There’s a sense of history and destiny about Kambalda, a nickel-fertile province of Western Australia – it’s a place that has weathered the vicissitudes of short commodity cycles and still thrives, nearly 60 years after diamond driller Jack Lunnon first intersected nickel there.
Lunnon Metals Ltd (ASX:LM8, OTC:LNMLF), the plucky Australian small cap whose name is a nod to that pioneering miner, boasts a team who knows Kambalda and its bounty well, having lived and worked there for most of their lives.
The company is helmed by the amiable Edmund Ainscough, whose own personal history has a hint of the Dickensian about it.
For the love of geology
Ed arrived in Perth from the UK – a place where geologists don’t get rich – in the late 1980s as a wide-eyed graduate who had studied the subject at university in England because he liked it.
Of mining as a career, Ainscough says: “It’s not really a thing in England.”
“During my last year at university, my father died – my mother had already died much earlier. My brother and sisters sold the family house, so after the funeral I went back to Bristol [university] recognising that I had nowhere to live in 6 months’ time after graduation.
“When I finished university, I thought to myself, well, I might as well go to Australia.”
The geologist-by-inclination had come to the right place. He was overwhelmed with offers of work almost as soon as he hit Perth.
“I couldn't believe that you actually could earn money as a geologist – it was a real eye-opener.”
Along with the good jobs, Ainscough found that the lifestyle suited him down to the ground. He fell for the relaxed lifestyle and a (near) local – he and his Kiwi wife have been married for 35 years and have raised their children here.
He tells stories of lying in his donga (on-site quarters) listening to crows stomping about on the tin roof, of the arid brown landscape and of spending a whole day in a local paddle pool cooling down before he went to an interview.
Unlike the many business people who may know little about the portfolios of the companies they run, Ainscough’s natural curiosity, expertise and authenticity shone through and paid dividends quickly.
“I never wanted to be a managing director. It was never a career ambition of mine.
“I had the opportunity to do it with people I've known a long time who I trusted implicitly, working on assets whose potential I’ve understood.
“Some people can turn the sales pitch on and off like a tap about areas they might not know that well.
“In my personal case, integrity and authenticity is important – and flowing from that confidence is hopefully the passion that gets people interested in the company and our assets.”
A sense of place
Lunnon Metals listed in June 2021 but has been around since 2014 as a private company.
It was founded during a downturn in metal prices by Ainscough, Darren Hedley and Ian Junk, who had both worked for WMC, a company recognised for the discoveries made by its renowned geologist Dr. Roy Woodall.
The recently retired Junk is well known as one of the drivers of the nickel resurgence of the late 1990s and early 2000s, when WMC sold all of its operating Kambalda nickel mines to three junior companies.
“Ian and Darren had made money in the Kimberley at a private iron ore company and mine that they built and sold to the Chinese between 2008 and 2011.
“They used the money they made from that to invest in myself and a couple of ex-Kambalda people to go hunting for assets during the downturn in the mid-teens.
“We got a joint venture with Gold Fields because we all used to work for Gold Fields as well in Kambalda.
“There was a lot of common history with the then-management at Gold Fields that helped get our feet on the property.
“We've all lived and been residents in Kambalda and worked for WMC and Gold Fields. There's a strong connection.”
Diggers 2023 Gala Dinner, with members of Lunnon staff, board and supporters.
Mining the way to net zero
With the recent critical minerals boom, Ainscough believes mining has started to be understood as an endeavour that quite literally paves the way for civil society.
“I think you're slowly seeing green shoots of people appreciating just how important mining is.
“For a long time there, during the downturn, it was frowned upon – it was a dirty word.
“But it’s the old adage, and it sounds a bit twee, that if you can’t grow it, you have to dig it up. And that applies to everything. I think some people have lost sight of that.
“Certainly, when I visit family in England and everything is plastic wrapped – there's been a disconnect between urban populations and where their food and resources come from versus the actual reality of making those industries work.
“I don't think we're quite as bad as that in Australia. And obviously in Western Australia, I think every single person knows somebody who's in the mines or has family in the mines.”
Ainscough thinks that net zero has brought the importance of mining into focus for urban economies. “There’s no getting around it,” he says.
“Net zero means you’ve got to dig a lot more stuff up.”
Fickle nickel
Fickle nickel is the most volatile of the base metals from a commodity perspective. “It spends a long time in the doldrums,” says Ainscough. “And when it peaks, it peaks fiercely and brightly, but for a very short time. It’s a frustrating commodity in that regard.”
Unlike other companies that have been quick to pivot to trendy minerals, however, Lunnon’s objective is to stay the course with its high-grade nickel and gold plays.
“One of the reasons I'm quite happy being tied by an invisible umbilical cord to Kambalda is the nickel here is extremely high grade.
“And that’s the reason it has been mined here for nearly 60 years. It's a resilient set of mines and a resilient township.”
