BHP is selling Aussie nickel to Tesla. Here's why ASX-listed juniors are set to share the spoils

After months of rumours, BHP (ASX:BHP) has finally revealed one of the mining industry’s worst kept secrets – that it will become a supplier of nickel to EV giant Tesla.

The news was not price sensitive for BHP apparently, but drove the miner to a ~3% gain yesterday.

Positive sentiment supercharged the nickel sector with Mincor Resources (ASX:MCR), IGO (ASX:IGO) and Western Areas (ASX:WSA), all current or future suppliers to BHP’s nickel business up 2.5, 4 and 6.25%, respectively.

Down the line smaller capped Kambalda and Kalgoorlie nickel explorers Poseidon Nickel (ASX:POS), Auroch Minerals (ASX: AOU) and Lunnon Metals (ASX:LM8) all traded higher on the good vibes, with Poseidon up a rollicking 11%.

With much of the world’s nickel currently supplied by energy intensive producers in controversial jurisdictions like Indonesia and Russia, BHP appears to have successfully pitched its – and by extension Australia’s – nickel as part of an ethical supply chain for the ESG conscious battery sector.

“Demand for nickel in batteries is estimated to grow by over 500 per cent over the next decade, in large part to support the world’s rising demand for electric vehicles,” BHP chief commercial officer Vandita Pant said.

“We are delighted to sign this agreement with Tesla Inc., and to collaborate with them on ways to make the battery supply chain more sustainable through our shared focus on technology and innovation.”

This could include using blockchain technology to improve the traceability of raw materials.

“Sustainable, reliable production of quality nickel will be essential to meeting demand from sustainable energy producers like Tesla Inc,” BHP’s Minerals Australia president Edgar Basto said.

“The investments we have made in our assets and our pursuit of commodities like nickel will help support global decarbonisation and position us to generate long-term value for our business.”

BHP share price today:

BHP preparing for the future

BHP’s revenue is dominated by its iron ore business, which is powering the Big Fella to a cash position that could see it pay out a dividend of over $10 billion this year.

But an investment in nickel, sounded out by CEO Mike Henry as one of the future-facing commodities BHP wants to pivot towards, could well pay off down the line.

As recently as 2007 Nickel West generated more cash for BHP than its iron ore business, when the nickel price spiked incredulously to more than US$50,000/t.

In an alternate timeline Nickel West shut up shop by the end of the last decade, something more than 3000 staff at the business were warned may happen back in 2014.

Instead it went on a campaign of cost-cutting and incremental improvement, helping the company keep its Goldfields nickel mines, Kalgoorlie smelter and Kwinana refinery open even as prices tumbled as low as US$7600/t in 2016.

Now, while making up just a fraction of its revenue, Nickel West is essential for BHP because it generates a sizeable amount of its goodwill.

Being in the sustainability game is good for BHP as it aims to exit “dirty” commodities like coal and petroleum (while being paid billions of dollars to do so).

Having Tesla on board provides some long term backing for the miner’s battery ambitions, and gives it some exposure to the mainstream publicity emanating from Elon Musk’s notoriety and stoner dad clout.

BHP should be producing nickel sulphate from its long delayed Kwinana plant by the end of this quarter.

According to BloombergNEF, demand for that kind of nickel should increase by 7.5x from under 200,000t in 2020 to 1.5Mt in 2030 with the rising take-up of EVs.

With a supply deficit projected from 2024, that could see prices charge even further from their current US$18,568/t, which is around 40% up over the past 12 months.

BHP’s win is junior sector’s too

The Tesla deal also means a lot for the junior and mid-cap nickel sector in Western Australia.

It is not just about sentiment. Most local producers and proponents are or will be suppliers of third-party feed to Nickel West.

The Tesla deal is a vote of confidence in the local industry, but also provides long-term impetus for BHP to acquire nickel sulphide concentrates from third parties.

Any new nickel sulphide producer in WA would be looked at closely by BHP as a source of supply to maintain and ramp up volumes of nickel sulphate production in Kwinana.

Most nickel demand still comes from stainless steel producers, so for many in the industry Tesla’s arrival in WA has turned blue sky thinking about the commodity’s future as a battery ingredient into something tangible.

