Got this from an investor who knows his stuff in the nickel...

Got this from an investor who knows his stuff in the nickel department ;) Some of the attached photos and graphs are missing, but the rest is there. One of Southern X's analysts wrote it up, not sure on name.

Regards
Eyeknow

Poseidon Nickel (POS.AU) –last Wednesday I flew out to Laverton in the WA outback to see Poseidon`s asset base and hear about their long term plans to be a large scale Australian nickel producer. The current equity market cap is $93m and once you add in the 115m 40c options owned by Andrew Forrest`s children`s charity the market cap would be around $150m once they are exercised.

I think at the implied $150m valuation this stock is a cheap free option on the nickel market over the next 3-5 years and Poseidon has clearly assembled a group of guys who have no interest in remaining a $150m market cap nickel player, they clearly want this company to be a major Australian nickel producer. First production will be a few years away and they still have around 9 months of de watering the main mine and re habilitating the mine but at its current equity price its cheap. POS current JORC resource is around 60,000 tonnes of contained nickel with clear exploration upside as well as from other programs such as tailings and surface material and even the old mine closure reported indicated a geological resource of 65,000 tonnes of nickel.

The first reason I am interested in POS is that its assets were owned by Western Mining and I have seen very few people in life who have not made money from buying assets from poor old WMC. Now when WMC closed Windarra at stages in the 1980`s and finally for good in the early 1990`s the main reason was the nickel price was sub $2.00 per pound and clearly the current price regime is a different story but Windarra did produce around 84kT of nickel over that period. I also think that people under estimate how new technologies can affect previously difficult ore bodies and I know Windarra was renowned in the past as a difficult ore body. But I have also in the past heard that all the ex WMC workings around Kambalda were difficult mines in the past yet I see stocks like Independence Group (IGO) and Mincor (MCR) now have market caps of between $500-1bn dollars.

View of Windarra Mine –site office and infrastructure above ground.


Management – the first thing people notice when they go to see Fortescue is that it is far from just the Andrew Forrest show as the press would have you think. There is a good hard team from places like Rio,BHP and the like who have decades of mining experience and FMG seems to get no credit for that. POS is very similar and even though they are at a far earlier stage than FMG is right now, the people you meet are ex Jubilee, Minara,WMC, BHP etc. David Singleton is the new CEO and we know him from his days as the CEO of engineering group Clough. Apart from being a nice bloke he also clearly has major experience bidding on and building huge projects across the minerals sectors and he knew the nickel market well given his presentation.


The main thing why I think POS at $0.60c is very low risk is the 426 sq km of tenements they control and how little exploration work WMC ever did. WMC basically had a mine at the top end (Windarra) and one at the bottom (Windarra South) and didn`t really have a look in between apart from some 1km spaced drilling. POS have hired Neil Hutchison to be their head of exploration and he was at Jubilee mines until last year and he has an expertise in finding new massive sulphides from his Jubilee days. Neil would not have left JBM unless he thought Poseidon offered huge exploration upside and there is 24km of host rock targets for him to look at so far. Neil explained how finding massive nickel sulphides you need to literally drill through them and doing 1km spaced holes like WMC did in the past was clearly like trying to win Lotto. My own view is that Windarra will end up in time not being Poseidon`s major nickel mine on their tenements it will be a new discovery and drilling at new prospects that have been identified like Denny Bore (photo below) are clearly exciting and any one of these prospects could be a major new mine. If you read a guys body language then Neil is clearly pretty excited about what is potentially out there in that 24km of host rock targets.


Drilling at Denny Bore.



Poseidon has also hired former Minara heap leach expert Michael Rodriguez after 11 years at Minara. Now Michael clearly has an expertise in bringing on complicated hydrometallurgical and pyrometallurgical plants and clearly the huge former Windarra stockpiles/tailings offer a lot of work for Michael to do. POS was stressing how much value add you get as a nickel player if you can take it from ore to nickel rather than from ore to concentrate as clearly that would add significantly to your profitability rather than giving away another 30-35% to a third party who adds the value to your product. Clearly there is no shortage of surface material or tailings dam material that Michael can work with for the next few years to try and get an optimal sulphide/oxide mix.

