Temperamental nickel tipped for strong second half as supply deficit kicks in

In the second of his special series on commodities, Prospector’s Diary looks at the Devil’s Metal
21st February 2020
Tim Treadgold

Fortunes to rival those from gold have been made in the Australian nickel mining industry, but it is also a metal that more than lives up to its nickname of “devil metal” or “devil’s copper”.

Erratic price movements which have seen nickel soar to more than $US20 a pound before crashing back to $US4/lb are the modern reason for treating nickel with caution.

The older reason for nickel’s bad name is that it was (and remains) difficult to process with 15th century German miners mistaking nickel ore for copper ore but failing to extract any metal from the material, earning it the name “kupfernickel” or devil’s copper.

For Australian investors, nickel is a relatively new metal, only hitting the headlines as recently as the 1960s, long after the establishment of the gold, silver, lead, zinc, copper and iron ore industries.

The driving force in what became known as the Nickel Boom of the 60s (and into the 70s) was a strike by Canadian nickel miners which drove the price sharply higher, followed by the discovery of nickel deposits at Kambalda, south of Kalgoorlie in WA, and a speculative rush into stocks such as Poseidon which discovered the promising (but ultimately frustrating) Mt Windarra orebody.

Nickel today appears to be poised for another boom as a major new use for the metal in batteries is developed, potentially matching the traditional use as a key ingredient in stainless steel.

In theory, batteries might even one day overtake stainless steel as the major market for nickel but it would be wise to remember the metal’s nickname and the potential for new sources of material to be developed – with a flood of nickel out of Indonesia and the Philippines bearing down on the price today.

Over the past 12-months, nickel has thrilled and annoyed investors as it went on one of its routine roller-coaster rides, rising above $US8/lb in the middle of last year before crashing back to $US5.60/lb as the China v US trade war bit, followed by the impact of the China coronavirus.

The outlook for nickel is for a continued rough ride during the first half of 2020 as uncertainty grips the Chinese stainless-steel industry and sales of battery-powered electric vehicles remain sluggish.

But the second half of the year could be a different story, with one of the leading investment banks, Morgan Stanley, this week tipping a recovery, partly because supply and demand are better balanced after last year’s sharp rise and fall, but also because of signs that a metal deficit is developing.

“As 2020 progresses, the market is likely to anticipate a move into deficit from 2021, bringing buying support,” Morgan Stanley said.

Another pointer to an improving nickel market could be found this week in comments from BHP’s chief executive, Mike Henry, who listed nickel, along with copper and potash, as three of his favourite “future facing commodities”.

There are many entry points into the nickel sector for Australian investors, here are six of the best:

 

Western Areas (WSA):

A pure-play nickel stock working a series of high-grade deposits in WA, including the Flying Fox and Spotted Quoll mines, as well as developing the new Odysseus mine.

In the December quarter, Western Areas produced 5849 tonnes of nickel, taking its output for the half-year to 11,654 tonnes.

Costs were largely in line at $A3.10/lb for the quarter and $A3.07/lb for the half compared with guidance of $A2.90/lb for the quarter and $A3.30/lb for the half.

Western Areas chief executive, Dan Lougher, said the December quarter had been one of consistent performance, leading to a substantial increase in pre-tax profit of $69.7 million, more than double the $30.6 million of the first half last financial year and good enough to declare a 1c per share dividend, whereas nothing was paid last year.

The company’s financial position was also strengthened by a profit of $24.7 million from the sale of shares in lithium-project developer Kidman Resources.

On the market, Western Areas has been moving higher even as the market for nickel bounces around. At latest sales of around $2.57, the stock is substantially higher than $1.94 of last July and could be heading for the $3.60 price tip from Macquarie Bank.

Mincor (MCR)

Frustration with the nickel price led Mincor away from its nickel-roots into a gold phase but discovery is leading the stock back to where it first made its name, in the nickel-rich ground near Kambalda and Widgiemooltha.

A highly-promising discovery called Cassini has excited management and outside investors who have rescued the stock from a lowly share price of 12c at this time last year to around 64c, making Mincor one of the best performers of the past 12-months.

