My site visit has now been completed and I want to let others know what I saw and heard. Keeping in mind this is not investment advice, we are not allowed to give that to each other but it may give you an idea of what I will be doing personally following the information I have gleaned. Some context, I started the tour a week ago with the brokers that will be joining Euros as leads on the capital raise. They are a very prominent US based broking house with a talented team of analysts based in Sydney. This meant that I was party to conversations that provided a very good grounding prior to the site visit (including financial metrics on competitors) and I was getting some appreciation for the views held by a group of professional analysts. Then of course I was grounded in a different fashion with a seven day lockdown for COVID.
On Thursday night I had dinner with John Lamb and we had far ranging discussions on the longer term plans for the company. Friday I went to site at 6:30am and didn’t leave until 5pm that evening. The itinerary on the day included further time one on one with John Lamb where the conversations were focussed on the next 12 to 24 months at Avebury and some of the possible development opportunities that might arise, many hours with Tony Chisnall the head geo, a tour of the underground mine development with Paul the underground supervisor and an extensive look at the physical plant with Andrew the plant manager followed by a dive into historical data on the performance and problems of the plant under other operators.
In our dinner conversation I made it clear to John that I had a keen appreciation of what the management team had been able to achieve post Bawdwin and that I while I was looking forward to the immediate future in being a part owner of a business that might become the pre-eminent green nickel producer in Australia, I was also thinking about what the long-term future might look like for MYL. Would the day come when MYL had found full value and I should perhaps be exiting or would MYL be looking to build beyond Avebury. Would MYL look to pay dividends in the future or would the opportunity be one of rising capital value and increasing share price to fund my needs?
John spoke about the immediate needs to complete the re-boot at Avebury, to avoid the obvious mistakes that had prevented former owners operating at plant capacity and prevented them from aspiring to expansion plans with the plant but he also spoke at length about the upside in exploration on the main Avebury tenements and the new Melba. While the plant has a nameplate target of 900,000t/year when MMG owned it they believed it could be readily lifted to 1.2Mt/year. He also discussed other possible future paths in Tasmania where MYL, especially via John as a past mine operator, have a very good reputation. Discussions also ranged over some of the other opportunities that MYL had looked at in the previous year. The discussions left me very comfortable that MYL intends to grow an empire and aspires to push further. Something I was pleased to hear of course and I suspect they intend to see share holder return balanced towards growing the capital value of the company and investing in sensible growth opportunities, using their expertise and contacts, rather than passing money back as dividends, my opinion only, though time will tell of course.
One of the major things that came out of the conversation was that in the search over the past year for a path forward, they looked at a range of opportunities but nothing compared to Avebury where John had an extensive prior knowledge of operations, the short comings of the initial plant start and design and most importantly, how eminently solvable these problems would be with the right people and the capital to correct the mistakes made by former owners.
This info is all in the public domain but some of it requires a deep dive on government and regulatory authority websites to uncover but a quick overview. Avebury started production in 2009 with a nameplate capacity of 900,000t per year and approximately a 1% nickel grade with about 260,000 tonnes of contained nickel. The GFC was about to bite with a vengeance, Zinifex/OZL had dramatically over paid for the Avebury asset in 2007 ($888M approx followed by another $200M plus on development) and had to complete the plant build while likely technically insolvent and having no money in the bank.
Simultaneously, the nickel price (no batteries theme back then) had crashed below cost of production. This meant that while the plant was being built and the mine developed, many short cuts were taken to try to stay alive. It was some of those short cuts that wrote the death sentence for the business. While it only took them 3 to 4 months to get up to 70t per day of a 75t target (900Kt annually) they had no proper knowledge of the orebody chemistry, in particular where the arsenic was relative to the nickel, and the ore they were bringing up for processing was at the upper end of the arsenic to nickel ratio. They had signed an exclusive offtake deal with Jinchuan group that demanded a 20% nickel concentrate but China had an import ban on any concentrate that had arsenic values above 5000ppm or 0.5% arsenic. So while many companies would make a concentrate that was maybe 15% or even less, because Avebury had to get to 20% to get paid (they couldn’t sell it anywhere else) they were incidentally upgrading the arsenic content in the concentration process as well. That put them over the limit with China and they couldn’t sell their product.There are numerous potential ways to solve this problem. You could do better geo chem and work out where the higher arsenic was for a start. That would allow you to do some ore sorting and blending to keep arsenic below the limits. You could also, if your offtake agreement allowed, reduce the Nickel grade in the concentrate, which, because the arsenic is associated with the nickel would also reduce the arsenic grade. You might even increase recoveries by not pushing so hard for a 20% nickel concentrate. Another alternative would be to put the final concentrate over a gravity sorting table. There are three main nickel compounds/minerals in the orebody. Two of them have arsenic associated with them and their specific gravity is almost double that of the dominant non-arsenic related nickel sulphide. That means that separation is relatively simple and a viable option. You simply drop the dried concentrate on a table and shake it so that the powdered concentrate sorts itself in bands of material depending on its specific gravity or weight. Looking over the historical data from the short run at production Avebury had, if you had removed 10% of the concentrate, while you would be removing 10% of the nickel, you would be removing 60% of the arsenic. If you removed 5% of the nickel you would be capturing 35-40% of the arsenic. MYL will be doing tests along this line shortly and it is not coincidental that Andrew the plant manager oversaw the installation and testing of a similar process up the road at Renison with great outcomes. Also, keep in mind that if they did go down this path, the 5 or 10% of the concentrate that they physically separate out is not thrown away. It can readily be sold to Canadian smelters who have no issues with arsenic, will happily take the concentrate and the only downside is that the freight bills on that 5 or 10% will be significantly higher. However, it would mean that the other 90-95% of concentrate has low levels of arsenic and could go into China where profitability is increased because of much cheaper freight costs. So, while good ore sorting (will they get an ore sorter?) and proper use of the now established orebody geo chem would reduce the arsenic problems some gravity separation puts it behind us.
