Will the Nickel Run-Up Last?

In February of 2016 the price of nickel hit a thirteen-year low. The price had been in a downward spiral with sporadic rallies since 2011. Then on 6 June of 2016 the perceived champion of the anticipated “revolution” in Electric Vehicles – Elon Musk of US-based Tesla Motors – commented that the batteries used in Tesla’s EVs are more reliant on nickel than lithium, and to a lesser degree, graphite. He went on say his intention was to add 33% more nickel into each Tesla battery.

The price of nickel began an upward run with a brief dives in mid-2017 and 2018 before resuming an upward trajectory in 2019.

Although the price of nickel is up more than 30% since January of 2019, the analyst community is largely skeptical, with many seeing the rise not based on fundamentals, but rather on speculation.

Both Citi and UBS are in the skeptic camp, with US investment bank Goldman Sachs predicting in January of 2019 the per tonne price would fall to USD$11,500 by mid-year. The current per tonne price is $14,470.

However, UBS is bullish on nickel over a three-year period, expecting the 2020 price to rise to USD$8.00 per pound in 2020.

Some speculative buyers betting on the coming dominance of EV’s over traditional Internal Combustion Engines (ICE) might be surprised to learn current demand for nickel comes largely from its use in the production of stainless steel with about two thirds of nickel production going into stainless steel. Mining.com.au tells us only 6% of current nickel production goes into EV batteries. However, metals and minerals research and advisory firm Adamas Intelligence claims as of May of 2019 the year over year increase of nickel going into EV batteries was 57%.

Bloomberg New Energy Finance, among many others, remains bullish on the long-term outlook for metals needed to produce the current leader in EV battery technology, the Li-Ion battery.

According to World Bank forecasts, nickel leads the packet in forecasted commodity price increases.

There are some sectors ideally suited for both active traders with a short-term profit outlook and longer-term “buy and hold” investors. Battery metal stocks are among them, given the swings in supply/demand imbalance conditions and the subsequent rise or fall in the price of the metal followed by the rise or fall in the share price of the producers.

Many investors who piled into various battery metal producers amidst the incessant hype about the coming EV revolution have been disappointed. When is the revolution going to get off the ground?

A March 2019 article written by a Woods Mackenzie Power and Renewables consultant sheds some much needed light on the question.

The article, entitled “Is the electric vehicle revolution more hype than reality” makes the case that the principal delay is due to the cost imbalance between an EV and an ICE vehicle. By 2025, the price of EVs in major markets, among them China, the US, and Northern Europe, will drop below the price of comparable ICE cars.

The cost advantage will come as the most expensive item in an EV, the battery, will become cheaper to produce. Driving forces behind the expected cost decrease include automation and access to lower cost and abundant mining resources. Cobalt is currently a supply and cost concern, but future batteries will reduce the amount of cobalt needed.

Remaining concerns might delay the revolution further, among them the driving range; the availability of charging infrastructure; and charging time. Battery and EV manufacturers believe technology improvements will resolve these issues.

There are a host of junior miners, some pure play (mining nickel only) and some diversified with assets in other metals on the ASX. These might be suitable for active traders willing to ride speculative momentum, but many long-term investors may look for a less risky investment, sticking with large and mid-cap stocks with existing growth forecasts and ideally, currently profitable. We found four stocks with double digit earnings growth forecasts.

Independence Group (IGO) is a diversified miner with producing nickel/copper/cobalt assets in its Nova operation in the Fraser Range in Western Australia. The company is a joint venture partner in the Tropicana Gold operation with majority owner AngloGold Ashanti (AGG). Independence owns 30% of the operation with AngloGold Ashanti controlling the remaining 70%.

The company has two attractive exploration projects with prospecting permits (tenure) for about 15,000sqkm (square kilometres) of underdeveloped assets in the Fraser Range Project. There are multiple companies exploring the region with Independence holding the largest tract. The Project is in early stages of development with the area said to be highly prospective for nickel/copper/cobalt.

