First Quantum sells 30% stake in Ravensthorpe to POSCO for US$240M

First Quantum Minerals (TSX: FM) is selling a 30% stake in its Ravensthorpe nickel operation in Western Australia to South Korean steel giant POSCO for US$240 million.

The funds will be used to help pay down debt.

Under the deal, POSCO, South Korea’s largest steel maker and the world’s fourth-largest, is also securing 7,500 tonnes of nickel in mixed nickel-cobalt hydroxide precipitate (MHP) a year starting in 2024 under an offtake agreement.

The two companies have also signed an MOU to explore a strategic partnership to produce battery cathode precursor materials — most likely in the form of nickel sulphate — by using Ravensthorpe’s MHP.

First Quantum will retain the remaining 70% of Ravensthorpe and continue to be the operator.

Jackie Przybylowski of BMO Capital Markets says the deal was done at a “significant premium to the value that we ascribe to the asset.”

“Our previous NAV (10%) for Ravensthorpe was US$257 million (100% basis), so the POSCO transaction (which would imply a US$800M value on a 100% basis) is a 233% premium to our estimate,” she commented in a research note.

But she also pointed out that “minority stakes by strategic investors, including smelters seeking secure supply, are not new and historically completed at a premium.”

“These include Sumitomo/Sumitomo Metal Mining’s 30% stake in Teck’s QB2 project for US$1.2B, ~3x consensus NAV; Freeport-McMoRan’s sale of a 13% stake in the Morenci mine to Sumitomo Metal Mining for US$1B, deemed ‘a good deal for Freeport’ then; and Sumitomo Corporation and Korea Resources’ investments in (subsequent ownership of) the Ambatovy nickel project/mine in Madagascar. Anecdotally, we have seen fewer such investments in recent years, likely due to poor performance of some past investments (especially early-stage greenfields investments) and weaker commodities markets, which likely made securing strategic supplies less critical then.”

The analyst also forecast that “future strategic investments will be centred on battery raw materials, renewable energy, and other ‘green economy’ initiatives, rather than past investments which were focused on securing smelter feed. Nickel, cobalt, and copper are expected to be especially strategic metals.”

Farooq Hamed, an analyst at Raymond James, said in a research note to clients that he was carrying Ravensthorpe “at an NPV of $716 mln implying a value of ~215 mln for a 30% stake.”

First Quantum acquired Ravensthorpe in 2010. At that time, the large-scale open-pit nickel and cobalt mine, about 550 km southeast of Perth, was decommissioned. First Quantum restarted the operation and shipped its first concentrates in November 2011. The mine was then put on care and maintenance in 2017 due to low nickel prices, but was restarted and resumed exporting in early 2020.

Mining at Ravensthorpe is from three open pits and the nickel laterite ore is than scrubbed and screened at a beneficiation plant.

A combination of pressure acid leach and atmospheric leach utilizes all ore types, and precipitation and filtration recover the mixed hydroxide (MHO) precipitate product, which contains about 40% nickel and 1.4% cobalt, which is suitable feedstock for battery production. Ravensthorpe uses seawater, which is pumped through a 46-km pipeline.

Last year the mine produced 12,695 tonnes of nickel and First Quantum started a mine expansion with the development of the Shoemaker-Levy deposit, a new orebody that the company says will extend the life of the mine by 20 years. In its 2020 annual report, the company said it expects Shoemaker-Levy to come on stream this year and is targeting production at a rate of 2,500 tonnes per month.