Trading at a Substantial Discount – Resuming Coverage

Report Highlights

• A 2022 Preliminary Economic Assessment (PEA) returned attractive economics, with an After Tax-NPV5% of $109M, and a high AT-IRR of 20%, using US$10/lb nickel. TN is trading at just 16% of the NPV. For comparison, shares of Talon Metals (TSX: TLO/MCAP: $159M), a comparable advanced-stage nickel junior, are trading at 25% of AT-NPV.
•  TN is trading at $0.10/lb NiEq vs the sector average of $0.27/lb, a 62% discount. TLO is trading at $0.41/lb.
• Several major producers have suspended production at some of their nickel mines in Australia due to a 19% YoY decline in prices, driven by slower global GDP growth, and rising supply. LME inventories are up 95% YoY. We foresee these production shutdowns exerting upward pressure on prices.
• We maintain a positive outlook on juniors focused on EV metals. Battery/EV manufacturers/miners are actively seeking stable/long-term supply sources. Early this year, Sumitomo Metal Mining (TSE: 5713) acquired a 10% interest in nickel junior FPX Nickel Corp. (TSXV: FPX).
• Upcoming catalysts include resource upgrade/expansion drilling (8,000 m), and positive sentiment towards juniors focused on EV metals

Price Performance (1-year)

*See the bottom of this report for important disclosures, ratings, and risk definitions. All figures in US$ unless otherwise specified.

Portfolio Summary

100% interest in three polymetallic projects in Ontario, and one in Peru

Kenbridge Nickel Project

This advanced-stage project, covering 4,108 hectares, is located in the Kenora mining district in northwest Ontario. 

Located 80 km north of New Gold’s (TSX: NGD) Rainy River gold mine which has been in production since 2017

Favorable location and infrastructure

Power can be accessed from a major powerline 40 km from the project. Topography in the area is relatively gentle

The company has an exploration agreement in place with First Nations groups in the area. 

Mineralization, Resources, and PEA

The project hosts a high-grade nickel sulphide deposit. Mineralization has been tested to a depth of 900 m below surface, with a shaft descending 622 m, featuring two levels at 107 m and 152 m. Since 1937, 667 drill holes (99,741 m) have been completed on the project

Open-pit and underground resources totaling 146 Mlbs Ni, and 78 Mlbs copper 

The deposit measures 250 m long x 60 m wide x 900 m deep

Underground resources have an average nickel grade of 1.08%; we view grades of 1%+ as high

In 2022, a Preliminary Economic Assessment (PEA) was completed. The study was based on underground operations (1,500 tpd) spanning nine years, involving conventional crushing/grinding/floatation processes, producing nickel/copper concentrates.

The PEA targeted deeper/higher-grade resources

Higher-grade ore will be accessed in the initial years, implying potential for relatively high cash flows in the early stages

The project’s initial CAPEX of  US$134M is relatively low, given the existing infrastructure

AT-NPV5% of $109M, and a high AT-IRR of 20%, using US$10/lb nickel, and US$3.8/lb in cash costs

The break-even nickel price is US$8/lb

AT-NPV5% increases to $160M at US$11/lb nickel vs the current spot price of US$8.6/lb

We believe the PEA was conservative as it excluded open-pittable resources 

Exploration/Resource Expansion Plans 

We believe there is resource expansion potential, as the deposit remains open laterally, and at depth

Drill intercepts below the existing shaft returned high grades of up to 1.15% Ni, and 0.71% Cu 

We note that nickel sulphide deposits often have extensive vertical depths, with offset or parallel zones

TN is planning borehole geophysics, and a deep penetrating airborne survey, over the entire property to test for hidden conductivity features

Management’s proposed budget for 2024/2025 is $15M, allocated as follows:

• $3M for dewatering the existing shaft, and $5M for establishing temporary facilities for underground access 
• $3.5M for an 8,000-meter drill program
• $1.5M for environmental baseline studies for project permitting, and working capital 
• <$1 million for completing an all-season access road, which should dramatically reduce on-going exploration costs.

Management intends to raise $6-$8M this year

Financials

Maintains a reasonably healthy balance sheet

As of April 2024, TN had cash, and marketable investments, totaling $2.2M

FRC Valuation and Rating

The following table compares TN to other high-grade nickel juniors.

TN is trading at $0.10/lb NiEq vs the sector average of $0.27/lb, a 62% discount 

Applying $0.27/lb to TN’s resources, we arrived at a fair value estimate of $0.38/share 

Juniors with higher grades generally exhibit a higher EV/lb

DCF Valuation

Our DCF valuation is $0.55/share

Unlike the PEA, we are using both underground and open-pit resources in our models

However, we are using a more conservative discount rate, and relatively low metals prices 

We are resuming coverage with a BUY rating, and a fair value estimate of $0.47/share (the average of our DCF and comparables valuations). Upcoming catalysts include drilling, and positive sentiment towards juniors focused on EV metals. With larger players actively pursuing M&A opportunities in the EV space, we believe TN could become an attractive acquisition target if its upcoming resource expansion drill program yields promising results.

Risks

We believe the company is exposed to the following key risks (not exhaustive):

• Volatility in nickel and copper prices 
• Exploration and development 
• Project financing may take longer than expected
• EIA and permitting 
• No guarantee that the company will be able to simultaneously advance all of its projects
• Ongoing support from First Nation communities near the project is crucial  

We are assigning a risk rating of 5 (Highly Speculative