Updated Analysis on Talvivaara

Talvivaara Mining Company Plc. (LSE: TALV; Nasdaq OMX Helsinki: TLV1V) has an open-pit Nickel mine in Sotkamo, Finland. The project leverages one of the largest known sulphide nickel resources in Europe. Talvivaara has 1121 million tonnes of mineral resources in ”measured” and ”indicated” categories and additional 429 tonnes in category ”inferred” (no reserves). Mine life is expected to be close to 50 years. Talvivaara uses a process called "bioheapleaching" to extract the metals from ore.

Production at the mine started in October 2008 and production ramp up is still ongoing. The annual production target for 2011 has been cut multiple times and is now iterated to be minimum 16,000 tonnes of Nickel (it was supposed to be 30,000 tonnes). In the Talvivaara capital markets day 2011 (17th of November) the company estimated the 2012 production to be between 25,000 and 30,000 tonnes of Nickel.

At full planned capacity (50,000 tpa of Nickel) the mine will also produce approximately 90,000 tpa of zinc, 15,000 tpa of copper and 1,800 tpa of cobalt. According to Talvivaara CMD 2011 presentation: "All processes and equipment exist for the 50,000t production level, and have been proven to be capable of running at full capacity "

Also uranium can be extracted profitably from the ore as by-product. Talvivaara has already made an agreement with Cameco regarding building a uranium extraction plant and delivering uranium. The current environmental permit is for 30,000 tonne annual capacity and does not cover uranium extraction.

Back in February I published An Analysis of Talvivaara Mining Company which needs to be updated to reflect the recent guidance. Talvivaara is now experiencing serious headwind pushing stock price to all time lows:
• production problems
• environmental problems leading to bad press, investigation by police and public pressure from Minister of Environment (Ville Niinistö – the chairman of the Green party)
• nickel price has been falling significantly since February (from $28000 USD/tonne used in my first analysis to $18000 USD/tonne used in this update)
• overall economic uncertainty

Valuation of Talvivaara Mining Company

For this update I used the following metal prices:
• Nickel $18000 USD / metric tonne
• Copper $7500 USD / metric tonne
• Cobalt $28500 USD / metric tonne
• Zinc EUR 350 / t + USD 268 / t (Nyrstar 1.25Mt streaming agreement)
• Uranium (Yellow Cake) 55 USD/lb (82 EUR/kg)

Treatment charges are estimated as follows:
• Nickel: 3000 USD/t (2012), 2500 USD/t (2013-2014), 2000 USD/t (2015)
• Copper: 25% treatment charge
• Cobalt: 44% treatment charge

EUR/USD = 1,35

Table 1. Value of production (30ktpa Nickel)

*) Streaming contract.

Table 2. Value of production (50ktpa Nickel)

*) Streaming contract.

Table 3. Value of potential uranium production

The following calculation assumes:

• Operational costs for 2012 (and Nickel production level 30ktpa in general): 250 MEUR
• Operational costs for production level 50ktpa of Nickel: 375 MEUR (Assuming basically 90% of OPEX being tied to the level of production)
• Depreciation etc. 2012: 45 MEUR and 50 MEUR from thereof
• Finance costs: 30 MEUR per year
• Corporate tax level 26%
• Talvivaara stock quote in Helsinki 18.11.2011: 2,42 EUR
• Number of Stocks (millions): 250 (2012), 263 (2013-2014), 290 (2015)
• Attributable to owners: 84%
• Uranium extraction begins late 2012 and it takes until end of 2013 to repay Uranium extraction facility construction ”loan” to Cameco. 

Table 4. Estimated profit levels and P/E

Talvivaara stock price appears to already discount the 30,000 tpa production level (est. 2013). Uranium extraction, if permitted by authorities, will have significant impact on bottom line (est. 2014). Further upside comes from operating at full capacity of 50,000tpa (est. 2015; if permitted by authorities) and ”operation overlord” (expansion to 100,000tpa production). Talvivaara states that they have also excellent near-mine exploration potential especially between Kolmisoppi and Kuusilampi deposits.

There is nothing Talvivaara can do about Nickel prices. There is, however, a lot it can do about environmental problems and bad press. If not handled properly these might become blocking points for uranium extraction and ramp up to full capacity (not to mention production expansion / mine area expansion).

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Full disclosure: Long Talvivaara at the time of writing.

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Notes:

 

MEUR = million euros

tonne (t) = metric ton = 1000 kilograms

kt = kilotonne = 1000 tonnes

Mt = Megatonne = Million tonnestpa = tonnes per annum