Alaska Energy Metals (TSXV: AEMC) (Maven Buys) – Report Released July 12, 2013
There’s no need to position for the base metals bull market yet. But individual stocks chart their own path, at least to some extent! That is why I’m initiating on Alaska Energy Metals today.
It’s a newly remade company focused on a nickel project in Alaska with known mineralization that needs dedicated but modest work to turn it into an asset of scale. It is a bet on a good technical team that’s partnered with some nickel-savvy marketers (the guys who ran Canada Nickel up 8-fold in 2020) advancing an asset with clear potential to become a large, road-accessible, US deposit in short order. I think those set it up to do well when investor interest turns to nickel.
And it’s still new, having debuted as this remade entity only in May. The share price moved up when that happened and held in the high-40-cent range since, rising a bit above that in the last few days because AEMC is financing. I understand the financing is pretty popular, which probably has some people buying in the market because they can’t get all they want in the raise.
Financing-related price spikes are unpredictable. Sometimes they hold; sometimes they ebb. With this one, I think the team is planning some good follow-on marketing, which should help; the likely end of rate hikes in July (?) would help too.
In other words, I don’t know if this is the exact moment to enter. The price might ease back 10% to its previous level once this raise closes or it might stick at this new level. I am buying half of my market position here and putting in a stink bid at $0.47 for the other half. I also have the opportunity to buy in the financing, which I will do.
The Story
Alaska Energy Metals is the rebirth of a company called Millrock, which was a well-run project generator for 15 years. Unfortunately, the little investor capital that flowed into metals over the last few years rarely reached project generators, instead preferring single asset companies with new discoveries or new mines, and so even though Millrock had multiple partners spending significant money drilling its projects last year the stock dropped as low as $0.03. As CEO Greg Beischer told me: “We needed to do something different.”
Beischer found that different in his past: he re-acquired the nickel-copper-cobalt-platinum project had first taken him to Alaska in 1995. Beischer worked the project for 5 years for Inco, which wanted to find another Norilsk (a giant nickel sulphide deposit in Russia). They didn’t find that but they did drill through hundreds of metres of disseminated nickel sulphides.
In a world short on nickel, in particular short on Norilsk-type massive sulphide nickel deposits, Beischer realized the zone very likely made sense as an orebody today.
Demand for nickel is going through the roof. CEOs from major car companies have all pointed to lithium and nickel as the two commodities they are worried about securing.
Lithium is an opportunity, as I’ve been discussing. And it attracted attention first because it’s a ballooning new market for a metal that geologists haven’t sought before, which sent the lithium price through the roof and means there have been (and will continue to be) all kinds of discoveries. Exciting stuff.
But nickel is just as undersupplied as lithium. And even though explorers have looked for nickel for years already, the big rich massive sulphide deposits that produced the bulk of nickel previously have been found. So the opportunity in nickel is different: large lower-grade deposits with good metallurgy and mineability will be in the spotlight.
That is what Beischer remembered drilling at Nikolai almost 30 years ago. He staked it.
The project is in Alaska. A basic lay of the land: Native land claims are long settled in Alaska (unlike in BC, for instance) and Nikolai is on state-owned land with no communities nearby. There are animals, including some caribou, but no salmon within 100 km. Beischer thinks it’s a highly permittable area.
It’s also accessible. Nikolai is 20 km from the Richardson Highway. An old mining road extends from the highway to within 5 km. AEMC will work to permit rehabilitating and extending that road this summer, work that it expects to do next summer. As such exploration will be by (short) helicopter access for the first two years and then by road.
Nikolai hosts Eureka, a 6-km long zone of disseminated sulphide mineralization. The zone starts at surface and angles into the gentle hillside like a three-layer cake.
The Core Eureka Zone (CEZ) is slightly higher grade than the Upper Eureka Zone (UEZ). The Lower Eureka Zone was not sampled by past operators like Inco; Millrock sampled the old core from the hole in the cross section above and it looks like UEZ. Together, the three layers comprise 275 metres true width in this section.
This is where scale comes into the picture. A zone 6 km long and 250 metres wide drilled defined to 500 metres depth would be an immense amount of metal. That requires the mineralization to be consistent along the zone… and consistency is one of the key reasons
Beischer likes this opportunity. “It was just so incredibly homogeneous in historic drilling,” he says. “There’s potential for some high grade but all along there’s this consistent disseminated deposit.”
In the drawing below, the mapped Eureka zone is in yellow and historic holes are marked in black. AEMC’s plan is to define mineralization in the central red area, where grades are slightly higher, in two seasons of drilling. The blue holes will happen this summer and, if mineralization is as consistent as Beischer expects, should define an initial resource of 295 to 395 million tonnes averaging 0.35% nickel equivalent.
The red holes will happen next summer and should boost the resource to 475 to 630 million tonnes of the same grade.
These are reasonably modest drill programs, just 5,000 metres each summer. That’s important because 5,000 metres is not a stretch, which gives confidence on the execution front. That leaves two key variables in play: grade and metallurgy.
For grade, we can look at the historic holes. Here is the plan map again with assays for each hole.
What stands out is the consistency – every hole returned 100 to 300 metres of very similar mineralization, with assays only varying between 0.3% NiEq and 0.47% NiEq along 6 km of zone.
The average is 209 metres of 0.22% nickel, 0.07% copper, 0.017% cobalt, and sniffs of platinum, palladium, gold, and silver.
