KNI: EM conductors light up - the hunt for high grades at Ertelien begins

Disclosure: S3 Consortium Pty Ltd (the Company) and Associated Entities own 2,837,550 KNI shares at the time of publishing this article. The Company has been engaged by KNI to share our commentary on the progress of our Investment in KNI over time.

The EU still gets 18% of its nickel imports from Russia.

The London Metals Exchange has banned Russian-originated nickel.

Nickel is on the European Critical Minerals list...

And the nickel price has been swinging up and down wildly for the last three months.

We think that Europe will need locally produced nickel for both steel manufacturing and electric vehicle production ambitions.

(not to mention copper and cobalt)

Kuniko (ASX:KNI), our European critical minerals exploration Investment in Norway, announced new areas of interest for exploration targets have now been uncovered at it's Ertelien project.

KNI has been busy running an electromagnetic (EM) survey around its existing ~23Mt JORC nickel-copper-cobalt resource with the goal of finding some big extensions to the mineralisation.

Electromagnetic surveys return a signal if potential metals are under the ground - these signals are called “conductors”.

Good conductors lead to drill targets... which leads to high potential drill campaigns.

KNI published the results of an EM survey which turned up some large conductors close to its existing JORC resource.

Next we want to see KNI drill test some of these conductors and hopefully deliver big exploration success with some above expectations hits.

It’s been a bit slow on the action front for KNI over the last 12 months, but now that we have some potential drill targets we are looking forward to some share price catalyst news from KNI.

(especially once tax loss selling finishes in two weeks, KNI had a huge run when it first IPO’d a few years ago and there may be still a few people left trying to crystallise a tax loss this month)

KNI has a very tight cap structure and we have seen it run hard in the past.

KNI’s conductors A, B, C and E highlight potential areas of interest for the company.

Conductor D exists on known mineralisation but highlights a trend line for KNI to test:

We Invested in KNI for the company to make a large European battery metals discovery.

To date, the company has developed a number of assets without discovering anything that is “company making”... yet.

We are hoping that these EM conductors will lead to further drilling at this Norwegian exploration project that has an inferred mineral resource of 23Mt at 0.31% NiEq.

More nickel, at a higher grade, is the name of the game for KNI.

And we are hoping that it can find some, and develop the asset.

KNI has some big investors in its corner.

Major European car manufacturer Stellantis made a €5 million (A$7.8 million) investment in KNI in 2023 for 19.99% stake in the company.

In addition, major lithium company (and our best ever Investment) Vulcan Energy Resources owns ~16% of the company.

(KNI was originally a spinout of Vulcan Energy Resources).

As we mentioned before, this gives KNI a relatively tight register, meaning that the share price movements (up or down) can swing big, particularly on big unexpected news.

(like a discovery or material extensions of its current JORC resource).

Now, making a new discovery is extremely challenging.

There is a lot of time, capital and a bit of luck involved.

But that is why we have Invested in KNI, to see it make a discovery and develop a European battery metals asset.

We think KNI is well positioned to develop a European battery metals asset.

It already has an offtake agreement term sheet with Stelantis, for 35% of future nickel and cobalt production from Norway for a period of 9 years.

Given the appetite in Europe for a local battery metals supply chain we think that all KNI needs to do is find something of value (which is hard... high risk high reward here) and we expect that development would soon follow.

This brings us to our Big Bet...

Our KNI ‘Big Bet’

“To develop a sustainable battery metals mine within European borders that is of strategic importance - and hence highly valuable as an acquisition target.”

NOTE: our “Big Bet” is what we HOPE the ultimate success scenario looks like for this particular Investment over the long term (3+ years). There is a lot of work to be done, many risks involved, and it will require a significant amount of luck. There is no guarantee that it will ever come true. Some of these risks we list in our KNI Investment Memo.

So, what did we just learn about KNI’s project?

The short answer is, KNI’s nickel project has the potential to scale up in a big way.

Obviously, KNI will need to develop high priority targets to drill, but this was our first whiff of bigger things for the project

The EM survey has lit up areas of interest, and ground-truthing and a field program starting next month should throw up additional targets at the project in Norway.

KNI’s Ertelien project is located in Southern Norway, and already has a JORC resource.

The project has 23.3 Mt of Inferred resources @ 0.31% NiEq (0.21% Ni, 0.16% Cu and 0.014% Co) containing 49.7 kt of nickel, 37.3 kt of copper and 3.3 kt of cobalt.

The resource has a high grade sulphide component of 4.59 Mt @ 0.64% NiEq and disseminated sulphide resources of 18.68 Mt of @ 0.22% NiEq.

Now this resource alone is probably not big enough to develop, however we think with more drilling KNI could grow the size of the resource into something interesting...

