Chalice Mining…Why this Sell-off Matters for Future Supply

Ask a geologist to name the number one greenfield discovery in Australia and there’s a good chance they’ll give you the name of Chalice Mining’s [ASX:CHN] Gonneville deposit.

The ore body was discovered by a small team of dedicated geologists in 2020.

It’s a high grade nickel-copper-platinum critical metal treasure chest located just 70 kilometres north-east of the Western Australian capital, Perth.

Yet, despite harbouring key ingredients for the green energy transition, Chalice’s share price has plummeted in recent months. The company has fallen around 70% since April 2023.

It begs the question…what will it take to get global capital back into the junior mining sector?

After all, Chalice’s Gonneville deposit is a poster child for the critical metal boom.

Without projects like this, the energy transition can’t happen.

Global capital continues to ignore the critical role of the junior mining sector.

Despite commodity prices remaining high, and mining giants continuing to post strong earnings results, there’s very little appetite for the small end of town.

That is, the sector that leads discovery and development.

Ultimately, these are the companies feeding future commodity supply chains.

But with the deep sell-off continuing, investor expectations have started to divorce reality.

Just take Chalice’s latest scoping study…

The company announced a two-year payback on a mine costing between $1.6 billion and $2.3 billion.

And with maidan production slated for the late 2020s…investors won’t have to wait decades to see the company turn into a profit generating machine.

Despite that, one of Australia’s most important critical metal projects now languishes in the dust and is still looking for a floor in its share price…

This shows you the gaping disconnect between investor expectations and what developers can deliver.

But without precious capital reaching these projects…future supply hangs in the balance.

Established producers, while generating income, are shrinking their asset base through mining.

Producers must replace depleting reserves through discovery or acquisition to maintain output.

Given big miners lack of interest in exploration over the last decade, acquisition remains the only option to replace declining reserves.

However, buy-outs do nothing to alleviate global supply pressures.

A deep disconnect remains between today’s income producing giants and those companies exploring for and developing the next generation of deposits.

So why does that matter to you?

Well, supply shocks come quickly in this game and so will the repricing of junior mining stocks.

It’s why investors waiting for a bottom in this market are likely to miss out.

We had a brief glimpse of that in the wake of Russia’s invasion of Ukraine.

Junior mining stocks surged into double and triple digit gains in a matter of days as the global economy panicked over future supplies of commodities.

Just look at the nickel explorer, Galileo Mining [ASX:GAL]…its share price jumped 875% in three weeks.

While GAL was a standout performer, junior mining stocks surged across the board in early 2022.

With supply chains remaining tight and long-term demand fundamentals strengthening, investors should consider maintaining at least some exposure to this sector.

In other words, do what the big miners are doing…

Over the last 12 months, BHP has poured billions into acquisitions, developments and exploration.

Late last year, it purchased the South Australian copper producer Oz Minerals for a hefty US$6.4 billion.

It seems the miner has this state in its targets…

11 rigs now spin at its Oak Dam exploration project in South Australia’s north.

It’s also looking to optimise output at the world’s largest copper mine, Escondida in Chile.

BHP is rapidly leveraging itself towards future facing commodities.

And which metals dominate the company’s growth pipeline?

Nickel and copper…the two primary commodities found at Chalice’s Gonneville development.

Unprecedented demand from a once in a century energy transition is still on course to collide with declining output.

The world’s biggest miner is positioning for this scenario and so should you.

But where does that leave Chalice’s investors?

Well, an opportunistic bid from one of the big players is not unreasonable given the enticing value on offer.

But any acquisition attempt will likely undervalue the company’s world class nickel, copper, PGE deposit and its proven ability to make greenfield discovery.

While there might be more pain on the way for investors, eventually the company will find support.

The global economy is committed to ending reliance on fossil fuels. The key for making that happen sits in the rich geological grounds in places like Chalice’s Gonneville.

Regards,

James Cooper,
Editor, Fat Tail Commodities