In terms of operational experience we were shown around by Chief Operating officer Rob Dennis who was part of the original WMC team on site. You want to have guys who know these assets when you are trying to re start them and Rob is clearly the man for the job. Rob reminds me so much of the FMG management where they have all worked for larger firms but just have this strong desire to actually build and grow an asset rather than just be employee number 152,000 of RIO or BHP.


Nickel Market outlook
While North Americans still think they drive global commodity demand it seems the Chinese have a different view. While growth in worldwide stainless steel output was 4% pa from 2005 to 2007 Chinese stainless output grew +40% pa over the same period and China has gone from a net exporter to net importer of nickel in the last 2 years. China is responsible for 25% of world nickel demand and people forget China is only 50% of the per capita consumption of Japan and India is only 10% of that Japanese per capita demand of nickel. When you see huge new modern steel mills being built in China it ain’t because they plan to mothball them anytime soon and I think the equity market still doesn’t understand that you cannot just turn off and on these huge mills. Most of the nickel market research I have read of late says many European mills stockpiled nickel at far higher prices and the last few months of 2007 saw some de stocking and now the mills are back in the market looking for ore. In the attached demand/supply work you can see that 3 new Ravensthorpe`s are needed every year until 2012 to get that into balance and that clearly ain’t happening. I also think that there is no better sign that the nickel price is going higher than Glencore creeping by another 6m shares in Minara the other day and as one of the largest daily traders of the metal, few would have a better idea on where nickel was heading than Glencore.






POS reminds me a lot of Jubilee. I remember we pushed JBM for years backing Kerry Harmanis and yet all we ever read from other brokers was about the lack of mine life. Well on the back of JBM`s exploration focus and new discoveries suddenly the end result is Xstrata taking you over for $23 a share and clearly Xstrata think there is no issue with mine life. I think Poseidon`s guidance for 6-7 years of mine life is clearly conservative (at 20,000 tpa longer term) as there is clearly a huge amount more nickel to be found in the area just like we saw with Jubilee.

POS will clearly raise money at some stage to fund the redevelopment of this project and get this mine up and cranking and that would be likely to be a combination of equity and debt and I would assume the capex to bring this development on line would be around $50m ish. That number would be a concentrate circuit for around $35m plus other costs that produces a smeltable concentrate as per WMC`s production in the old days.

So when I add up the current market cap, the options and an equity raising I see a company of around $200m implied equity market cap which looks cheap compared to their long term production targets. The sunk value in embedded infrastructure that is already on site also makes this a far easier re start than and far lower cost operation than a green fields start up operation. They already have 4,100 metres of decline that is currently being de watered and I would hate to think what that alone would cost to build in the current environment as well as multiple other ex WMC assets.

I always liked the quote from the Texan oil Billionaire Sid Bass when asked where the best place to find oil was . “Oil is like dog shit, where you find one bit you always find more nearby”

Well I like Sid`s quote and I think Poseidon will be the same in terms of finding more nickel in the area. POS looks cheap. There is a good team of experienced operational guys, there is clear upside from WMC`s lack of exploration over 20 years and also technological upside from applying more modern techniques to the ore bodies.

We will go into more detail on Poseidon in coming weeks and months but you can do your own back of the envelope calculations as to what POS could earn 3-4 years down the track assuming 20kT pa of nickel production and its clearly EBITDA in the hundreds of millions of dollars which would imply at 60c you could be buying POS for 1-2x EBTIDA? That number sounds awfully familiar to FMG where people told you we were mad saying FMG could deliver EBITDA of $3-5bn in 2010 which now just merely seems consensus.

Finally just remember to have a look at recent nickel market transactions. Allegiance Mining`s takeover was done at inferred values of $140k annual produced tonne to $200 per annual produced tonne at Jubilee and Lion Ore. If you use POS`s longer term output target of 20kpta it infers a valuation of $3-4bn.