Which is why we like punting on exploratory/extensional drilling - you just don’t know what the company will find.

We think this project for KNI is now a more traditional “swing for the fences” exploration play...

Just how we like it.

Below is an image of KNI’s resource area (green circle) and the two areas where the EM survey was completed (blue areas, right and left):

(Source)

A large amount of the resource is at open pittable depth, which makes it a whole lot easier to mine.

KNI is currently doing a more conservative expansion/step out drill program in this area.

Assays from this program should be published in the coming months.

However, we think that the bigger news for KNI is that there could be extensions to the mineralisation, potentially to the south and west of the existing resource.

Conservative step out drilling can be considered "boring" by the market - even if it leads to important upgrades to existing resources.

It is essentially “known” information that needs to be confirmed to a higher level of confidence.

It’s important, but assays here are unlikely to move the share price.

More aggressive step out drilling, the kind we are hoping for KNI to undertake to test these new EM conductors, can excite the market... if new discoveries are made.

This is UNKNOWN information - and can sometimes surprise on the upside, which is why we Invest in these kinds of companies.

So, how are the EM surveys working to help KNI develop new targets?

New EM targets for KNI to drill

Below is an image of KNI’s existing resource area:

Conductor D shown above matches where KNI’s existing resource area is.

The conductor being above the existing resource is like a control sample used in statistical tests.

It shows that the conductor methodology applies and is validated in the area as corresponding to known mineralisation.

In other words, the EM works here - so it should work elsewhere on the project.

Now what we want is more nickel, so the presence of 4 other conductors in addition to conductor D is a good hint there’s nickel around these areas.

There’s a cluster of two conductors immediately to the south of the known mineralisation - and two conductors stretching out to the west of D.

This is what the conductor images look like layered on top of each other in an animation, which we think tells the story well:

By ground-truthing, generating targets and ultimately drilling, we think this would give KNI the chance to extend the strike of the existing JORC resource mineralisation.

We’re hoping for massive or semi-massive sulphide nickel mineralisation - the good, high grade stuff.

And in turn, an even bigger, higher grade JORC resource for KNI to take into feasibility studies.

It’s methodical work, but if KNI can take a decent sized European nickel resource to a much larger one, the pieces could start to fall into place.

There’s also the chance that the European market for nickel may be even more receptive to domestic sources of supply by the time KNI enters feasibility studies.

After all, there’s been rumblings of a “green premium” nickel:

(Source)

And KNI’s nickel would certainly fit the bill with the company’s Zero Carbon approach to exploration, and (we hope) future mining.

The latest KNI announcement didn’t outline when drilling could happen following up on these EM conductors, but here is what we’re looking for next.

What’s next for KNI?

• 🔄 Drilling results from diamond drilling program (Q2-3 2024)
• 🔲 [NEW] Commence field work following up on EM survey (July 2024)
• 🔲 Upgrade nickel resource (expected by Q4-2024)
• 🔲 Early stage feasibility studies (start end of 2024)

What could go wrong?

Exploration risk

KNI is drilling to upgrade the Mineral Resource Estimate over the project, 23.3 Mt of inferred resources at 0.31% nickel equivalent.

If the upcoming conservative step out drilling assays lead to a weaker upgrade to the current Mineral Resource - this could be bad for the KNI share price.

And as drilling gets closer following the EM surveys, it is always possible that the conductors may not help deliver economic results.

Commercialisation risk

At the current nickel price the grades of KNI’s resource would be considered on the lower side.

Through more drilling, the company will likely need to find further high grade areas of the deposit in order to have a commercial nickel project.

Commodity price risk

As an explorer for battery metals, KNI’s share price is inherently linked to the commodities it is exploring for.

If the price of nickel falls, then it could affect the prospects of KNI’s project.

Market Risk

In the short term the key risk for our KNI Investment is “market risk”.

KNI is looking to put out an upgraded JORC resource estimate on its predominantly nickel focused, nickel-copper-cobalt project in Norway.

There is a risk that KNI puts out its resource estimate and the market just doesn't show much of a reaction.

Current market appetite for nickel projects is tied to the nickel price, which has been swinging up and down, so the market may not re-rate KNI’s share price immediately after any news from its Ertelien project.

Key education resources to better understand today's article:

• 🎓 Learn: Why are EM surveys so important
• 🎓 What is a JORC Resource
• 🎓 Mining Company Lifecycle explained

See our KNI Investment Memo for more risks we listed as part of our KNI Investment Thesis.

Our KNI Investment Memo

Read our KNI Investment Memo, where you can find a short, high level summary of our reasons for Investing including the following:

• Key objectives for KNI for the coming year
• Our KNI Big Bet
• Why we are Invested in KNI
• The key risks to our Investment thesis
• Our Investment plan