Last week I looked at copper and its role as a new-age “green” metal – today it’s nickel’s turn.
Nickel is in a great position as the world intensifies its efforts to “decarbonise” and move to perceived cleaner energy sources than fossil-fuel power and engines. The metal is a crucial component in producing stainless steel – about two-thirds of nickel production goes to this use – and that bedrock use is only increasing. But on top of that, nickel is a vital constituent in lithium-ion batteries, which are considered the key to electric vehicles (EVs) and the storage of renewable energy; nickel also goes into the actual generation infrastructure in solar and wind farms.
Demand for nickel is set to surge. According to a 2021 report from the International Energy Agency (IEA), EV and clean energy demand will drive a total demand increase for nickel, between 2020 and 2040, of between seven times and 19 times.
According to Australian nickel producer Mincor, EV batteries have a current average price of US$156 per kilowatt hour (kWh), but this needs to drop to about US$100/kWh to match Internal combustion engines – one focus for manufacturers is replacing high-cost cobalt with nickel, which is cheaper and holds more energy. High-nickel-content batteries are the key to longer range, more efficient and cheaper EVs.
Nickel has risen in price from US$8,260 a tonne at the start of 2016 to just under US$19,000 a tonne –touching a nine-and-a-half-year high of US$19,700 a tonne in February. The price is up by 9% in 2021. In the short term, however, the nickel market is expected to remain in surplus in 2021, driven by increasing nickel supply from Indonesia.
Australia is the fifth-biggest producer of nickel, producing 180,000 tonnes a year. Diversified miner BHP is the biggest contributor to this, from its Nickel West operation in Western Australia – BHP’s guidance for the financial year (FY) 2020-21 puts its total expected output at between 85,000 and 95,000 tonnes, about half of Australia’s nickel production.
Other big producers include the Anglo-Swiss Glencore group, which owns the Murrin Murrin operation in the north-eastern Goldfields region of Western Australia, from which it produced 36,400 tonnes of nickel in 2020; and Canadian firm First Quantum, which operates the Ravensthorpe mine in Western Australia (13,000 tonnes of nickel produced in 2020).
But there is a small group of ASX-listed producers poised to tap into the mooted growing demand for nickel – the problem for investors is that this has not gone unnoticed on the market, and value is hard to find.
1. IGO Limited (IGO, $8.40)
Market capitalisation: $6.5 billion
Three-year total return: 22.1% a year
FY22 estimated yield: 1.1%, unfranked
Analysts’ consensus price target: $8.25 (Thomson Reuters), $$8.00 (FN Arena)
Nickel miner IGO owns 100% of the Nova nickel-copper-cobalt mine in Western Australia’s Fraser Range region, In December last year, IGO diversified into the lithium business, buying a 25% stake in the world’s largest hard-rock lithium mine, the Greenbushes mine in WA, and a 49% stake in a lithium hydroxide being built at Kwinana, south of Perth. The reorientation of IGO was confirmed in April when it sold its 30% stake in the Tropicana gold mine, a joint venture with AngloGold Ashanti Australia, in Western Australia’s goldfields region, to gold miner Regis Resources, for $903 million.
Excluding the gold side of the business, last year IGO beat its production guidance, producing 30,436 tonnes of nickel, 13,772 tonnes of copper, and 1,142 tonnes of cobalt from Nova. However, it’s not going to do as well this year: the company’s FY21 guidance is for 27,000 to 29,000 tonnes of nickel, 11,000 to 12,500 tonnes of copper, and 850 to 950 tonnes of cobalt.
The company’s FY21 cash cost guidance stands at A$1.80–$2.10 a pound of nickel – the current spot nickel price in pounds is US$8.58 ($11.44) a pound).
Over time, IGO will become more dominated by lithium earnings, but it’s still going to be churning out nickel from its high-value nickel sulphide deposits – and nickel sulphides are the most attractive form of deposits, being simpler and cheaper than nickel laterites to produce battery-suitable nickel.
IGO does not offer much capital gain at present, based on analysts’ consensus valuations; and generates a small dividend yield – what it really offers in the long term is very good exposure to the decarbonisation/electric vehicles/clean energy transition, underpinned by nickel’s stainless-steel use. The most bullish broker, Macquarie, sees a target of $9.50.
2. Western Areas (WSA, $2.31)
Market capitalisation: $750 million
Three-year total return: –11.8% a year
FY22 estimated yield: 0.4% fully franked (grossed-up 0.6%)
Analysts’ consensus price target: $2.46 (Thomson Reuters), $2.59 (FN Arena)
Western Areas operates two of the highest-grade nickel sulphide mines in the world, at its Forrestania operation near Leinster in Western Australia, the low-cost Spotted Quoll and Flying Fox mines. The high-grade nickel ore mined from Forrestania is processed through the company’s Cosmic Boy concentrator and sold into offtake agreements with Chinese stainless steel producer Jinchuan Group, and the BHP Nickel West operation.
