Barry FitzGerald: Will the nickel price crash pave the way for a Legend to rise?
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Nickel equities had a tough time last week in response to the 12% price crash for the stainless steel and lithium-ion battery material.
The metal’s price fall from $US8.46/lb to $US7.41/lb left leading producers and explorers/developers sporting losses for the week ranging from 3% to 15%.
That was despite the nickel price, at its diminished level, still being 18% higher than its CY2020 average of $6.26/lb, with the bounce from 2020 levels a response to the battery-powered electric vehicle revolution gathering momentum.
So has the battery thematic for nickel broken down, and does the sell-off in nickel equities present investors with fresh opportunities?
In short, no and yes.
The “shock’’ that took the nickel price down was news from the world’s biggest nickel producer, China’s Tsingshan, that it was partly diversifying from the supplying the stainless industry into the battery materials space.
Tsingshan said it had signed a one-year supply contract for 100,000 tonnes of nickel matte (an intermediate product grading 75% nickel) from its Indonesian operations with two Chinese battery materials groups.
The shock factor was that the nickel matte would be produced from nickel pig iron (NPI), a combination of nickel and pig iron consumed by the stainless industry and not suitable as a precursor battery material.
There will be a conversion cost in turning NPI in to nickel matte which Macquarie estimates at about $US1,000 tonne ($US45c/lb). And as matte selling prices are the same or lower than NPI, the exercise is value destructive.
Value destructive perhaps, but as Macquarie noted, on current Indonesian expansion plans, NPI for the stainless steel market faces massive over-supply. So it makes sense for Tsingshan to diversify into the battery materials market rather than having to stockpile NPI.
But from a broader perspective, the world is going to need every pound of nickel it can get to meet the super-charged growth in demand coming from the EV sector, with the nickel market widely tipped to go into deficit around 2023, with or without NPI sourced nickel matte.
So Tsingshan’s diversification move is needed anyway.
According to commodity consultant Roskill, nickel demand from the stainless steel sector was about 1.55 million tonnes in 2020 while batteries absorbed 143,000 tonnes.
“However, it is the battery sector that is forecast to become the most significant driver of nickel demand growth moving forward. Batteries are expected to increase by 13.5% (CAGR) to 2040, where demand from the sector could reach over 1.8 million tonnes.’’
And again from a broader perspective, many commentators have noted that nickel matte produced from NPI is unlikely to meet the clean and green requirements of European and US automakers. NPI production is energy and emission intensive itself, relying in Indonesia on coal-fired power. Then there is the energy and emissions involved in converting NPI in to nickel matte.
From all that it can be said that Garimpeiro for one is satisfied that the nickel price come 2023 or thereabouts, it will likely be much higher because of supply shortages, and the need to incentivise new production.
Having said that, sentiment to the nickel price has been dented in the near-term by the Tsingshan move. So investors might want to avoid the nickel producers until the nickel price stabilises.
It’s a different story with the explorers and developers. The explorers remain leveraged to a discovery while the advanced developers are poised to capitalise from having their first production kicking in when the EV-induced nickel supply shortage takes hold around 2023.
In the here and now, both categories can be picked up at lower prices thanks to last week’s sell-off.
In the explorer category, Legend (ASX:LEG) weathered the nickel price slump better than most with its 3.7% share price fall for the week to Friday’s 13c.
Little wonder too, as a diary entry suggests that the company must be close to starting its 2021 drilling program at its high-rated Mawson discovery in WA’s Fraser Range.
It is the one that finished off last year with a flourish with the best hole to date – 31.1m grading 2.04% nickel and 0.15% cobalt from a depth of 200.7m. The new program will be all about finding the big system driving that kind of result.
Amongst the developers, Mincor lost 12% to 96c last week. It is on its way to returning its Kambalda operations to production at an annual average rate of rate 14,000 tonnes of (contained) nickel.
Its “new’’ Kambalda is underpinned by the Cassini discovery, expected to deliver nickel at a cash cost of $US2.76/lb.