Company Overview: Poseidon Nickel Limited (ASX: POS) is focused on exploring and producing nickel sulphide in Western Australia (WA). The company has three nickel (Ni) operating sites and combined Ni resources of ~400,000 tonnes. It has growing exploration programs underway. It plans to produce at least ~15,000 tonnes of nickel concentrate per year and operates - Black Swan, Mt. Windarra, and Lake Johnston as its key projects. 

POS Details

Federal Grant for the Development of Battery Materials Refinery Hub

• In October 2021, POS and PBT (Pure Battery Technologies) signed a Memorandum of Understanding (MoU) to develop a regional battery mineral refining hub in Kalgoorlie, WA. Recently, the companies declared the grant confirmation of ~$119.6 million by the Australian Government under the Modern Manufacturing Initiative (MMI) for the purpose mentioned above.
• POS foresees significant value by being a potential feed supplier to the refinery hub and expects an opportunity to improve the margin concentrates due to the direct nature of the minerals processing route and nearness of the hub to the operating mines.

Operational Highlights of 1HFY22 (Ended 31 December 2021):

Significant Exploration Upside Expected:

• The drilling program at the Silver Swan resource has returned multiple high-grade intersections in the inferred zone. POS expects the Tundra-Mute Inferred Resource boundary within the Silver Swan Channel and the Black Swan Disseminated Zone to hold further discovery potential, expanding the JORC reserve.
• POS plans to undertake a significant drilling program at the Lake Johnston project (drill up to ~250 holes and ~15,000 metres in the high priority Western Ultramafic unit) in Q2FY22.

Robust Demand Outlook:

Nickel production is expected to increase due to increasing demand from the electric vehicle (EV) battery makers and stainless-steel manufacturers. The current nickel supply situation is also likely to be exacerbated by sanctions on Russia, the fourth-largest nickel producer.

Comparative Net Loss & Net Cash Outflows, Analysis by Kalkine Group

Top 10 Shareholders:

The top 10 shareholders together form ~24.45% of the total shareholding. Black Mountain Metals Pty. Ltd. and Tattarang Pty. Ltd. hold a maximum stake in the company at ~11.88% and ~4.83%, respectively.

Paste here the shareholders’ chart.

Source: Analysis by Kalkine Group

Key Metrics Performance: POS has reduced its debt-to-equity levels from ~1.79x in FY16 to ~0.01x in FY21. It reported an increase in the current ratio from ~1.38x in 2HFY21 to ~3.83x in 1HFY22.

Debt-to-Equity Trend, Analysis by Kalkine Group

Key Risks:

• Exploration Risk: POS faces the risk of discovering new nickel deposits and estimating reserves. It meets the risk of project commercialisation and delays in actual nickel production.
• Shortage of Skilled Labour: POS faces the risk of scarcity of skilled labour and a probable rise in wage costs due to the prevailing COVID-19 situation.  

Production Outlook:

• POS is targeting nickel production in Q1FY23 and revenue generation in early FY23.
• The company plans to complete the bankable feasibility study and make an FID (Final Investment Decision) at the Black Swan project post the completion of drilling, updated mine studies, and receipt of revised indicative offtake terms.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Technical Note: On the daily chart, POS stock prices are trading above the horizontal trend line support level and taking the support of the trendline. Moreover, the momentum oscillator RSI (14-period) is trading at ~52.20 level, indicating positive momentum. Further, the prices are trading above the trend-following indicator 21-period SMA, which may act as a support zone. An important support level for the stock is placed at AUD 0.076 while the key resistance level is placed at AUD 0.114.

Stock Recommendation: The stock of POS gave a positive return of ~4.44% in the past month and a negative return of ~10.47% in the past three months. The stock is currently trading below its 52-weeks’ average price level band of $0.055 - $0.160. The stock has been valued using the EV/Sales multiple-based-illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). The company might trade at some discount than its peers’ mean EV/Sales multiple, considering nil revenue generation, negative bottom-line, and net operating cash outflows. For this purpose of valuation, a few peers like Western Areas Ltd (ASX: WSA), South32 Ltd (ASX: S32), Panoramic Resources Ltd (ASX: PAN) have been considered. Considering the current trading levels, low debt levels, strong demand drivers for nickel production, POS’ growing nickel resources, plans to target production and revenue in FY23, an indicative upside in valuation, and associated key business risks, we give a ‘Speculative Buy’ rating on the stock at the closing market price of $0.094, as of 23 March 2022.

Markets are currently trading in a highly volatile zone due to certain macro-economic issues and prevailing geopolitical tensions. Therefore, it is prudent to follow a cautious approach while investing.

POS Daily Technical Chart, Data Source: REFINITIV 

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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