Sao Miguel Paulista nickel and cobalt refinery in Sao Paolo, Brazil. Total purchase price is $22.5m payable in tranches based on performance criteria through June 30, 2023. There are 3 plans currently under review to utilize the capacity at this refinery with potential capital costs of $13.5m to $27.0m dollars.

There are several important pieces to the refinery acquisition.

  1. It allows Jervois to further negotiate with potential customers on off-take agreements for finished cobalt and nickel.
  2. Adds a value step for Idaho cobalt concentrate and eventually Nico Young Nickel and materials.
  3. It allows Jervois to adjust their Nico Young project plan to a mixed hydroxide product that can be processed at the new refinery. This eliminates an estimated $142m (AUS Dollar $200m) in capital from the 2019 Preliminary Economic Assessment that was completed for Nico Young.
  4. Adds an additional revenue and profit source from processing and sales of non-Jervois cobalt and nickel.

Class 1 Nickel: The Coming Storm

Electric Vehicle Adoption Drives Demand for Nickel

Tesla (TSLA) and Elon Musk recently provided investors an interesting if controversial update on September 22, 2020 during its “Battery Day” meeting. Nickel and nickel supply were key items addressed by Mr. Musk and the implied volume of Nickel needed by just Tesla by 2030 would be 1 million metric tons. This is roughly 40% of the current total supply of Nickel in the world. The coming wave of electric vehicles is impressive driven by Tesla and several traditional and new auto manufacturers with plans to introduce an increasing number of all-electric and hybrid vehicles in the market. Volkswagen (OTCPK:VWAGY) alone has plans to produce at least 1 million EVs by the end of 2023 and 1.5 million by 2025. In addition to Tesla and Volkswagen there are many other legacy ICE and new EV only manufacturers looking to bring cars to market soon.

To put this in perspective from 2018 to 2019 there were approximately 2 million EVs and hybrids were added to the global fleet in 2019.

2018 to 2019 EV and Hybrid Growth EIASource: IEA, Global electric car stock, 2010-2019, IEA, Paris

Per IEA here are longer term electric car volume scenarios, one based on current government policies and a second based on a more environmentally conscious scenario. As you can see the expected growth in either scenario is huge.

IEA LT EV Growth Scenarios

Source: IEA, Global electric car stock, 2010-2019, IEA, Paris

Against this backdrop of increasing demand for Nickel (and cobalt) are the current market dynamics of nickel. About 70% of nickel today is used to make stainless steel, about 20% for other alloys and only 5-8% is used in EV batteries.

Sources and Uses of NickelSource McKinsey Study: “How clean can the nickel industry become?”

Class 1 versus Class 2 Nickel; a looming gap in supply

The other key thing to understand is that there are different classes of nickel. Class 2 nickel may contain iron, copper or other contaminants and is thus ruled out for processing for use in EV batteries which currently requires Class 1 nickel. Only about 45% of current nickel production is Class 1 nickel.

Class 2 nickel is largely used for stainless steel production due to its lower cost. The quality of Class 1 nickel ultimately has a large impact on the quality and performance of a battery. The mineral deposit availability and related costs associated with Class 1 nickel are significant supply concerns for the future.

Nickel Pricing

Nickel is a relatively inexpensive metal and published prices have recently been increasing recently after hitting a low in March of this year.

1 Year Nickel Pricing

Source: Kitco.com

Nickel is not all the same as discussed above and Auto OEM’s are likely to be more particular with respect to sources of Nickel due to these important factors.

  1. Quality of the nickel. High quality class 1 nickel is needed for EV batteries.
  2. Surety of supply. Given the expected increased demand for Class 1 nickel and the fact that as much as 40% is currently processed in China and Russia. Supply security is important.
  3. Environmental, Social, and Governance “ESG” standards are playing an increasingly important role in sourcing decisions by corporate purchasers. The move to clean energy must be deemed as really being clean.

This combination of factors seems likely to raise the price of nickel in the future.

Valuation

Here is an update to the valuation estimate to the one I provided in my previous article prior to the Bankable Feasibility Study for the Idaho Cobalt operations and the acquisition of the Brazilian refinery.

This updated valuation is largely a sum of the parts based on the published economic studies conducted on key assets of Jervois.

