The nickel worm finally turns up

A rise in the nickel price could signal a recovery in other base metals.

PORTFOLIO POINT: Rising nickel prices could be an early warning of recovery in the wider base metal complex.

First in, first out. That has always been the way nickel behaves in a conventional metal-price cycle and it seems to be doing it again, though it would be a brave man to shout “nickel boom!”

A smarter way for investors to treat news from the market in Australian nickel stocks is to see recent events as a bellwether for the wider complex of base metals, including the least-loved zinc and lead.

Eye-catching upward share-price moves by local nickel producers such as Mincor, Mirabela, Panoramic and Independence over the past two months have been partially explained by a rush into hard physical assets as the US and Europe try to inflate their way out of recession.

Gold has also been a big beneficiary of the shift away from government bonds and other forms of official promissory notes that risk being degraded by long-lasting ultra-low interest rates and high levels of inflation.

Nickel, however, is only being partially driven by the fear of inflation. There are also a number of fundamentally positive factors at work, including:

  • Almost four years of depressed nickel prices, which have been below the break-even price for more than 30% of the world’s nickel mines.
  • Those low prices have seen production decline even as demand for stainless steel, the principal consumer of nickel, has risen.
  • One of the causes of the low prices, the development of a destructive source of supply called “pig-iron nickel”, is being phased out.
  • Low levels of investment in major new mines to meet future demand, and equally low levels of discovery of new nickel deposits.

It is those four factors, plus the excitement of recent exploration news, which also help explain the spectacular price rises posted by a number of nickel explorers, led by Sirius Resources (see A Sirius minerals development in Eureka Report on August 3). Sirius has risen from penny dreadful obscurity, trading at around 6 cents a share three months ago, to more than $2.

Companies with exploration tenements close to the Nova discovery of Sirius include Sheffield Resources (up from 40c to 64c); Matsa (from 12c to 35c); and Buxton (from 10c to 35c).

Another nickel explorer to react spectacularly to changes in the nickel market is Marmota Energy, which has hit visible nickel and copper during drilling near Tarcoola in South Australia’s Gawler Craton.

Last week Marmota, which started life looking for uranium, rocketed up by 800% from 3c to 29c over two hectic trading days. It is now trading around 15.5c.

Taken together, the available evidence points to nickel reacting as it has since the original Australian nickel boom of 1968 when similar factors, including supply shortfalls resulting from severe industrial strife in Canada’s world-leading nickel mines, preceded the Poseidon boom. This was a time when I was pegging nickel claims in WA’s outback for a Canadian company reacting to trouble at home.

It was the Poseidon era that gave Australian investors their first taste of how nickel behaves as the first of the base metals (a group that includes zinc, lead, copper and aluminium) to react to market forces.

Nickel has traditionally been first to feel the effects of a cyclical slump in demand and price, and first out of the slump.

The next few months will reveal whether there is anything traditional about the current cycle, with opinion divided and with too much political interference in markets to get a clear view of what comes next.

One man who is confident that the nickel worm has turned is the chief executive of Mincor, David Moore. He has been riding the nickel cycle since the company acquired former assets of Western Mining Corporation (WMC) at Kambalda in WA a decade ago.

“Nickel always overshoots and undershoots in the metal-price cycle,” Moore told Eureka Report.

“The price went way too low after the global financial crisis, and it still has further to rise if investment in new mines is to be encouraged.

“At US$8 a pound most producers can scrape by, but to get new investment prices need to rise above US$10/lb.”

Source: Kitco

Moore’s view of the nickel market is echoed by the world’s biggest producer of the metal, Russia’s Norilsk Nickel.

Two weeks ago, in reply to questions submitted to the company by the Bloomberg news service, Norilsk said that at a price of US$16,000 a tonne (US$8/lb) an estimated 30% of global nickel output was unprofitable. At US$15,000/t (US$7.50/lb) an estimated 45% of output would be unprofitable.

Helping kill the nickel market over the past four years has been the development of the pig-iron nickel business, which is based on shipping unprocessed, low-grade (1% nickel), ore directly to China from open-cut pits in Indonesia and the Philippines.

Indonesia in particular objected to the practice and officially banned it earlier this year, with the removal of some pig-iron nickel from the market likely to help conventional metal producers.

The changes in the nickel market are starting to be seen in the price of the metal, which has risen from less than US$7/lb as recently as mid-August to a latest price of US$8.27/lb.

The stockbroking firm, Citi, has told clients that the nickel price will continue to recover as the supply of low-grade Indonesian material dries up. A Canadian broker, TD Securities, reckons nickel will trade at US$8.50/lb in the first quarter of next year, rising to US$9/lb in the second quarter.

Moore’s view is that nickel entered a destructive phase of its price cycle several years ago, when the price moved below US$8/lb.

“It’s been happening (supply drying up) for two years already, so nickel is just running ahead of the pack,” he said.

The pack Moore refers to is the wider base metal complex, where a number of metals have been in a supply destructive price-phase for the past year.

Zinc, a favourite of the world’s biggest commodity trader, Glencore, has been showing signs of recovery over the past month, rising from US84c/lb to US94c/lb. Lead, often produced in association with zinc, has been moving even more swiftly, up from US83c/lb to US$1.03/lb.

The challenge for investors is to judge whether what’s happening in the base metals sector is a wider recovery, or the result of hot money flowing out of low-yield bank deposits and government bonds into speculative trading situations.

My view is that nickel is playing its time-honoured role of bellwether metal. It is signalling a recovery, but it could be reacting well ahead of a more widespread recovery.

For that to happen, global industrial production needs to recover from its current anaemic level, and picking the time of a worldwide revival is anyone’s guess given the debt problems confronting the US and Europe.

Meanwhile, the way to play the mini-boom underway in the nickel sector is to buy low-cost producers such as Western Areas, which is yet to react in the same way as Mincor to the price signals in the market, Panoramic, Independence and Mincor (which might already be the one that got away).

Short-term trading fun can be had among the explorers, keeping a close eye on:

  • Sirius, which analysts at the broking firm Patersons reckon is heading for $5.80.
  • Sheffield, Matsa and Buxton, because they will benefit from what happens to Sirius, and
  • Marmota, because it appears to have made a “greenfields” discovery in an area not previously known for base metals.

As I said earlier, this is not a nickel boom, but it could be the start of a recovery that runs for a few months with anything longer dependent on what happens to the global economy and demand for metals.

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