“It is material for us and I think more broadly (the Tesla deal) makes people think this is real, it’s not just a fashion that the media is talking about, it’s something that is probably going to happen,” Lunnon Metals managing director Ed Ainscough said.

Explorer Lunnon owns the historic high grade Foster and Jan nickel mines on the Kambalda Dome, and raised $15 million for its IPO this year for drilling.

BHP holds an option over offtake from Foster and Jan dating back to the mines’ sale by its predecessor WMC to Lunnon’s largest shareholder and former JV partner Gold Fields.

BHP owns the nearby Kambalda concentrator, most of which has been on care and maintenance since 2018 when IGO shut the Long Nickel Mine.

Mincor’s new Cassini mine will help restart operations next year, but for now its ore will only fill a minority of the concentrator’s 1.4Mtpa capacity.

“On the face of it you’d say there is a lot of leverage embedded in that concentrator in terms of being able to source what is renowned to be high quality nickel sulphides,” Ainscough said. “It is a part of their supply chain that does have some clear latent capacity.

“You’d think anyone who is within a reasonable ore haulage (distance) of that concentrator that would be something that if I was in the Nickel West development team I’d be looking at over the course of the next 1 or 2 years.”

Lunnon is still at an early stage, of course, with plenty of exploration to complete to confirm and increase its resources.

“Really for us the goal is to get drilling and grow the resources so we have a bit of work to do before we’re visiting those channels again,” Ainscough said.

Lunnon Metals share price today:

WA a battery supply chain hub

Tesla may also wind up as a customer of WA lithium through Wesfarmers’ (ASX: WES) Mt Holland Lithium Mine and Kwinana refinery.

Construction has begun on the JV with Chile’s SQM after State ministerial approval was granted.

The influential EV and battery storage manufacturer had signed an offtake deal with Kidman Resources before that company’s $776 million acquisition by Wesfarmers.

Tesla’s deal with BHP has the WA Government boastful about the State’s potential future as a battery industry hub.

“Today’s announcement not only highlights that Western Australia hosts the best quality raw materials integral to the world’s decarbonisation efforts, it also reinforces the level of comfort global brands have in investing in the State knowing that raw materials are responsibly sourced,” WA Mines Minister Bill Johnston said.

“As investors and the community are increasingly holding mining companies to the highest ESG standards and practices, the supply agreement between BHP and Tesla reflects the regulatory framework in place in Western Australia that ensures the sustainable production of battery materials.”

ESG premium a possibility for WA nickel

Mincor Resources managing director David Southam, who was a non-executive director at Kidman when it signed its offtake deal with Tesla, said deals between nickel producers and EV companies were destined to come eventually.

“For us that’s fantastic because ultimately we’re going to become the next nickel concentrate produced for BHP which will ultimately make its way into the Kwinana nickel refinery where nickel sulphate powder or crystals are made and sold to Tesla,” he said.

“I’ve been banging this drum for over two years – and unfortunately I don’t own a nickel refinery – about large vehicle companies going further upstream to secure supply and secure clean supply.

“I believe at one stage the head of strategic procurement for Tesla was an ex-nickel executive.

“That doesn’t happen by accident and obviously BHP are heading down that line, that very strong ESG line about low carbon footprint and all the studies show nickel produced from sulphides is the least energy intensive process to get nickel into a battery.”

One of the big questions now is whether, as analysts like BloombergNEF have suggested, high grade nickel sulphides destined for batteries will be subject to a price split from lower grade nickels supplied to steel makers.

“I think responsibly sourced, ESG-friendly nickel, iron ore, copper, those components that are going to go into the battery space will ultimately get a premium,” Southam said.

“At the moment there is already bifurcation in the nickel market.

“Nickel sulphate that at the moment comes from sulphide deposits already gets a premium to the LME price. Nickel pig iron, which is hugely carbon intensive and is largely powered by thermal coal, gets a discount to the LME price.

“There’s already that split in pricing. I have a view that ultimately there’s going to be an ESG split in products and especially in terms of going into EV supply or battery supply for storage.”

That is not just about emissions, Southam says, but also considerations like not having child labour in the supply chain.

“All of those things are now becoming so important, and I think ultimately there’ll be premium for that,” he said.