Historically there were other problems with the plant that created bottlenecks. Some where very small design flaws that resulted in serious production constraints, MYL have been on site for many months now and the entire plant has been stripped down and rebuilt (still ongoing but aiming at a restart within weeks). An example, there are some serious industrial sized pumps that move the concentrate around in preparation for drying. There was one bottleneck where a 2 metre length of 300mm diameter pipe was moving the concentrate horizontally from one storage area towards the filter press which de-waters the concentrate in preparation for shipping. What was happening was that as the weight of concentrate in the holding tank reduced the pump would start cavitating and not moving the concentrate through to the press. The horizontal run of the pipe was creating too much drag and as the pressure was reduced in the holding tank there would be insufficient head to push the concentrate through, The historical solution was to add water to the concentrate (remember they are now trying to de-water it!) to prevent the pump cavitating but that of course pushed problems down the line to the filter press which is now trying to remove the excess water. MYL’s solution. Move the pump, reduce the length of the feed pipe and lift the intake end so that the pipe feed is now on a 45 degree decline to let gravity assist rather than impede the flow of concentrate. This is just one small example of numerous simple yet effective adaptations I saw which had already been completed or which were in process. MYL have managed to bring some of the industries finest across to Avebury. People are wanting to work at this site because it is a new mine and being redesigned by MYL to be the leading light in the industry. Tasmanian based industry participants, some of whom previously worked in old, deep mines, have the opportunity to work in a great new setting. JL’s reputation is bringing many of them on and word of mouth about the quality of the team and work environment is getting around. Whether it is FIFO workers who are getting tired of commuting from Tassie to WA and QLD or whether it is workers getting out of the hot, potentially dangerous conditions in old deep mines, they are finding good people. The entire plant itself has been effectively totally stripped down, overhauled and getting ready for its new incarnation. Given the previous operators had it at 90% plus of nameplate within 3 months, I expect MYL will get to nameplate quite quickly, maybe by Xmas or shortly after.
The amount of capital raised will determine if they are targeting 900,000t/year or going for the larger target of around 1,200,000t/year. Some of the growth targets require that extra capital to get up immediately. Also, obviously if they can increase production volumes it will reduce average costs per tonne. I saw that Panoramic quoted their AISCs as US$9800 per tonne in their last quarterly and I think they are the closest parallel for Mallee. While I expect costs to be higher during this start up phase I am hopeful that in the second year of operations, perhaps with the larger production targets approaching, we will also approach those AISC levels. Given current Nickel prices are still US$20,000 per tonne even in this commodities crunch the future looks bright to me. There is a lot of headroom to make good money. If as expected by some, the nickel market starts separating out into two markets; one the laterites etc selling into the steel market and the other sulphides/sulphates selling into the batteries market I think we will be on the more valuable side of the equation. If you are a batteries metal producer who can demonstrate zero carbon and a green footprint, I think we will do even better and attract one of the highest premiums. The clients of electric car manufacturers will want to know that their supply is coming from the likes of Avebury. They won’t want dirty nickel, it defeats the purpose of going electric in the first place. If the nickel sulphide price bounces back MYL could get VERY exciting.
I am not interested in telling others what they should be doing in the upcoming capital raise or when the shares relist in about a month, dependant upon ASX timelines, but I will be putting extra capital in for two reasons. Firstly, I trust the team to create a very good business that will make me money and it will be located in a first world location with a great workforce and a great commodity. Secondly, MYL need a spread of 300 minimum investors to throw at least $2000 dollars each at the capital raise to create the ‘spread’ that the ASX demands for a relist. While I expect there will be some big players ready to put up capital, we need the numbers from us smaller guys to get the deal sealed. I will be doing my bit. I expect to make good money going forward as well of course But that is my choice for me, everyone will have their own view and circumstances.