The company’s “very successful 2.5 years followed by quite a miserable six months as sentiment turned” has taught Ainscough some valuable lessons.
“We went from a $200 million company back to a $45 million company in the space of three or four months, and now we really need to do it all again.
“We've all lived either in gold or nickel and Kambalda through similar cycles before. So that old expression ‘it's always darkest before the dawn’ is true.
“Nickel will have its day, but I think the reality of Indonesian nickel now is that they've gone from producing nothing to heading for 75% of the world's production in just a few years.
“So, that nickel price is probably not going to be as volatile as it has been. But they produce so much nickel so cheaply that really there's a floor below which it won't go, and there's probably a ceiling above which it won't go.
“As an Australian producer, you need to be high-grade to be able to compete with the Indonesian market. So, despite the difficult times for nickel, we are blessed to be in Kambalda, and blessed to have what we have.”
The company can afford to sit the hard times out, having raised $18.5 million last August, bringing the cash buffer to just under $24 million at the end of the March quarter.
“We’ve made a decision to preserve as much of that cash for as long as possible,” Ainscough says.
Ready to swing into action
When things kick off again for nickel, Lunnon will be poised to start on its discovery, Baker, which contains 33,700 nickel tonnes at a grade of 3.3% and at no more than around 300 metres’ depth.
“It's relatively shallow and cheap to get to, so when conditions improve slightly, we can start Baker, and it doesn't cost much to start,” Ainscough says.
“There's a processing plant in Kambalda that has served the district for 60 years,” Ainscough adds. “And we have set our business up to feed that concentrator.”
Big players in the area, such as Andrew Forrest, have stopped producing and have stopped feeding that concentrator during these lean times.
That said, Ainscough points out, “Andrew Forrest understands the place of ethically sourced clean nickel in the global economy. And I think they're long on nickel.”
“At some point we will make a decision to be independent of that legacy asset.” And Ainscough thinks investors will realise the stakes. “If you want a good hedge against the nickel price dropping, you need to have good grade, which means being in Kambalda.”
Geopolitics, as ever, will play a role – both in terms of supply sovereignty and the need to prove sustainable provenance. “We have seen the bifurcation between China and the East and Russia, and the West and the European Union.
“I think the bigger companies like BHP (ASX:BHP) and IGO were hoping that would drive a green premium for metal sourced from places like Australia.
“That hasn't been seen yet, because the global economy is in the doldrums, basically.
“When times are tough, all producers, even producers of electric vehicles, need to produce that car as cheaply as possible so they'll buy the cheapest nickel, even if it comes from a questionable source.”
This looks to be the case at least until there is more discretionary cash around and people feel comfortable paying a premium.
It will also depend heavily on the European Union, which has exacting regulatory standards that can effectively penalise or subsidise jurisdictions. Elections can change everything.
In any event, Lunnon is prepared to swing into action with a nice cash runway and accessible, high-grade ore.
Ainscough points to manufacturers like Volvo. “They've just produced a new electric vehicle that actually has the sources of its metal in the vehicle all able to be traced from source right through to the vehicle. So, it is coming. It's coming slowly.”
Advice for small cap miners
So, what’s the secret sauce for survival as a small cap company in this landscape? “You certainly can't plan a listed company's business strategy on what you hope might happen.
“You very much have to deal with the here and now and the present and one of the best hedges on commodity price is to have high grade.
“There are very few places in the world that have operated almost continuously for 60 years in nickel, and Kambalda is one of them.
“The big companies probably have whole teams of people strategising and looking for black swan events and trying to plan ahead of time. But, as a small junior company, it's just about being resilient.
“And not being seduced by what may be and dealing with what is.
“There are so many resource tonnes being identified currently, that as a small junior, you gotta be careful. If you suddenly try and hop on the next most popular bandwagon, it tells your existing investors what you think of your current assets.
“The minute you start looking over the garden fence and thinking someone else is better, it can be a backwash negative on your own portfolio.
“What we've done is to look at what's on our existing tenements.”
Kambalda is not just fertile ground for nickel, it’s a great spot for gold.
“We've been blessed to be able to turn our minds to doing some gold exploration.
“Looking for small, amenable, easy-to-mine open pits that might put some cash in the bank rather than just depleting the cash.
“We put out some recent results that suggest that we have got some small areas of interest that are worth pursuing. So, we're not looking over the fence and we’re very much focused on progressing and de-risking our nickel assets.”
Ainscough wraps up with some advice about the attitude to take into small-cap mining.
“Weather the low points and enjoy the high points. There are always, inevitably, going to be low points. Things don't go up in a straight line all the time, unfortunately, so to be successful, you do have to have that degree of resilience.
“I don’t understand how people operate in the exploration space without expecting to make a discovery.
“You have to have that eternal hope that the next drill hole will be the one that changes the fortunes.”
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