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The Outlook for Nickel Miners

The Outlook for Nickel Miners

By Bob Kohut 27.08.2018


In January of 2016 a Reuters Poll of analysts covering the base metals index (aluminum, copper, lead, nickel, and tin) saw a majority predicting an end to the price rout in the index that commenced in 2011.  While the index has yet to recover earlier price levels, the analysts got it right – the collapse had bottomed out at the start of 2016.  The following price movement chart from indexmundi.com tells the tale.


The poll included the analyst expectation that the price of nickel could outperform other metals.  From kitco.com we can see the price of nickel did indeed rebound, although it has fallen over the last few months.


Nickel is used in the production of stainless steel, but it is not only improving demand there that has driven up the price of nickel.  Nickel has become a key ingredient in the booming demand for more and better lithium-ion batteries to charge our electronic devices and now the electric vehicles (EV) of the future.

Some investors who have been following developing trends in the search for better batteries have bounced back and forth between the metals that go into li-ion battery components.  Given the current leader in the better battery battle is the lithium-ion version (and likely to remain so for the foreseeable future), investing in lithium miners seemed the obvious choice.  As often happens with booming demand, miners of all stripes rushed into the lithium space, creating oversupply conditions, real or perceived, collapsing the price.

Investors with the time and temperament for researching beyond what appears obvious begin with a basic understanding of how a li-ion battery works, as shown in the following diagram from Bosch Media.


So now it appears graphite is another metal in demand, but further searching reveals it is with the cathode that researchers are experimenting with different materials to improve battery performance, with nickel among them. 

Although virtually every major automobile manufacturer on the planet is rushing into the EV battle, the global financial press seems enamored of the man and his company that brought EVs into focus – Elon Musk of Tesla Motors (NASDAQ:TLSA).  

On 5 June 2016 Musk stated: “Our cells should be called Nickel-Graphite, because primarily the cathode is nickel and the anode side is graphite with silicon oxide…”

Price volatility is likely to plague investors in nickel miners, as it has with lithium and graphite producers, but nickel has two demand trends driving the price – steel in the near term and li-ion batteries in the longer term.  Forecasters at the World Bank present a bullish picture for the price of nickel through 2025.


There are multiple ASX stocks with exposure to nickel mining available, with a few pure or near pure plays and others with diversified operations.  Some are producers while most others are in early or late stage development or exploration phases.  The following table includes a selection of producing companies with positive two-year earnings forecasts.


Independence Group (IGO) is a diversified miner with interests in nickel/copper/cobalt and gold.  The company’s flagship resource is the Nova operation in Western Australia, with 100% ownership, along with a 30% joint venture in the Tropicana Gold Mine with Anglo/Ashanti. 

The Nova mine is new, discovered in 2012 and going into production in July of 2017.  In its first full year of operation the mine is expected to produce 23,000 to 27,000 tonnes of nickel contained in concentrate.  

As is the case with many minerals, there are different compositions of nickel, with one more valuable than the other.   The more common in the case of nickel is nickel laterite, generally found close to the surface and suitable for more cost-effective open pit mining.  Laterite deposits can contain iron and other elements making them costlier to process into the higher grades of concentrate required for battery usage.  Nickel sulphide deposits are found both near the surface and at deeper depth, comprising only 40% of the world’s nickel reserves, but they are less costly to process into a battery grade concentrate – nickel sulphate.

Independence is working towards establishing a processing plant to process its nickel concentrate into nickel sulphate, with a successfully completed trial leading to the company exploring sites for the plant.

In addition, the Nova Mine and other company assets are relatively unexplored.  The company commissioned a 3d Seismic survey to explore the entire area under lease in 2018.  After posting a $58 million-dollar loss in FY 2016 Independence rebounded to report a profit of $17 million in FY 2017.

Western Areas Limited (WSA) is a pure play nickel miner with assets in Canada and Finland as well as the company’s flagship operation here in Australia at the Forrestania project. The company both mines and processes the prized nickel sulphide concentrates from two mines at Forrestania, the Flying Fox and the Spotted Quail.
 
The company continues to explore for new opportunities, with Western Areas’ wholly owned Cosmos Nickel Project, with feasibility studies underway at the project’s Odysseus deposit.

The company currently has offtake agreements with BHP Billiton (BHP) and China’s Tsingshan Group, the world’s largest producer of stainless steel.  Western Areas management is expecting a boost from Tsingshan, as that company is planning substantial increases in its high nickel content stainless steel production.

The demand growth stemming from the EV market spurred the company to commission its Mill Recovery Enhancement Project (MREP), previously shelved, aimed at extracting additional nickel from waste tailings streams to be converted into useable product for the EV market.  The company has a competitive edge here with its proprietary BioHeap® leaching process enabling the conversion.

Western Areas has an analyst consensus OUTPEFORM rating, with Macquarie recently raising its price target on WSA to $4.44.

Metals X Limited (MLX) is a diversified miner with production and exploration assets in Australia, claiming the title of Australia’s top producer of tin and a top ten copper producer.  Its prized exploration asset is the undeveloped Wingellina nickel-cobalt project in the Central Musgrave Ranges, billed by the company as “world class.”

The company has another significant nickel/cobalt exploratory asset 30 km east of Wingellina at Claude Hills.  Feasibility studies suggest high grade ore and a 40-year mine life for the project.

The company appears in no hurry to develop the Wingellina project, stating in its 2017 Annual Report “Metals X has received the required approvals, including Native Title and Environmental, to proceed with the development of Wingellina. Development of the project will be contingent upon nickel price improvement and funding.”

In a June 2017 Quarterly Report, the company announced it had completed a successful trial of 100 tonnes of ore from Wingellina processed by a proprietary Nickel Extraction Process (PosNEP) from South Korea’s KOSCO.  Next steps were supposedly under discussion, but there appears no mention of the project since.

Less than one month ago the company completed a successful capital raise of $50 million, with the proceeds going to further existing production operations. Despite lagging performance in both the tin and copper operations, Metals X has an analyst consensus BUY Rating, with a price target of $1.10. 

Despite the focus on nickel use in li-ion batteries, investors in companies like WSA have yet to experience returns remotely approximating the performance of one of the top lithium miners on the ASX – Galaxy Resources (GXY).


A 24 July article appearing on Bloomberg.com points to growing concern that nickel supply will fall short of demand as miners rush to process battery grade nickel sulphate, ignoring the need for additional feedstock.  The article points to research conducted at the behest of commodities goliath Glencore Plc, pointing to world-wide demand for nickel in EVs to rise to 1 million metric tonnes by 2030, outstripping demand for the prior winner of the next big thing in li-ion applications – cobalt – as battery manufacturers increase the amount of nickel in cathodes.


An analyst from Benchmark Minerals claims the battery market will not make a significant impact on nickel prices for “several years”, with traditional use of nickel in stainless steel driving current demand.  That may well be, but global energy research and consulting firm Wood Mackenzie predicts the price of nickel could double by 2022, with nickel supply still trailing demand.


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