Blackstone Minerals (ASX:BSX): Straw hats in winter

Blackstone Minerals (ASX:BSX): Summer is coming

Back in early 2022, Blackstone Minerals was riding high. The Perth-based resource junior, at around 60 cents a share, had a market capitalisation north of $250m, of which $60m was cash. The flagship Ta Khoa Nickel Project in Vietnam, 90% owned by Blackstone, was looking good on the early numbers, with a Preliminary Feasibility Study valuing the project at US$2.1bn NPV using an 8% discount rate. And the price of nickel was on a tear, rising from around US$21,000 on LME at the start of 2022 to peak out at US$48,000 in early March.

The nickel price is down

Two years later and times have most definitely changed. Nickel has trended down almost continually over the last couple of years and all sorts of nickel mines have been placed on ice as a result. Mention nickel in polite investor company and one gets icy stares, with the general consensus that nickel will be under pressure for years given the rapid expansion of Indonesian production. And that means that sentiment towards nickel project developers has lessened considerably. Blackstone stock is now changing hands at around 5 cents a share.

It’s fair to say that Blackstone Minerals is, right now, one of those ‘straw hats in winter’ stocks. Many think, however, that the warmer weather is coming. Our parent company, Pitt Street Research, recently got commissioned to write some detailed research on Blackstone Minerals and the initiation report takes a close look at many aspects of that summer story.

But we’re going to need more nickel

Why is summer potentially on the way for companies like Blackstone Minerals? Well, consider the reason why nickel has been generally trending up since 2016 and even today remains a lot higher than the 2016 nadir, in spite of the recent bear market. Historically, the world needed nickel mainly for stainless steel production. Then the Electric Vehicles started to appear on our roads and it became apparent that in the near future the world would need a lot more nickel than was currently being mined. Nickel, you see, is essential in EV battery manufacturing, because of its energy density and capacity retention. Sure, nickel supply has temporarily moved ahead of demand, but there’s now talk of the metal moving back into deficit sooner rather than later, helped by the fact that more than 250,000 tonnes of annual production have been shut down.

But we want “clean” nickel

And then there’s another important factor. Nickel has typically been produced at lower environmental and regulatory standards in Indonesia. Many industrial users in Europe and North America would prefer ‘clean’ nickel produced according to best ESG practice. Remember back in July 2020 when Elon Musk told the world’s nickel miners that ‘Tesla will give you a giant contract for a long period of time if you mine nickel efficiently and in an environmentally sensitive way’? In 2024, that ESG imperative is still around and it’s reasonable to expect it to help propel the return of clean nickel production in the short-to-medium term.

Which is good news for Blackstone Minerals, because this company has engineered Ta Khoa to have strong ESG credentials, with a lot of the power for the future nickel mine and processing plant coming from hydro power. The result is an operation with a low carbon footprint but with low costs that put it into the lowest quartile globally.

Resources investors should look at Vietnam more

Ta Khoa is around 160 km west of Hanoi and about 340 km west of the port city of Haiphong. Vietnam doesn’t generally come top of mind to ASX-focused resource sector investors when they think about mines, but this country has a lot of what they would look for, particularly if they like battery minerals. For one thing, the country already has around 20 mines and the geology, particularly in the north, is favourable for large deposits, like Ta Khoa, where the JORC 2012 resource is 130 million tonnes at 0.37% nickel, for 485,000 tonnes of the metal.

For another, taxes are light in Vietnam, with the top corporate tax rate only 20%, and the level of business and trade freedom in the country are surprisingly high. Indeed, economic freedom generally has been headed up in Vietnam since the late 1990s. No wonder the level of Foreign Direct Investment was close to A$28bn in 2022, up from just $1bn or so at the turn of the century.

Domestic EV manufacturing in Vietnam?

And then there’s the potential for more high-end manufacturing that makes use of Ta Khoa’s product. Did you know that they make EVs in Vietnam? The car manufacturer VinFast Auto was started up in 2017 by Vingroup, one of the largest private conglomerates in Vietnam, and in 2021 it built its first EV. It’s been solely focused on EVs since 2022 and in 2024 intends to sell around 100,000 of them. As of early June 2024, Vingroup isn’t associated with Blackstone Minerals and Ta Khoa in any way, but we mention it as an example of what could be emerging right in the backyard of this potential mining and refining complex.

Moving into the nickel summer

Blackstone Minerals’ challenge in 2024 and 2025 will be to complete a Definitive Feasibility Study on Ta Khoa, negotiate offtake for the operation and, importantly, get it funded. The PFS we noted above came with US$491m capital cost, which to some investors will seem like a serious challenge. However, the fact that the Internal Rate of Return is 67% and the payback period just a year and a half, could make debt funding a straightforward proposition.

And there’s potential for Blackstone Minerals’ equity stake to be funded by a strategic sale of an interest in the project, attracted by the favourable economics we noted above. It may be winter right now for nickel, but industrial producers and consumers of nickel have been there before and they know spring and summer are what follows.

Disclosure: Pitt Street Research directors own shares in Blackstone Minerals. Blackstone Minerals is a research client of Pitt Street Research, which owns Stocks Down Under.

This article about Blackstone Minerals, ASX: BSX, is not financial advice.

Also note that Small caps are risky and you can easily lose money in these kind of stocks (but you probably already knew that).

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