Barry FitzGerald: Panoramic ready for nickel’s return with Savannah up its sleeve
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The much tweeted comings and goings of the US-China trade war has pulled the rug on nickel prices.
The metal was riding high mid-year, with prices having recovered from the 2017 average of $US4.73/lb to $US7/lb. But the uncertainty caused by the trade war has pulled what was looking to be the boom metal of 2018 back to more sedate territory of $US4.89/lb.
Nickel has not been alone, with other base metals also hit as investors fret about what happens to trade flows when tariffs get piled on top of one another.
Having said that, as the year comes to close, nickel is widely tipped to be a strong performer in 2019.
That’s because LME warehouse stocks have halved to more than 5-year lows, and because of the metal’s key role in the lithium ion-battery revolution in electric vehicles and renewable energy storage.
As previously mentioned in Stockhead, nickel is key to the increased energy density in batteries sought by car manufacturers to win over consumers to EV’s en masse.
It is essentially a new market for nickel, with its traditional stainless market chugging along nicely in terms of demand as well.
As the nickel market is already in supply deficit, the idea is that it won’t take much for the metal to fulfil expectations that it will pop higher in 2019. An easing in trade war tensions would no doubt help its cause.
Given the expectations of higher prices next year, there could well be good news from nickel’s bad run in the second half of this year in that nickel stocks are down massively from where they were mid-year. It means selective buying of nickel stocks could be rewarding as 2019 unfolds.
Today’s interest is in Panoramic Resources (ASX:PAN), mentioned briefly here in early July when it was a 63.5c stock. It’s now back at 37.5c.
But fear not, three brokers have recently put the company in Christmas stocking consideration by nominating target share prices ranging from 60c to 73c.
While the strong target prices are partly due to the brokers expecting a nickel price recovery, the forecast nickel price levels they have based their target prices on are pretty much consensus.
The main factor in Panoramic’s high rating (on a target price basis) is the pending resumption of nickel production, along with copper and cobalt, at its Savannah project in the East Kimberley region of Western Australia.
Savannah was shut down in 2016 when nickel prices crashed to $US4.35/lb.
At a cost of $36m, Savannah is coming back as an annual producer of 10,800t of nickel, 6,100t of copper, and 800t of high-value cobalt (in concentrates).
Forecast average life-of-mine operating cash costs are estimated at $US2.40/lb nickel, and using a base case nickel price of $US5.50/lb, the internal rate of return comes out at 100%.
Plug in what is roughly a consensus long-term nickel price of $US6.75/lb and the IRR increases to 200%. That in itself explains why Panoramic is bringing Savannah back in to production.
It is not too far off either, with first concentrate shipments to its Chinese customers expected early in the March quarter next year.
Concerns about the timing of the nickel price recovery to levels which will make Savannah sing is mitigated somewhat by the hedging of 7,000t of nickel at substantially higher prices for delivery between February 2019 and June 2021.
Morgans was the most recent (December 12) of the brokers to initiate coverage of Panoramic with a 70c price target.
It said execution of the re-start was assisted by “significant infrastructure kept in good standing, Panoramic’s long established operating knowledge, low costs and supportive customers.”
“We think Panoramic will appeal to both specialist and generalist investors comfortable with more modest upside (of about 100%) in return for higher technical/commercial certainty on execution,” Morgans said.