Current Cap Structure and Valuation

Shares Outstanding

641.63m

Options/Warrants

100.39m

Fully Diluted Shares Outstanding

742.02

Share Price (US OTC) @ 9/29/2020

$0.22

Market cap (fully diluted)

$163.2

Sum of the Parts Valuation

Idaho Cobalt (After Tax) NPV

$95.7

Previous (After Tax) 8% NPV for Nico Young

$179.6

50% of expected capital expenditure savings for Nico Young (AUS $200m x 50% x .70 AUS/$ FX)

$70.0

Est. Valuation

$345.3

Fully Diluted Shares Outstanding

$742.0

Implied Share price

$0.47

% Increase

112%

Please note this adds zero incremental value for the new Sao Miguel Paulista cobalt and nickel refinery and sales operation nor for the Uganda assets owned by Jervois. The PEA NPV for Idaho Cobalt operations only considers 60% of the measured and indicated resources so there is potentially additional resource there. It also only gives Jervois credit for 50% of the estimated capital expenditure savings associated with Nico Young. In other words, the valuation is relatively conservative and the management team at Jervois has shown a talent for unlocking the value of their assets.

Aggressive Valuation Scenario

A key premise of this investment thesis in Jervois is the potential increase in cobalt and nickel pricing, here is a very bullish (optimistic) scenario based on the sensitivity analysis performed for the Idaho Cobalt Operations BFS and the Nico Young PEA.

As background here are the sensitivity analysis presented for cobalt and nickel pricing from the Idaho Cobalt Operations BFS and the Nico Young PEA (43-101 Technical report).

ICO Sensitivity Analysis (Cobalt)

Sensitivity Analysis Idaho Cobalt OperationsSource: Jervois Mining Presentation on ICO BFS

Nico Young Sensitivity Analysis (Nickel)

Nico Young Sensitivity Analysis Nickel

Source: Jervois Mining PEA filed with SEDAR

Assuming Cobalt at average of $30 per pound and Nickel at $9 per pound the potential value of Jervois is significantly higher than today’s quoted prices.

Bullish Valuation Scenario

Base Valuation (from above)

$345.3

Idaho NPV with Cobalt at $30/lb. (+20%)

$244.0

Nico Young NPV with Nickel at $9 (+12.5%)

$327.6

Total Valuation Bull Case

$916.9

Fully Diluted Shares Outstanding

742.02

Implied Share Price

$1.24

Current Share Price

$0.22

Change %

462%

In a scenario where secure and ESG compliant cobalt and nickel are important to auto OEM’s and battery metal prices rise from current levels the potential of Jervois Mining is very compelling.

Risks

Jervois Mining is not without risk. Here are some of the risks that could affect the valuation.

  1. It is possible that a portion of the funding for the completion of the Idaho Cobalt Operations Mine and/or the Sao Miguel Paulista refinery may entail an equity raise and thus some equity dilution for shareholders.
  2. Realized cobalt and nickel prices are below forecasts used for the company provided NPV numbers above. Nico Young PEA NPV was based on $8.00 nickel price and Idaho Cobalt Operations NPV is based on $25.00 cobalt price both above current LME quoted spot prices. As noted in the sensitivity analysis above Jervois has significant exposure to both higher and lower prices of both cobalt and nickel.
  3. There is a disruptive technology that replaces current Lithium-Ion battery cells and does not require cobalt or nickel or requires less.
  4. The Sao Miguel Paulista refinery does not pass all technical inspections and the acquisition is cancelled or production delayed.
  5. Jervois is traded in the US on the OTC market. Its primary exchange is the ASX in Australia. Like many OTC stocks it is not as liquid as stocks traded on the NYSE or NASDAQ and subject to wider bid ask spreads and can fluctuate significantly on higher volumes. The 90 day average volume is about 313,000 shares per day on US OTC market.

Conclusion

Jervois Mining continues to execute on its plan to become an ESG compliant and jurisdiction friendly supplier of battery metals. Its latest actions have further clarified its path forward. I recommend that risk tolerant investors looking to benefit from the upcoming increase in EV adoption add Jervois to your portfolio.

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

Additional disclosure: Please do your own research before making any investment decision. Opinion expressed is that of the author only.

Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.

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