The other major exploration effort underway is a JV at Lake Mackay in the Northern Territory, also prospective for nickel/copper/cobalt. On 17 July the IGO share price hit a new 52-week high following positive exploration results from Lake Mackay.

The company is testing an internally developed downstream processing operation to convert the raw nickel-cobalt sulphide concentrate from the Nova operation into the chemical form of nickel needed for lithium-ion batteries, nickel sulphate.

Between FY 2017 and FY 2-018 Independence grew revenues by 83% and increased net profit by 210%.

Independence and Western Areas (WSA) are the only companies paying dividends, but Independence stands alone with dividend growth expected to more than double in two years. The company paid $0.03 per share in FY 2018 with expected payment of $0.144 per share in FY 2019. Both companies have analyst consensus ratings at OUTPERFORM.

Western Areas is a pure play nickel sulphide producer with two wholly owned operating mines in its Forrestania Operation – the Flying Fox mine and the Spotted Quoll mine. The company has a Cosmic Boy Concentrator refinement operation to produce a nickel concentrate product with reduced impurities to improve performance in the smelting process. Western Areas also has a patented process for leaching nickel waste (tailings) to extract additional nickel.

The company’s premier exploration project is within the 100% owned Cosmos Nickel Complex, acquired from Glencore in 2015. The Odysseus mine in the complex has a completed Definitive Feasibility Study in place. On 5 July the company announced a positive update on capital works completion and other milestones achieved, leaving the mine on track to begin producing in early 2023. Investors liked what they heard, reversing a downward trend in the stock price.

Like larger rival Independence Group, Western Areas has a stellar P/EG (price to earnings growth ratio) of 0.70 while Independence has a P/EG of 0.28. The P/EG ratio is favored by many investors since rather than rely on historical earnings as does the P/E ratio, the P/EG takes expected earnings into account.

Metals X (MLX) is a diversified miner with operating mines for tin and copper, and exploration assets in nickel. It is the only stock in the table to earn an analyst consensus BUY rating and the only stock with negative share price appreciation year to date.

The company’s wholly owned Nitty Copper Operation in Western Australia is a Top Ten copper producer. Metals X is also a 50% owner of the Renison Tin Project in Tasmania, the largest tin producer in Australia.

The financial performance of its operating assets has been less than spectacular. Earnings per share (EPS) for FY2018 came in at a loss of $0.04 per share, forecasted to drop further in FY 2019 to a loss of $0.049 per share before rebounding to a positive $0.038 in FY 2020.

For long-term investors, the company does have impressive nickel assets in development at Central Musgrave Project where the Wingellina Nickel-Cobalt Project – one of three prospective areas in the Musgrave Project – is, according to the company, “world class” and the largest undeveloped nickel-cobalt project in Australia.

The company’s Half Year 2019 results were disastrous with a 13% revenue increase and a staggering 96% decline in net profit.

The Wingellina Project is still seeking government approvals and strategic partners to develop needed infrastructure.

For some investors Mincor Resources (MCR) might seem like a punter’s delight, at best. However, the company has narrowed its focus from its gold assets in a concentrated effort to be ready to profit from what the company sees as a substantial jump in the demand for nickel suitable for EV batteries commencing around 2022.

For those willing to consider a speculative buy, Mincor is worth a look. The company is looking to restart mining operations in the Kambalda mining district of Western Australia. Back in 2014 BHP Billiton was looking for a buyer for its BHP Nickel West Operation in the district in a strategy designed to shed non-core assets. BHP has now decided to keep the operation as a “future growth option linked to the expected growth in battery markets and the relative scarcity of quality nickel sulphide supply,” according to the company. The decision by BHP is a testament to the viability of nickel operations in the Kambalda district.

Mincor has recently signed an offtake agreement with BHP Nickel West allowing Mincor to use Nickel West facilities for processing high-grade nickel sulphide ore from Mincor mines.

Mincor is targeting four deposit areas in the 300 square kilometres it holds in the Kambalda district, with development studies underway at each of the four deposits – Cassini, Durkin North, Ken/McMahon and Miitel/Burnett. The company has a producing gold mine but is shifting its focus to the nickel restart.