Nickel has been whacked, but is poised to bounce back faster than other battery metals

Nickel failed to dodge this week’s sector-wide mining sell-off, but with the battery metals and electric vehicle (EV) business model intact it could be the first commodity to recover.

Strong demand is one of the reasons to feel confident that nickel will bounce back with the new market of EV batteries adding to the existing major use of the metal in the production of stainless steel.

A second factor supporting most Australian nickel miners is that they’re producing top grade material, which is what EV battery makers want and which attracts a price premium over lower grade material produced in other countries, particularly Indonesia.

Driving the shift to electric

A third reason for confidence in the case for nickel became clear to me after arriving in London last Sunday for a round of business meetings and that is the remarkable number of EVs on the road but, more importantly, the number of charging points which will encourage more drivers to make the shift to electric.

As well as purpose built charging stations a large number of streetlights have had a plug-in battery charging facility installed about a metre off the ground making it easy for motorists to give the batteries in the cars a quick boost to relieve range anxiety – a major reason for some potential EV buyers holding back, especially in Australia.

Macquarie Bank touched on the bifurcated (split) nickel market in a research report earlier this month, a few days before rising interest rates and recession fears hit investor confidence.

China is where the differences in nickel grade is being most acutely felt with nickel pig iron (NPI) and nickel sulphate “trading at unprecedented discounts to (prices on) the London Metal Exchange”, the bank said.

Dislocation

Macquarie described the nickel market situation as a “dislocation” with much of the material being produced in Indonesia (the world’s biggest source of the metal) requiring additional processing before it can be used by battery makers

Australian nickel miners, including BHP (ASX: BHP), Mincor Resources (ASX: MCR), Panoramic Resources (ASX: PAN) and Western Areas (ASX: WSA), produce a premium, or class one nickel which meets LME requirements with big name car makers such as Tesla increasingly specifying nickel from class one miners with an environmental record cleaner than that of South American brine (salt lake) producers.

Macquarie analysts believe that a looming surplus of nickel later this year “is likely to be entirely class two material with the size of the deficit in class one reduced but not entirely eliminated”.

Decoded, the bank’s view is that there will be too much class two (second grade) nickel in the market and not enough class one material.

The difference between nickel grades is not yet reflected in share prices with most nickel-exposed stocks knocked by the sell-off with one significant exception, Western Areas, which last month agreed to merge with IGO (ASX: IGO) after negotiating a price of $3.87 a share – up 15% on IGO’s original offer.

The result of that deal is that Western Areas has traded this week at around $3.84, which is a few cents below the merger price, but comfortably ahead of the $3.33 low in February.

This compares to rival nickel stocks, which are down between 10% and 25% this week.

IGO, which appears to have paid top dollar for Western Areas, has been punished with a share price fall of $3.66 (20%) since early last month to latest sales at $11.18 – a drop which also reflects slow progress in IGO’s drive to make battery grade lithium.

Both metals, nickel and lithium, are essential in the preferred chemical mix of big battery makers but there is a significant difference in the future supplies of the metals.

Lithium, despite its red-hot market of the past 12 months is edging towards a period of over-supply because it is abundantly available in deposits waiting to be developed and when new mines and processing facilities are started lithium could enter a period of significant surplus.

Nickel is different

Nickel is different. It is not an easy metal to find or produce, which is why it has enjoyed spectacular price spikes in the past, including the mad dash to US$22 a pound in early March, double the price of mid-February.

The most widely reported cause of the price surge was a Chinese metal processing company, Tsingshan, being caught in a short trap, selling metal it didn’t own in the belief the price would fall and it could buy back cheaper.

Tsingshan’s plan didn’t work, and it was forced to negotiate an exit which reportedly included swapping some of its second-grade metal for LME grade material.

But behind the botched short trade and forced buy-back can be found the underlying view of battery makers that there is a deficit developing in class one metal as the EV revolution accelerates.

Entry points into class one nickel market

For Australian investors there are a number of entry points into the class one nickel market with the majors and IGO an obvious starting point once it digests Western Areas and incorporates that acquisition with its existing nickel assets.

Mincor and Panoramic are two other stocks already producing class one nickel, while explorers targeting future production include Blackstone Minerals (ASX: BSX), Centaurus Metals (ASX: CTM), Lunnon Metals (ASX: LM8), Nimy Resources (ASX: NIM), Poseidon Nickel (ASX: POS), Widgie Nickel (ASX: WIN), Western Mines (ASX: WMG),  NickelX (ASX: NKL), St George Mining (ASX: SGQ), and Chalice Mining (ASX: CHN) with its world-class Julimar nickel and palladium discovery near Perth.

Nickel Mines (ASX: NIC) is another nickel sector entry point popular with some investors, but it has been heavily sold (down 30% since early March) because of its close business links to Tsingshan in Indonesia’s class two nickel sector.

Stocks to watch

Of the many players in the nickel sector the two which could be the most interesting in terms of news flow in the next few weeks are:

• Kuniko (ASX: KNI), a spin-off from the runaway German lithium project developer Vulcan Energy Resources (ASX: VUL), which is exploring a series of nickel, copper and cobalt prospects in Norway, and
• Mincor, which is close to generating first cash flow from the redevelopment of historic nickel mines close to Kambalda in WA – home of the Australian nickel industry.

In Kuniko’s case the stock could benefit from drilling results at the Skuterud cobalt project and a re-assessment of drill core from the Ringerike copper, nickel and cobalt project.

Mincor’s potential price moving event will be first cash flow from nickel ore processed at BHP’s Nickel West Kambalda concentrator, starting towards mid-year.

BHP started processing Mincor material on 6 May with RBC Capital Markets describing the event as a “positive and key de-risking milestone” for Mincor.