AOU to Drill for Nickel Underneath Historic Nickel Mine
Auroch Minerals (ASX:AOU) has confirmed that it will drill deep under a historically producing nickel mine in a few weeks’ time.
AOU will be chasing extensions to the existing nickel mineralisation - 3,000m of drilling will take place - large, high grade nickel intercepts should be positively received by the market.
AOU’s nickel mine stopped producing back in 1987 when the nickel price dropped to below US$4,000/tonne - this is not the case now. Nickel is currently trading at around US$17,000 per tonne, almost doubling since March 2020.
This is a big event that we have been waiting for since we first invested in AOU at 20c in March.
Why the recent sell off in AOU?
We are currently underwater with our investment in AOU but hopefully not for long.
We are holding to see AOU execute on its exploration strategy and haven’t sold a share.
We have been observing some selling pressure in AOU in recent weeks, despite the company continuing to charge forward toward drilling at Nepean.
Whilst we don't know for sure, we can think of three reasons that could explain why AOU is trading in the 15c region at the moment:
1. EOFY Tax Loss Selling?
Perhaps investors that bought into AOU at around the 30c mark in February have been exiting for a loss before June 30th, to offset taxable gains made elsewhere in the market.
This will end come June 30th - which is only a week away, and one week closer to AOU’s drilling event.
2. Options overhang?
AOU has 31 million options with a strike price of 10c which expire 30th November 2021 - whilst seeing these converted to shares would bring in over $3M to the company, it's unlikely to happen until the share price appreciates further.
These options appear to have created a natural weight to the AOU share price, especially if holders are converting and selling into the market.
This dynamic will change completely if AOU can strike a large, game changing nickel discovery, or November 30th is reached and options overhang is removed.
3. Impatient holders?
There have been some minor delays to AOU’s current regional RC drilling programme and MLEM surveys, which have been hampered by heavy rain in the area.
The small cap market has its share of short term traders - perhaps some investors aren't prepared to wait a few more weeks until AOU starts drilling.
AOU is continuing to RC drill and finish these MLEM surveys - with results expected in the coming weeks.
Then deep drilling under the Nepean Nickel Mine is happening in late July.
With a pipeline of funded newsflow over the coming weeks, we would expect AOU to generate more attention and hopefully upward momentum.
Tesla to spend $1BN per year over the next few years into Australian mining?
We think nickel is going to continue to perform well as a commodity over the coming years, riding the demand for EV batteries. Nickel is vital for batteries and allows producers to reduce the use of cobalt, which is more expensive and has a less transparent supply chain.
One third of Tesla’s nickel is currently sourced from Australia.
Last year, Elon Musk called for more nickel supply to meet demand for Tesla’s scale up of electric vehicles. In fact, he has promised a "giant contract" for efficiently mined nickel .
Tesla Chair Robyn Denholm recently said that it expects to increase spending on Australian minerals to more than $1 billion per annum in the next few years.
Tesla has already had private talks with BHP on a nickel deal - which means BHP should be looking for more nickel from local suppliers...
Mining giant BHP wants more nickel in the same region AOU is exploring
Here is a photo of AOU’s Nepean Nickel Mine in the summer of 1976 when nickel prices were performing well:
AOU’s historic Nepean nickel mine used to feed the Kambalda nickel processing facility in the same region - now owned by BHP - that used to take nickel from third parties.
BHP has publicly stated they want to re-start the nickel processing facility - and given the global interest in new nickel sources, this makes a lot of sense.
However, BHP is going to need more local nickel to do this.
So while its early days in terms of AOU discovering more nickel, AOU could have a local customer for any nickel it can find.
Does AOU’s Nepean nickel continue deeper? We will know soon
At Nepean, AOU is following a similar analogy to other WA nickel discovery below a historic mine - Western Areas (ASX: WSA) Flying Fox nickel mine. After the mine started, they continued to make deeper nickel discoveries.
This mine has continued operation, having mined down to 1,200m below the surface, and produced over 100,000 tonnes of nickel to date.
Here you can see how far on the right how far down the nickel goes - and on the left is AOU’s Nepean mine - which is only 500m deep at the moment...
Despite the analogy to the Flying Fox nickel deposit AND the high grade historic production at Nepean - no significant exploration down plunge of the mine has occurred - until now.
Here is why we like AOU:
- WA nickel could be highly sought after if BHP and Tesla are seeking nickel in the state.
- Nickel is going to play a key part in EV batteries for the coming decades - we are bullish on the long term nickel price.
- AOU is aiming to unlocking a much larger nickel resource below/along strike to an old nickel mine has happened before in WA – Western Areas is the case study here, and shareholders were hugely rewarded.
- AOU continues to deliver impressive drill results, confirming thick, high grade nickel at shallow depths at its historical nickel mine.
- AOU has a number of options that exercise at 10c that have been converting into shares over recent months. This is good in that it brings funds into the company without having to tap the broader market, however it is worth noting that this can also soften upward momentum in the share price.
- AOU is aiming to build over 100kt of nickel resources, and has multiple nickel exploration projects - we like the scale of the company’s goal.
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