Jack Lifton on what China is really eyeing in Afghanistan

There are some large deposits of metal bearing minerals in Afghanistan, and some of them are of critical elements, but they are elements most critical to the development of the infrastructure of Asian technological society, iron and copper, not the support of the Western ones. Among the most important of them is a copper deposit often described as the 2nd largest copper deposit in the world by the breathless green (very green in all senses of the word) resource journalists. I doubt very much whether such a judgment as to the value or size can reliably be made today of a deposit that is deep within a region with no modern infrastructure even of roads, much less reliable electric power, water, and mass transportation. But the deposit, known ironically as Mes Aynak, ironically, “small copper deposit, ” in the local language has, according to the USGS, 240 million tons of 2.3% grade copper ore. If so, it is one of the highest-grade large deposits of copper that is yet to be developed.

The Chinese, of course, have had a deal (originally) with whatever government Afghanistan had then, since 2007, to develop Mes Aynak. It was and is a sweetheart deal for whichever Afghan kleptocrats will ultimately be paid. It is apparently still in force even though not a single kg of copper concentrate has been produced yet at Mes Aynak. As with all such Chinese deals only concentrate was to be produced at Mes Aynak, the value add downstream would, of course, be done in the Peoples’ Republic of China. But where even the Chinese screwed themselves was the royalty deal to which they agreed when the first 21st century commodity super-cycle was well underway. Jiangxi Copper and its partner (in crime?), Metallurgical Corporation of China agreed to a 19.5% (!) royalty on the value of the copper contained in the concentrate. Well, the super-cycle subsided to a less than sturdy tricycle, but the associated costs, a railroad through Pakistan to Uzbekistan, the resettlement of the local population, and a 400 MW “coal-fired” (How green is that?) power station for both the project and Kabul (natch!) continue to this day to spiral way past any realistic economics of the project. One good thing for the Chinese: The site is a UN World Heritage Location, and this was a problem during the brief flowering of a democratic Afghan kleptocracy, but the Taliban love to dynamite incorrect historical monuments, most famously the ancient Buddha”s nearby. So there’s that.

The Fraser Institute considers the Democratic Republic (two lies) of the Congo to be a more attractive mining investment jurisdiction than Afghanistan by a wide margin. Unless you do not consider a return on investment in a reasonable time to be a driver for investment, run do not walk away from anyone offering green (or any other color) investments in Afghan resources.

China is the wrong bellwether for short term profitable investments in critical element resources. It, China, takes the view that security of a sufficient supply for the long term future is the key driver in resource investments.

Afghanistan has iron, copper, chromium, lead, gold, silver and so-called “precious stones.” We know that most of these are mineable, but, of course, the deposits are not amenable to commercial development without massive investments in infrastructure and substantial political reform or external control. Alexander the Great, the Islamic awakening, the British Empire, the Soviet Union, and now the United States could not bring Afghanistan into the centuries where each of these empires and movements predominated. You cannot mine effectively, efficiently, or economically without control of the local “business” environment and a stable society.

Alaska is far richer in natural resources than Afghanistan, but the Western “greens” like to export pollution to the third world, not control it and solve problems relating to its effective management.

Afghanistan is known as the graveyard of empires. If the resource promotion press, aka, the hucksters, have their way it will become the graveyard of the money of the Western (mostly) small investors whose fleecing by promoters is much easier than fleecing Afghan sheep.

During the period when the Soviet Union invaded and tried to bring Afghanistan into its orbit, 1979-1989, I was an active automotive supplier of engineered materials, metals, and alloys. During that time GM’s copper buyer told me that Soviet geologists were actively following the Red Army looking for mineral resources, and that (drum roll) they had discovered large deposits of copper. Now its American geologists funded by U.S. military “contractors” who are selling the story of the flavor-of-the-moment, rare earths. If anyone’s interested, it doesn’t really matter if there are rare earths in Afghanistan. There’s a lot of much more accessible rare earth deposits all over the place, but without a downstream processing industry in place, it really doesn’t matter. The Chinese are in neighboring Afghanistan for copper. Doesn’t that tell you something about what’s critical for them?

