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Thursday, May 22, 2008


An Intriguing Oil/Nickel Investment: Victory Nickel

Victory Nickel is a nickel junior with a huge amount of nickel in 3 different projects with excellent infrastructure -- a relatively small one with very high grades requiring minimal capex to go to production, a very large one with lower grades but a huge amount of tonnage, and a third project in between the two with respect to size and grade. In addition, they have what's becoming an intriguingly attractive oil and gas related project in their frac sand overburden overlying the proposed open pit for their largest project (Frac sand is used to enhance recoveries in the oil and gas industry).

We first wrote about Victory Nickel back in August:

Victory Nickel

Another baby being thrown out in this market selloff is Victory Nickel (NI in Canada, or VNCKF in the U.S.). Victory Nickel is a fairly new nickel junior, having been spun off from Nuinsco Resources earlier this year. With a market cap of under $100 million , they have 3 promising projects, the main one being the Minago project in Manitoba, which, based on a recent scoping study, has an NPV@8% (Net Present Value using an 8% discount rate), assuming $7.43 nickel, of $334 million. They also have frac sand overburden at Minago with an NPV@8% of that resource of $32 million. Minago has excellent infrastructure, with a nearby paved highway, port, rail, and low power rates.

Victory also has the Mel project, with 83 million lbs of Measured and Indicated contained nickel, and the Lac Rocher project in Quebec with 25 million lbs of Measured and Indicated contained nickel (including a phase one section with 50,000 tonnes of 4.06% nickel, which can go to production with minimal capex).

Victory plans to get all 3 projects in production by 2009 or early 2010, using the early cash flow from the Minago frac sand and Lac Rocher's phase one to minimize the dilutive financing required to get the huge Minago project (one of the largest nickel projects in Canada) into production.

While we don’t like the outlook for nickel nearly as much as we do zinc and silver, if Victory can get to production with these projects as planned and nickel doesn't completely collapse below $6/lb (currently around $12/lb), the stock should move much higher in the next couple of years. With the recent weakness in the sector, market, and nickel price, the stock has dropped back to all-time lows (currently $0.53, less than half the high of 2 months ago, which was less than the stock's first day close of $1.21 in February), which we believe is a great buying opportunity for risk-tolerant long term investors looking for near-term production of sulphide nickel.

You can see more details on Victory nickel in this recent presentation.

(Here's the more recent presentation, from December)

Last month, Victory announced a dramatic increase in the potential for its frac sand project, with over 5 times the projected annual net revenue. More of the frac sand has been identified as potentially saleable, and with the increasing demand for oil and gas, the demand for frac sand at oil and gas projects in Canada and the U.S. has risen dramatically. Just yesterday, Victory announced the commissioning of Outotec to design the frac sand production plant, showing they're serious about moving this project to production quickly. Since the original scoping study on the frac sand project showed an NPV@8% of $32 million, and the projected annual net revenue is now over 5 times higher, Victory, with a market cap of around $100 million, is arguably undervalued based solely on the frac sand overburden project, which requires very low capex investment.

On the nickel front, Victory announced impressive drill results from Lac Rocher in October, as well as excellent metallurgical results for Lac Rocher in December, and then last month the receipt of a key approval for Lac Rocher's very high-grade Phase 1 extraction, all of which moves them closer to the goal of beginning Phase 1 extraction by the end of 2008. On Wednesday, Victory also continued to report impressive drill results for the huge Minago project, for which they plan to complete a feasibility study later this year. With one of Canada's largest nickel resources moving toward production, we believe Victory is undervalued for their nickel projects, and is a strong takeover candidate within the next year.

Just as with Metalline Mining (MMG), which, as we outlined earlier this month, we believe is undervalued based solely on their zinc project and also based solely on their north side silver project, we believe Victory Nickel is another company that has projects with excellent infrastructure in a politically safe location where you get outstanding value from 2 different types of projects. We really like the 2-for-1 concept where you get a huge base metal project combined with a precious metals/oil and gas project which can help the base metal project get to production without excessive dilution and/or hedging. The precious metals/oil & gas projects provide diversification in case the base metals don't do well, and also provide tremendous upside. Both of these companies' valuations should move up significantly as they move toward production, with stong potential for takeover bids within the next year.

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