BSX Day to Day SP discussion, page-523

Thespeculative dark horse

Your third nickel recommendation is a far morespeculative, but potentially lucrative pick.

It’s BlackstoneMinerals Ltd [ASX:BSX]. A $133.5million market cap stock that trades for 42 cents per share.

Compared to both Western Areas and Panoramic,Blackstone is far newer to the industry.

Incorporated in August of 2016, Blackstonestarted out as a gold explorer. Listing on the ASX in early 2017 in order todrum up funds for its exploratory activities.

However, this gold focus shifted dramatically inMay 2019.

Blackstone suddenly announced that it wasevaluating the acquisition of a nickel mine. And not just any nickel mine — thesite had an established and workable processing facility to boot. All built to‘AustralianStandards’ as management put it.

The caveat though was that this mine was basedin Vietnam.

Known as the Ta Khoa project, the site had beenpreviously operational from 2013 through to 2016. That is before it went intocare and maintenance just like Panoramic’s own mine.

Unlike Panoramic though, the previous ownersweren’t able to recapitalise. Even after committing roughly $175 million to getthe mine up and running over the years.

Blackstone didn’t jump at the prospectimmediately. Instead, they sat on a binding option and waited. Taking theirtime to decide to pursue the nickel venture or not.

Just short of a year later, in the wake ofCOVID, Blackstone pounced. Agreeing to the acquisition and taking a 90% stakein the Ta Khoa project. With the remaining 10% controlled by an obscure localVietnamese company.

For all intents and purposes, Blackstone is nowin control of the mine. Committing themselves to become a nickel producer. Andwith a final price tag of roughly $1.7 million — they acquired it for dirtcheap too!

A huge bargain when compared to the $175 millionworth of capital already invested in the mine and accompanying facilities.

Not to mention the fact that this isn’t somedepleted deposit we’re talking about here. No, Ta Khoa has an estimatedstockpile of 44.3 million tonnes of ore. Containing some 229,000 tonnes ofnickel.

A huge resource, albeit with a fairly low grade(0.52%) compared to our Australian recommendations. But the sheer size ofresource more than makes up for it, with the opportunity to extract more nickelthan either of them.

With that in mind, Blackstone believes it couldreach annual production levels of 12,700 tonnes per year. With a relativelyshorter 8.5-year mine life. And that may be a conservative estimation.

In reality, this project could be far bigger,far more lucrative and one of the best acquisitions I’ve ever seen.

The challenge for Blackstone though is to getthe site operational. Because while early data from the Ta Khoa is promising,it’s still very early days. With both pre-feasibility (PFS) and definitivefeasibility (DFS) studies yet to be finalised.

However, they are on the way.

With any luck, investors will get their hands onthe PFS sometime before March. And if everything continues smoothly followingthat, Blackstock hopes to wrap up the DFS before the end of the year. Withhopes to make a final decision on the whether to proceed with the mine in early2022.

It is certainly an aggressive timeline. One thatdoes understate the likely need for external capital, and the potential timeneeded to acquire it. But that doesn’t mean management isn’t aware of thiseither...

See, perhaps the most exciting aspect ofBlackstone’s project is the interest that it has already attracted.

In December 2019, prior to even confirming theacquisition of the site, Blackstone signed a MOU. Agreeing to a non-bindingpartnership with Korea’s largest EV battery cathode producer: EcoPro.

Together, they pledged to work on a newdownstream processing facility. With the clear intent to create a viable commercialsolution for this nickel output.

What this means is that EcoPro may help fund anyfuture development needs for the mine. Which in turn, would then process andsupply the raw material it needs for their cathode production. A potentialwin-win for both parties.

So, provided the PFS and DFS are compelling,Blackstone may be able to secure funding to kickstart operations immediatelyfrom EcoPro. Giving them direct exposure to the booming battery sector.

And keep in mind, this kind of downstreamprocessing will open up higher margins. Giving Blackstone the ability to sellrefined raw materials for the battery market, not just pure nickel concentrate.

It’s a huge opportunity, especially with thelarge nickel reserves inferred from Ta Khoa. And that is precisely why I amrecommending this stock to you.

However, of the three recommendations in thistwo-part report, Blackstone is by far the riskiest. A highly-speculativeinvestment that is not guaranteed to become an active producer.

Because of this, Blackstone has no meaningfulrevenue to speak of — both past and present.

In FY20 they reported just $46,333 in revenues.All of which derived from interest rather than any actual sale of goods. On topof $539,699 worth of other income, which was largely made up of a Canadian taxincentive refund ($391,703).

So, until any actual mining gets underway, don’texpect this to change. Meaning that Blackstone will be burning through cashwith no real offset until early 2022 in the best-case scenario.