Last year, Western Areas produced 20,900 tonnes of nickel concentrate. For the recently completed FY21, however, this amount will be substantially lower – WSA has downgraded its production guidance twice, and now expects 16,000–17,000 tonnes. Cost estimates too have risen to $3.50–4.00 a pound, which is still comfortably below the nickel price.
The problem has mostly been lower-grade ore, particularly at Flying Fox, where a seismic event in the September quarter limited the access to the better ore, and reduced the grades; but there were good signs in the March 2021 quarter, which saw production surge 20% as the company entered higher-grade areas at both mines, allowing Western Areas to return to what it called a “more normal” level of operation, producing 4,236 tonnes of nickel.
WSA is currently developing a third mine, the Odysseus underground mine, which will go under the old Cosmos open-pit nickel mine. The Cosmos operation produced more than 127,000 tonnes of nickel, at an average grade of 4.8%, between 2000 and 2012: Odysseus is expected to be a long-life operation (at least ten years), producing a potential 2.1 million tonnes. WSA expects to mine the first tonnes from the site in the 2021 September quarter, with the operation scheduled to commence nickel concentrate production during FY23. This is well-timed, given that Flying Fox is expected to end life in 2023 and Spotted Quoll in 2024.
The Odysseus project’s total reserves now stand at 10.3 million tonnes, at 2.1% nickel, for 212,000 tonnes of contained nickel, with average output expected to be about 14,600 tonnes of nickel. Western Areas says Odysseus is one of the only nickel sulphide projects that will be coming into production in a timeframe that will enable it to deliver into the growing nickel demand profile, particularly for nickel-rich EV batteries.
On current consensus price targets, WSA looks to offer some scope for capital gain, and a (very small) fully franked yield.
3. Mincor Resources (MCR, $1.145)
Market capitalisation: $519 million
Three-year total return: 47.4% a year
FY22 estimated yield: no dividend expected
Analysts’ consensus price target: $1.30 (Thomson Reuters), $1.30 (FN Arena)
In March, Mincor opened the Cassini nickel mine, located just south of the historic mining town of Kambalda in Western Australia – the first new nickel sulphide mine in the region in more than a decade, on a deposit it discovered in 2014. Mincor – which mothballed its Kambalda nickel production in 2016, at a time of historically low nickel prices – is back with a vengeance with Cassini, from which it aims to become a high-grade nickel sulphide producer and extract its first nickel concentrate in the first quarter of 2022. That will position Mincor ideally to capitalise on the new era of demand for nickel.
Mincor has signed a deal to sell its nickel concentrate to BHP’s Nickel West operation, ultimately to be processed into nickel sulphate for use in EV batteries. At present, the Cassini ore reserves are expected to hold about 71,100t of contained nickel, but Mincor expects to increase that substantially, given the exploration potential of its tenements.
Kambalda has historically been one of the most highly endowed, high-grade nickel sulphide mining areas in Australia; the area has seen historical production of 23 million tonnes of ore at an average grade of 3.6% nickel, yielding 818,000 tonnes of nickel. Mincor has some very prospective ground – in particular, the 1.1-kilometre-long “golden mile” area between the Long and Durkin North deposits has never been tested, because the tenements were separately owned: Mincor now owns both, and earlier this month, intersected what it described as “massive sulphides” while drilling in that gap.
Cassini will be a low-cost production centre, with Mincor projecting an average all-in sustaining cost (AISC, which incorporates not only the “cash cost” of production, but all the costs that allow production to be sustained) from Cassini of $3.81 (US$2.67) a pound over the life of mine, which, again, looks very attractive compared to the current nickel price of US$8.58 ($11.44) a pound).
4. Poseidon Nickel (POS, 10 cents)
Market capitalisation: $278 million
Three-year total return: 38.8% a year
FY22 estimated yield: no dividend expected
Analysts’ consensus price target: 8 cents (Thomson Reuters), 7.6 cents (FN Arena)
Owner of a very famous name in Australian nickel circles – but not connected to the Poseidon Nickel that sparked the infamous share surge in 1969-70 – Poseidon Nickel owns three high-quality nickel sulphide assets in Western Australia. Its Black Swan deposit was mined as an open pit, but has been on care-and-maintenance since 2009, with a remaining resource of 179,000 tonnes of nickel metal at a grade of 0.6% nickel. The Silver Swan underground mine was also placed on care-and-maintenance, in 2009, and contains 136,000 tonnes of nickel at 9.1% nickel, for 12,400 tonnes contained nickel metal. Between the two, total production was 178,500 tonnes a year of nickel in concentrate.
