Soaring EV demand suggests nickel poised to play catch-up to lithium

28th October 2021
Barry Fitzgerald

A lack of ready-to-go new nickel mines is also set to underpin increased investor interest. The bullish outlook is fuelling talk of consolidation among WA nickel players, including Mincor, which is preparing for the start of production at Kambalda.       

Booming demand for lithium in response to the accelerating electric vehicle uptake has been working wonders on the market caps of the ASX-listed lithium stocks.

The nickel stocks have being doing okay on the same EV thematic, but the market cap surge being enjoyed by the lithium stocks is another thing all together.

The nickel sector’s relative underperformance – to the boom, boom lithium sector that is - is a bit puzzling on a number of counts.

Unlike lithium, there is not a string of mothballed mines able to be turned on, and the preferred sulphide nickel is actually exceedingly difficult to find in meaningful amounts.

There are legitimate concerns that the demand surge coming from EV’s for nickel will be covered by the nickel pig-iron producers. But no self-respecting auto group outside of China will want converted NPI in their batteries on emission intensity grounds, and other ESG considerations.

Tesla’s recent confirmation it would stepping up the use of lithium iron phosphate (LFP) chemistry for its cheapest and range-challenged models – mainly for the Chinese market - has not helped either, even if LFP’s won’t fly in western auto markets.

Whatever the reason for investors running cold on nickel compared with lithium, there is good reason to think nickel is not far off being talked about in the same excited tones as lithium.

As Macquarie’s commodities desk noted recently, the battery market for nickel is growing so rapidly (from 200,000t last year to as much as 1.3mt by 2030) that the supply of low-carbon units (i.e. not from NPI) is getting stretched.

Putting the 1.3Mt demand potential by 2030 in context, the additional 1.1Mt requirement is the equivalent to 11 times what BHP’s Nickel West produces annually, or five times that of Russia’s mighty Norilsk, the world’s biggest producer.

“The requirements for new nickel supply this decade is unprecedented in the history of the nickel market,” Macquarie said.

As it is, the LME nickel price has been nice and strong this year. While the price has eased back under $US20,000t to $US19,412/t, the current price is still 40% above last (calendar) year’s average of $US13,803/t.

NICKEL WAR:

Given the unprecedented growth in demand for nickel from EV’s, there is a belief that the WA sulphide nickel scene is ripe for rationalisation and consolidation.

The expectation is helped by the fact that one way or another, they are all up each other anyway.

On that score, the $1.08 billion nickel producer Western Areas (WSA) did not provide an update in this week’s September quarterly report on its takeover talks with the $7.46 billion nickel/lithium producer IGO (IGO), with the talks first aired in mid-September.

The companies are in the due diligence phase, which is complicated because IGO’s plunge into lithium by acquiring an interest in the Greenbushes mine is making its scrip difficult to value, from Western Areas’ perspective.

IGO’s Greenbushes interest remains very much a black box at the moment but more clarity around just what it is expecting from the previously wholly foreign-owned project in the years to come could be covered off in its own quarterly report on Monday.

While IGO got big in a hurry in lithium, its long-term future as a nickel producer is clouded by reserves at its mainstay Nova operation being good for another six years or so.

Western Areas stands as a quick fix, with the company having mapped out a minimum 10-year/20,000tpa nickel future at its Cosmos/Odysseus development.

A move by IGO on Western Areas could well be the first of many in the industry because as mentioned previously, they are all already up each other in one way or another.

Western Areas owns 19.9% of the $500m Panoramic (PAN) which is returning as a nickel producer. And then there is the $665m returning producer Mincor (MCR), which is owned 8% by Andrew Forrest’s Wyloo and 15% by IGO.

And for good measure, Forrest's family company Tattarang owns 11.5% of the $300m of Poseidon, another returning producer, as well as 5% of Western Areas.

Wyloo is of course in a ding dong battle with BHP for control of the Canadian nickel explorer Noront.

The bidding is now up around the $C450m mark, with Wyloo and BHP backing the idea that Noront’s Ring of Fire exploration ground in Ontario might one day support a mining operation.

The bidding is now at a 213% premium to Noront’s undisturbed market price, such is the scramble to secure long-term nickel resources.

One of them will lose. It will most likely be BHP given Wyloo was there first and has a 37% stake.

A loss by BHP could well prompt a greater focus on what is available in terms of additional production in the here and now, and in the backyard of its Nickel West division.

Nickel West is a 95,000t a year nickel producer. It is big in global terms but not BHP terms. BHP  needs to scale Nickel West up to something more meaningful. Will it stand aside as Forrest, IGO and Western Areas consolidate the WA industry?

You never can never tell with BHP, remembering it tried and failed to flog Nickel West a few years ago because it was considered non-core. Now it is central to the company’s mantra of focussing on growth in the “future facing” metals of copper and nickel.

MINCOR:

At this point it is worth mentioning, independently of what might or might not come from the suggested WA nickel war, that Mincor announced in its September quarterly this week that it had issued a “start notice” to Nickel West.

The notice tells Nickel West that Mincor intends to start delivering first concentrate sales from its 16,000tpa (contained) nickel operations at Kambalda from both old and new mines in the June quarter next year.

The deliveries come under the previously announced ore tolling and concentrate purchase agreement (OTCA) between Mincor and Nickel West, with the heads up from Mincor giving Nickel West time to complete the re-start works at its Kambalda nickel concentrator.

The start notice is as important as things can get for Mincor, which got its start in the nickel game by acquiring one of the Kambalda nickel mines offloaded by WMC in late 2000 when nickel was in the doldrums and when Elon Musk’s EV ambitions had yet to be formed.

The nickel mine sales by WMC also gave IGO its start in the nickel mine business, the idea being that the “small’ nickel mines would continue to supply WMC’s system of mines, concentrator , smelter and a refinery under the OTCAs.

WMC was of course acquired by BHP in 2005, chiefly for Olympic Dam. The OTCA with Mincor reboots the supply of Kambalda concentrates to the WMC (now Nickel West) system that fell to the wayside when nickel prices took a hit in 2015-2018.

Mincor last traded at $1.38 for that $665m market cap. It is off its recent highs but nevertheless is holding at near 11-year highs. But again, the growth in the market caps of the lithium stocks has left Mincor and other nickel stocks in its wake given what is brewing in the EV demand space.

Mincor’s near-term move into production and more exploration success are obvious potential re-rating events.

So too is what could come from the looming WA nickel war.

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