The good news is that Blackstone has been plentybusy topping up their cash reserves lately. With a recent placement to bothsophisticated and retail investors. On top of an extension of a separatecontrolled placement agreement with Acuity Capital. A facility that still has$11.84 million worth of cash available up until the expiry date of 31 July.

With $22.7 million cash already on hand, theyare well positioned for the short term. More than enough money to oversee thedelivery of both the PFS and DFS.

All that matters after that is actually breakingground. The sooner the better, in my view.

Because with EcoPro already showing interest,Blackstone could become a major supplier to the EV industry. Capitalising uponthe huge growth the sector is seeing right now. And that makes them anextremely exciting, albeit risky, recommendation.

Having said that, you need to be aware of therisks involved for all three of these stocks.

Risks

Again, just like Western Areas and Panoramic,the biggest risk for Blackstone is the nickel price.

My entire rationale for these recommendationsrelies upon demand and supply factors keeping the nickel price high.Potentially even sending it to levels not seen since the mid-2000s China boom.

Like any commodity, there is no guarantee thatwill happen.

Nickel is volatile for a reason and as pastbooms have shown, the bust can be just swift. Leaving suppliers, and theirinvestors high and dry during the tougher times.

So, while it’s clear that we are headed into astrong period of interest for nickel, it may not be the ‘supercycle’ that I amcounting on. There is a distinct possibility that demand could wane if eitherthe steel or EV markets suffer setbacks. With the latter in a particularlyprecarious position right now.

This certainly isn’t the first time that marketshave gone ‘all in’ on EVs. Only to later find out that the automotiverevolution they’re talking about was still years away.

Plenty of industries and suppliers have beenburned in the past for making that mistake. Being too early to the party.

This time may be no different, though I trulybelieve all the evidence points to the contrary.

At the end of the day, it’s still a relativelyspeculative proposition. A factor that has been at the centre of plenty ofnickel price booms and busts in the past.

Because of this, if the price of nickel startsgoing downhill quickly, I will possibly be looking to cut our losses quickly.After all, a high price is likely going to be pivotal to securing higherreturns from these small-caps.

Moving on, the second major risk is operationalin my view.

Blackstone is in the process of reopening an oldmine. An endeavour that is obviously easier and less resource intensive thanopening a new mine, but still presents risks. There is never a guarantee thatthe feasibility of a mine will be 100% accurate. There are plenty of thingsthat can and often will go wrong. Whether they be technical, worker related, orjust plain bad luck.

Mining is not an easy venture, and sometimesextracting the valuable materials in the earth isn’t as simple as any study maymake it out to be.

My point is, even if everything goes to planfrom here on out, it could still go wrong for any of these miners. With anymajor delays or setbacks undoubtedly going to result in a hit to the shareprice.

After all, if we are in the midst of anothersupercycle, the window of opportunity may be small. With each of nickel’s pastbooms all lasting a year or two at most.

For this reason, timing may be key.

The faster they can break ground, the better.

Last but certainly not least, there’s also thefinancial risk to consider.

Mining is a capital-intensive business.Requiring large investments in infrastructure and facilities in order to bringthem online. Not to mention, maintain.

This will place a large burden on Blackstone toensure they have sufficient capital to finance their operations. Because evenas the profitable Western Areas has shown with its recent loan, getting a mineup and running isn’t cheap.

I expect all three of these recommendations willneed to manage their cash wisely. But of the three, Blackstone has the leastamount of cash to spare. Making it that much more important for them. Becauseuntil they reach a point of free cash flow, money will be tight. Especially ifthey feel the need to explore new deposits or sites.

And while access to capital may be fairly easyright now, amidst the EV euphoria, that could change. Flagging a potentialproblem for these miners if they struggle to generate meaningful revenues.

With all that said, I still believe all threeare an excellent addition to our buy list.

So if you’re willing to accept the risks, readon for buying instructions.

BuyingInstructions

BlackstoneMinerals Ltd [ASX:BSX] trades for42 cents per share, with a market cap of $133.5 million.

This makes them notably smaller than bothWestern Areas and Panoramic. As well as far more illiquid. With an average ofjust 982,000 shares trading hands each day. Equating to roughly $412,000 worthof actual exchanges.

That may make it a little more difficult toenter this stock. As I wouldn’t be surprised to see the share price spikehigher following this recommendation.

Nevertheless, you should follow the buy-up-toprice strictly. Ensuring you don’t overpay for this stock.

ACTIONTO TAKE: Buy Blackstone Minerals Ltd [ASX:BSX] at the recent market price of 42cents. Buy-up-to 50 cents per share. Set a trailing stop-loss of 50% tomitigate downside risk.