Drill results from Cassini include thick intersections of up to 17.6 metres at 5% nickel, with a 13m core in the hit grading an even more impressive 6.1% nickel.

Grades like that will underwrite the success of Cassini, which is moving swiftly towards development with all government approvals in place, fresh development capital ($35.6 million) raised and project funding being arranged.

If the nickel price performs as Morgan Stanley expects, Cassini nickel will hit the market at just the right time.

Nickel Mines (NIC)

Not well known in the Australian nickel mining industry, Nickel Mines has been a big winner through its investment in Indonesian nickel production.

Widely-derided when it started, Indonesian nickel has emerged as a global success story, thanks to strong Chinese investment and Indonesian Government demands that a simple, direct-shipping business be converted into value-added nickel processing.

From shipping out a product that resembled mud with a nickel grade of less than 2% metal, a series of furnaces have been installed to produce an upgraded product call Nickel Pig Iron and in the case of a big nearby Chinese-owned steel mill, the NPI is fed directly into stainless steel production.

ASX-listed Nickel Mines has a stake in some of the furnaces which deliver NPI to the steel mill, generating a handsome pre-tax profit of $US56 million in the December quarter from sales amounting to $US141 million.

On the market, Nickel Mines doubled to 75c late last year before trade worries stifled steel demand, pushing the stock back to 60c, which is still well ahead of where it was at the start of 2019.

Independence Group (IGO)

More of a diversified metal producer than a pure-play nickel stock, Independence generates cash from gold produced at the Tropicana mine in WA as well as well as nickel and copper produced at the nearby Nova mine.

Nickel production in the first half of the current financial year totalled 15,236 tonnes, at the upper end of guidance with cash costs at an attractive $US2.51/lb.

Fuelled by strong cash flows from its existing mines, Independence is equally interesting for its expansion ambitions, both from an extensive portfolio of well-located exploration tenements in the Fraser Range which hosts Nova and Tropicana as well as from corporate activity which included a failed bid for small nickel miner, Panoramic Resources.

On the market, Independence has recovered strongly from a mid-year sell-off in 2019 when it dipped to $4.28 to be trading around $5.67.

Panoramic Resources (PAN)

Panoramic is a company which lost its way when the nickel price crashed a few years ago and continues to struggle with a revival plan centred on the Savannah project in the Kimberley region of WA.

Despite poor performance in recent years Panoramic is slowly making a return as a profitable nickel miner and, as was seen in the failed move by Independence (mentioned earlier), as a takeover target.

As an investment proposition, Panoramic mainly appeals as a takeover target, or from the wild card, which is ownership of a small but rich palladium deposit called Panton.

On the market, Panoramic has done little over the past 12-months, falling from 44c to 22c, with that latest price valuing the stock at a modest $171 million, making it an easy acquisition for a bigger nickel producer.

Poseidon Nickel (POS)

History dogs every step of Poseidon, which traces its roots back to the nickel boom of the 1960s as well as later phases of the WA nickel industry, leaving the company with fingers in three projects, all with potential if the nickel price moves higher.

Windarra, the original Poseidon asset, has been joined by old Lake Johnston and Black Swan mines with the three holding a combined 395,530 tonnes of nickel metal.

Interesting as the in-ground assets might be, there is a better reason to keep an eye on Poseidon, which has attracted two rich supporters, Australian iron ore billionaire Andrew Forrest, who has a 17.1% stake in the business, and US investment fund Black Mountain Metals with a 19.8% stake.

Moves to crystallise value in the nickel appear to be underway with the appointment of prominent corporate executive Peter Harold (a former chief executive of Panoramic) as Poseidon’s new chief executive, alone with a new chairman in Derek La Ferla.

The potential for corporate action is a better reason to follow Poseidon than its old mines.

Centaurus Metals (CTM)

A 7th (bonus) nickel idea is Centaurus which is working towards the development of the Jaguar project in Brazil where a resource of 315,000 tonnes of nickel metal was outlined by the previous owner and where Centaurus now has a three-rig drilling program underway to discover more.

Results from the drilling and other events, such as news of improved metal recoveries in the latest metallurgical tests, should ensure a solid news flow over 2020.

 

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