Poseidon acquired the Black Swan/Silver Swan project from Norilsk Nickel Australia in late 2014, encompassing the two mines and the Black Swan concentrator, with 191,400 tonnes of nickel metal in resource. Along with Black Swan, Poseidon’s WA assets include 149,000 tonnes of nickel in resource at Windarra and 52,000 tonnes of nickel in resource and a 1.5 million-tonnes-a-year processing plant on care and maintenance at Lake Johnston.
POS has since added to that base the Golden Swan discovery, in March 2020. The company is about to complete a drill-out program on Golden Swan that’s designed to establish an average grade and maiden resource. From that, it hopes to proceed to a final investment decision later this year, and develop and commission a high-grade underground mine, by the second half of 2022. The company is looking at a range of options to bring Golden Swan to market – it could be a concentrate purchase agreement, smelt its own concentrate or sell direct shipped ore – but whatever the case, Poseidon appears nicely poised to enter production in 2022, just when nickel demand is forecast to soar.
5. Nickel Mines (NIC, $1.08)
Market capitalisation: $2.8 billion
Three-year total return: n/a
FY22 estimated yield: 2.8 % unfranked
Analysts’ consensus price target: $1.35 (Thomson Reuters), $1.30 (FN Arena)
Nickel Mines is a different kind of nickel exposure: it produces at its Indonesian operations nickel pig iron, a semi-refined product and a cheaper alternative to pure nickel metal, in making stainless steel.
NIC, which listed on the ASX in 2018 at 35 cents, has integrated operations in Central Sulawesi, Indonesia, where it holds an 80% interest in four rotary kiln electric furnace (RKEF) NPI production lines with Shanghai Decent Investments (SDI), a subsidiary of Tsingshan Group, the world’s largest stainless steel producer. The RKEF lines are located in an existing, fully integrated stainless steel production facility, the Indonesian Morowali Industrial Park (IMIP).
NIC also owns an 80% stake in the Hengjaya mine, a high-grade, long-life nickel laterite deposit, also in Central Sulawesi, in close proximity to the IMIP. Hengjaya produces direct shipping ore (DSO), most of which is sold into the IMIP facility for NPI production.
In November last year, NIC struck a deal to buy an 80% interest in the Angel Nickel project, comprising four new-generation RKEF NPI production lines, and a captive 380MW power station. Angel Nickel is currently under construction on Halmahera Island in Indonesia.
NIC had a tough March quarter, with lower-than-expected nickel sales and production after “a minor seismic event” in early January reduced its power availability at Morowali. But the attraction with NIC is not only stainless-steel demand: partner Tsingshan revealed in March that it plans to make battery-grade nickel metal using an alternative process, converting NPI to nickel matte, an intermediate material for the production of battery-grade nickel sulphate, in a process powered by renewable energy. If NIC, which has not really had a route into the “green” sector before, can piggyback on its partner’s plan, that could be a game-changer for the company.
6. Panoramic Resources (PAN, 15.2 cents)
Market capitalisation: $328 million
Three-year total return: –27% a year
FY22 estimated yield: no dividend expected
Analysts’ consensus price target: 18.5 cents (Thomson Reuters), 18.5 cents (FN Arena)
Panoramic Resources operates a nickel sulphide mine and processing plant in the East Kimberley region of WA, the Savannah nickel project. The project was previously operated between 2004 and 2016, before being put on a care-and-maintenance basis. It was then recommissioned in 2018 following the discovery of the Savannah North orebody, but suspended once again in 2020 as COVID-19 hit.
Since then, Panoramic has worked on an updated mine plan, and in April, the company’s board approved a re-start, with underground mining scheduled to begin in August, ore processing in November, and the first shipment in December Panoramic has entered a five-year nickel and copper concentrate offtake agreement with Swiss commodity trading group Trafigura, which is also funding Panoramic into the restart.
However, Panoramic managed to beat its schedule, with mining operations beginning this month, as newly appointed mining contractor Barminco (a subsidiary of the ASX-listed Perenti Global) was able to mobilise equipment quicker than expected. Panoramic expects to have 100,000 tonnes of ore stockpiled before processing begins in November. Savannah has a predicted mine life of 12 years, with annual production of 9,072 tonnes of nickel, 4,683 tonnes of copper and 676 tonnes of cobalt in concentrate. Panoramic expects to do this at average site all-in costs of $6.36 a pound of nickel, after counting the copper and cobalt by-product credits and royalty payments. Its base-case nickel price assumption is $9.63 (US$7.28) a pound, which would give the project estimated pre-tax cash flow of $610 million.
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