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The New Criterion: Nickel Stocks

Tim Boreham
February 08, 2018

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Some argue that nickel is a more important component in electric vehicle batteries than lithium or graphite. It's a controversial debate but here are two stocks worth looking at.

Panoramic Resources (PAN) 42c

Barring a fresh commodities meltdown, the WA nickel stalwart is poised to press the button to restart its dormant mainstay mine after investors flocked to its recent capital raising.

The mine, Savannah in the east Kimberley, was placed on care and maintenance in mid 2016 after becoming victim to the plunging price for the stainless steel ingredient.

At the time nickel traded at $US3.50 ($4.30) a pound, but optimism about nickel’s role in electric vehicles has pushed the metal to a spot price of $US6.05/lb.

While the metal has retracted from its recent high of $US6.30/lb, it’s gained 28% over the last 12 months. Nickel has thus outperformed the in-favour copper as well as zinc, lead and aluminium, but the gains come after eight years of dismal prices.

At the current spot price ($US6.15/lb) at the time of writing), nickel is comfortably above the ‘sustainable’ minimum of $5.50/lb needed to resume production at Savannah, which was mined for 12 years and produced 1.2 million tonnes of concentrate material over that time.

“It feels a lot better than 18 months ago when we shut the mine,” CEO Peter Harold says. “But we have a bit of stuff to do first.”

 The Savannah feasibility study costs the re-start at $36m, assuming an ‘all in’ production cost of $US3.50 ($4.30) a pound. With the potential to be expanded, the mine boasts reserves of 112,600 tonnes, grading a handy 1.65% nickel.

This time around, the economics are boosted by the presence of copper and cobalt, two other EV-related ingredients that have been on the fly.

The feasibility study assumes annual output of 10,800 tonnes of nickel, 6100 tonnes of copper and 800 tonnes of cobalt. The latter two metals will play a key role in the mine economics: copper and cobalt credits are expected to account for 40% of the mine’s revenue, compared with only 20% last time around.

Apart from hawkishly watching the nickel price, Harold is working on an offtake agreement to secure a buyer beyond 2020, when a current deal with Jinchuan Sino Nickel expires.

 While it’s possible the Chinese conglomerate might extend the deal – it’s done so twice already – other nickel hungry parties are beating a path to Panoramic’s Hay Street HQ as well.

 “One of the issues is whether we split the concentrate 50:50 as a risk mitigation strategy, or just go with one supplier,” Harold says.

Then there’s the always-pertinent question of financing the project. But having just raised a net $19.8m in the underwritten rights offer, Panoramic needs to raise only modest debt that should be covered by one bank, rather than the syndicate.

As for the nickel price, it’s a case of ‘anyone’s guess’ but expert forecasts hover around $US6.75/lb. 

“I have been in the nickel game for more than two decades and have seen the price at $1.90 and as high as $20 (as pound),’’Harold says. “There’s no way anyone makes money at $3.50, but at $US6-8/lb things get really interesting.”

The case for the nickel bulls is supported by both the projected demand for the electric vehicle battery market and surprisingly robust output of stainless steel, which is what nickel is still mainly used for. On the supply side, there’s a dearth of big new projects.

There’s cause for wariness too because the metal remains in oversupply: the London Metals Exchange inventory stands at 380,000t, a chunky stockpile in the context of global supply of around two million tonnes.

In January, key nickel supplier Indonesia eased a ban on raw ore exports and the effect of this is yet to be seen.

Some party poopers also contend that electric vehicle demand has been exaggerated, or in any event is factored into the price already.

On Macquarie estimates, lithium ion batteries accounted for only 10-15,000t of nickel production in 2016, although this number probably doubled in 2017.

Others argue that with lithium-ion batteries needing ten times more nickel than lithium, punters have been getting excited about the wrong material.

Still, it’s almost certain the Panoramic board will press the green button on Savannah, which has a net present value of $210m to $380m.

If the unexpected happens – as its wont to do with commodities – Panoramic's $200m valuation will melt like a Paddle Pop on Cottesloe beach in summer.

At least the company has a little known sideline: renting out a 200-person accommodation camp at its Lanfranchi site near Kalgoorlie (also mothballed) to another miner.

“We are a hospitality mining company now,’’ Harold says. “That asset is a real sleeper.”

Mincor Resources (MCR) 34c

Fellow quiescent nickel miner Mincor is feeling the love as well, having also been forced to curtail its two Kambalda mines after 15 years of continuous operation that delivered $133m in dividends.

Mincor has just raised $10m in an oversubscribed share placement and share purchase plan to fund more work at its Kambalda prospects, in view of re-starting production in the short term.

The company also refers to “forecast growth in the nickel market over the next few years” – and punters obviously agree.

Unusually, retail investors flocked to the SPP – so much so that the offer was increased from $3m to $4m. The now cashed-up company is kicking off a drilling campaign at its Cassini project in early February.

Mincor has extensive ground in the nickel-rich territory and is underpinned by resource of 99,000t (28,000t proven).

But it’s gold, not nickel that is likely to provide Mincor’s short term cash flow via its Widgiemooltha gold project.

Last year’s feasibility study supports the project as a short-term (19 month) operation across ten shallow pits, with a modest start up cost of $2.8m.

The Widgiemooltha project has a net present value of $25.7m, based on recovering 65,800 ounces of the lustrous stuff. But it’s nickel that has driven Mincor shares up 35% over the last 12 months, for a market valuation of $84m.

For impatient investors craving here and now exposure to the nickel, Western Areas (WSA, $3.04) is the only pure-play nickel miner of substance. The WA miner produced 5970t in the December quarter, which was within expectations.

Western Areas expects to produce 21,500-22,500t for the full year, at a comfortable cash cost of $2.40-2.65/lb

Independence Group (IGO, $4.53) has also started producing from its Nova mine, with 4500t of output.

Independence owns one of Australia’s biggest gold mine, Tropicana but s dramatically expanded into nickel with the $1.5bn purchase of Nova owner Sirius Resources in 2015.

The market currently values Independence at $2.66bn and Western Areas at $830m, with the ‘bondcano’ taking some of the gloss of their worth. We’ll leave it to the bulls and bears to argue whether these numbers still factor in the upside of the nickel boom-ette.

Tim Boreham edits The New Criterion

Tim.boreham@independentresearch.com.au

Disclaimer: The companies covered in this article (unless disclosed) are not current clients of Independent Investment Research (IIR). Under no circumstances have there been any inducements or like made by the company mentioned to either IIR or the author. The views here are independent and have no nexus to IIR’s core research offering. The views here are not recommendations and should not be considered as general advice in terms of stock recommendations in the ordinary sense.

 

Published: Friday, February 09, 2018


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