Yes, those are low grades. But large and low grade is the future of nickel mining. Don’t take my word for it – ask major miner Anglo American, global stainless steel producer Outokumpu Oyj, or auto maker Mitsubishi, who have each made significant investments ($26M, $16M, and $8M) in large low-grade nickel projects in Canada in the last year, either partnering on the asset or investing in the owner. The juniors with the projects are Canada Nickel, FPX Nickel, and Giga Metals; I’ll compare AEMC’s valuation to theirs at the end.
Beischer says he has already fielded calls from companies interested in partnering on Nikolai, a field that includes miners, car makers, battery makers, and nickel processors.
The bottom line here is that we are running out of high-grade nickel to mine just as nickel demand is going through the roof because batteries are adding dramatic new demand to a market that for decades had only one major consumer (stainless steel). All nickel users know this, which is why they are all watching for large low-grade nickel opportunities.
That’s grade. The other key question is metallurgy. Here there are both knowns and unknowns, though the short version is that there are no big red flags at this point.
Metallurgy is a challenge with low grade nickel deposits. Nickel is just hard to recover; high- grade deposits often only release 60 to 70% of their nickel. High grades can shoulder low recoveries; when grades drop, pressure rises to improve recoveries.
From past work and mineralogical studies, it seems clear Eureka rock could be processed with standard flotation to produce two concentrates. The copper, which is mostly in chalcopyrite, would report to one concentrate while the nickel, which is largely in pentlandite, would report to the other.
Not all of the copper is in pentlandite. Some is in olivine; it will take some work to figure out if/how that nickel can be recovered. And there’s no understanding yet of if/how the precious metals and cobalt might be recovered.
Knowing that most of the two key metals exist as minerals that can be float recovered is a solid starting point, hence my initial comment about no red flags. I’ll use a quote from Beischer to capture the rest.
Metallurgy is crucially important. We have to learn what we will recover and for what metals we will get paid. Much has to be tested and learned.
“I think we are in a paradigm shift for nickel processing. There will be much experimentation to optimize recovery for all of our peer companies. I think this is the future of nickel mining: process technology advancements that allow us to bulk mine and optimize recovery of disseminated deposits. High grade deposits are just so rare. We’ll have to mine disseminated deposits to meet society’s nickel demands.”
Valuation and Outlook
AEMC is currently financing, raising $4 million by selling units for $0.40 a piece (though I think it will be upsized). Each unit comprises a share and half a warrant; full warrants are exercisable at $0.80 for two years.
Post raise, the company will have 35.3 million shares outstanding and $5 million in the bank. It’s a tight share structure, which means good potential for gains if investor interest arrives. I think that is precisely why the stock is trading at $0.53 today, well above its financing price – investors are hearing about the story and those who can’t get into the financing are buying in the market.
Thirty-five million shares at today’s price gives a market cap of $18.6 million. The three clear comparables are Canada Nickel, whose series of properties in the Timmins area includes the large low-grade Crawford project that should have a feasibility study in a few months, FPX Nickel, whose even larger even lower-grade Baptiste project in BC is getting close to pre- feasibility, and Giga Metals, whose similar Tournagain project is grinding from PEA to PFS.
The chart below also include some smaller projects on the right and a privately-held asset on the far left.
The bars show contained metal – green shows NiEq while blue shows Ni – and AEMC’s bars show its exploration target, meaning the 475-630 million tonnes of 0.35% NiEq it thinks it can define within two years. The lighter green and blue extending up from there show what Eureka might hold if drilled along its entire 6km strike.
So what’s the outlook here? I think there are two factors to consider.
One is AEMC simply getting it done. If they indeed define some 300 million tonnes of 0.35% NiEq by the end of this year and demonstrate a path to doubling that next year, it would based on these comps be worth anywhere from $12 million to $40 million. But there’s a c-change in valuation once a project gets big (over 5 billion pounds nickel eq) that lifts the per-pound valuation notably, so if AEMC also punches holes along the entire 6-km zone to show consistency of mineralization, then it could be worth twice that.
The second factor is nickel. When investors get comfortable that the world is clearly on a growth path, they will get interested in commodities. It always happens. This time it will happen when the metals needed for growth are dramatically undersupplied over the coming decade. Amidst that, nickel will offer bullish fundamentals and green credentials.
I think there will be a flood of investor interest in nickel sometime over the next two years. When that happens, all that interest will find only a small group of nickel-focused stocks. They will all run.
Is AEMC the best bet for that opportunity? I like it because I think it offers significant resource growth on top of the re-rate that investor attention will bring to other nickel stocks, at a project that is well located (US wants domestic sources of critical metals; in resource-friendly Alaska but close to roads) and carries relatively low exploration risk.
Will it reach an FPX or Canada Nickel-type valuation of $130 to $165 million? It’s certainly possible, given the seeming scale of mineralization at Eureka, the project’s US address and proximity to roads, and the likelihood that investors will dive into nickel sometime in the next year or two.
I want to own AEMC. I am buying in the current financing. I think interest in the financing has boosted the price a bit of late in a manner that might cool down, so I will buy half of my market position tomorrow but I will post a bid for the other half at $0.47. Not a huge difference in price but 10% lower. I will watch the price over the next two weeks and if my stink bid doesn’t get hit I will likely buy the other half at market.
I am investing with a view to own at least until the company defines its first resource late this year. That said, while corporate achievements matter, I want AEMC to be the second nickel stock (alongside Premium Nickel) that I ride when investor interest turns to this undersupplied green metal.
Written by: Gwen Preston – Resource Maven
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