Nickel 28 is in an enviable position for future nickel demand

The headlines for the new green (low carbon) world tend to focus on security of supply of rare earths, with a decent helping of lithium, cobalt and copper supply news. However there is a commodity that doesn’t seem to get its share of the attention when it comes to the build-out of EVs and battery storage – and that’s nickel. Global primary nickel usage is seen increasing by 12% in 2021 to 2.67 million tonnes, while primary nickel production is only expected to climb by 9% to 2.7 million tonnes, according to the International Nickel Study Group. EV nickel demand is forecast to grow to 1.3 million tonnes yearly by 2030, representing a whopping 48% of 2021 forecast nickel production. And let’s not forget that presently about 65% of nickel is used to manufacture stainless steel. I’m pretty sure stainless steel will play an integral part in the US infrastructure spending the Biden administration has planned. So suffice it to say the supply/demand picture looks reasonably healthy for nickel for the foreseeable future.

There are several ways to add nickel to your portfolio if you are intrigued by these statistics. However, today we are going to look at a somewhat unique hybrid opportunity to get some nickel exposure. Nickel 28 Capital Corp. (TSXV: NKL) is a base metals company offering direct exposure to nickel and cobalt through its holding of 8.56% joint-venture interest in the producing, long-life and world class Ramu Nickel-Cobalt Operation located in Papua New Guinea. This provides Nickel 28 with significant attributable nickel and cobalt production, both being critical elements of electric vehicles and energy storage systems. But where Nickel 28 differentiates itself from other miners and explorers is that it also manages a portfolio of eleven nickel and cobalt royalties in Canada, Australia and Papua New Guinea on nine exploration stage projects and two advanced / development stage projects. So an investor gets direct exposure to nickel and cobalt production today, with upside from a diverse set of potential royalties in the future. In other words, Nickel 28 is also a nickel/cobalt streaming company.

As interesting as that sounds, it’s not even the most intriguing thing about Nickel 28 at present. The Company has reached a watershed moment in its deal with the Ramu mine majority owner and operator Metallurgical Corporation of China Limited (“MCC”). Without trying to get too deep into the financial nitty gritty, as part of the Joint Venture Agreement with MCC, MCC provided financing for the construction and development of the Ramu Mine. Nickel 28 had two separate debt agreements with MCC – one to finance the original construction of the mine (“Construction Debt”) and a second amount to finance the ramp up and early operating expenses of the mine (“Operating Debt”). Up to this point, 100% of the operating surpluses from the mine are first allocated to repay the Operating Debt and related interest. Once the Operating Debt is repaid, the Company can repay the Construction Debt at any time without penalty and is entitled to its share of 35% of the mine’s operating surpluses, with the remaining 65% used to repay any remaining Construction Debt and related interest.

So what the heck does all that mean? The operating surplus for the 6 month period ended December 31, 2020, at Ramu was $15.4 million, which was applied to the Operating Debt in Q1/21 leaving $10.1 million outstanding. With the average price for nickel in H1/21 being higher than H2/20, it’s reasonable to assume Nickel 28 should soon be making its final payment on the Operating Debt thus freeing up some material free cash going forward. Back of the envelope math would suggest that number is almost $11 million per year based on H2/20 pricing and costs.

There are several options that Nickel 28 has available to it for deploying this cash. Following repayment of the $82.7 million Construction Debt still owed to MCC, Nickel 28’s ownership interest in the Ramu Mine, will automatically increase to 11.3% at no cost. The Company can continue to invest in a battery metals focused portfolio of streams, royalties and direct interests in mineral properties. The Company recently announced a normal course issuer bid to repurchase its common shares, which it feels would be highly accretive to its net asset value per share and represents the highest rate of return on investment based on the current share price. Additionally, Nickel 28 has also indicated that there is an option to explore the institution of a dividend.

It’s always an exciting time for a company when it is in the enviable position of having numerous options to deploy its cash. Nickel 28 is focused on IRR and will be making a decision on how to spend its capital accordingly once the Operating Debt is officially retired. Stay tuned for what’s next.