The big money chasing nickel small caps

Follow the money is always sound investment advice and that’s certainly the case at the small end of the nickel sector where some of Australia’s richest people are building positions ahead of what’s expected to be another upward surge in the metal’s price.

Andrew Forrest, best known for his iron ore and green energy pursuits, is rebuilding his nickel exposure in Australia and Canada where he is locked in a takeover battle for the small Noront Resources (TSX-V: NOT) with BHP (ASX: BHP).

Meanwhile, Kerry Harmanis is a less well-known WA-based investor who made a fortune in the last nickel boom and is also back in the new game by building an interest in the low-profile but promising Duketon Mining (ASX: DKM).

Back in 2007, Harmanis walked away with a reported $500 million from the sale of his stake in nickel miner Jubilee Mines to Xstrata (now Glencore).

The nickel price at the time was close to US$30,000 a tonne, having peaked a few months earlier at a record US$50,000/t.

Driving new nickel boom

Nickel was last trading at US$20,485/t, close to double the price of early last year and potentially heading for US$27,000/t, according to a report earlier this week by Morgan Stanley, a leading investment bank, if the Indonesian Government goes through with a proposal to increase export taxes.

What’s driving nickel is traditional demand in stainless steel and a fast-growing market in the batteries of electric vehicles (EV) with car makers such as Tesla scouring the world for reliable and “clean” supplies of the metal.

It is EV demand which is behind an increase in nickel sector corporate deals, including a plan by IGO Ltd (ASX: IGO) to acquire Western Areas (ASX: WSA) and BHP’s attempt to buy Noront, which Forrest seems determined to thwart.

Flying under the radar

Duketon has been flying below most investor radar screens, despite having its foot on some of the most prospective tenements in the northeast goldfields region of WA.

The region is home to a number of big nickel projects, including Glencore’s Murrin Murrin mine and BHP’s Leinster operations.

But that could change as Duketon moves closer to making a fast start on mining the relatively small Rosie nickel, copper, and platinum discovery.

Rosie could be a profitable starter project leading to something bigger as exploration continues over Duketon’s large land package.

The basic parameters of Rosie are of a steeply dipping structure (a komatiite on its side) containing an estimated 87,100t of nickel, 12,900t of copper and 230,000 ounces of platinum group metals.

A scoping study has shown that the resource is good enough to sustain a mine with an eight-year life producing ore grading 2.1% nickel equivalent (nickel plus other metals). Net present value of the project was estimated in the study at $161 million, assuming a nickel price of US$8 a pound (US$17,600/t).

Marginal to most investors Harmanis saw value in Rosie and Duketon, doubling his stake in the stock from 9.4% to 18.5% in a mid-year deal where which he bought most of the shares held by St Barbara Mines.

Rosie will probably never be a big project. The orebody is too narrow, and the steep plunge means it will only be developed as a narrow underground mine.

Key to unlocking Rosie

But there is a key to unlocking value in Rosie and that’s the super-low pre-production capital cost estimate of just $18 million, a number which underlines the simplicity of the mine and the plan to truck ore to a nearby concentrator (probably at BHP’s Leinster nickel project) where Duketon’s ore would be toll treated.

Ongoing exploration is adding confidence to Rosie being bigger than shown in the scoping study, especially when it comes to platinum and copper, with the latest drill results topped by 6.48m at 3.92% nickel equivalent.

Nickel small cap prices on the rise

With a handy $30 million in cash, Duketon shares, which last traded at $0.41, have a backing of $0.25.

Euroz Hartleys, a Perth stockbroking firm, rates the stock a speculative buy with a price target of $0.70.

Duketon is not alone at the small end of the nickel sector where a large number of explorers are following in the footsteps of established miners such as Western Areas which has seen its share price rise by $0.33 (11%) over the past month to $3.35, while Mincor (ASX: MCR) is up $0.10 to $1.38 and Poseidon (ASX: POS), up $0.022 to $0.24.

Further down the nickel pecking order are explorers with potential, including: Azure Minerals (ASX: AZS), Impact Minerals (ASX: IPT), Western Mines (ASX: WMG), Tambourah Metals (ASX: TMB), Nickel X (ASX: NKL), OZZ Resources (ASX: OZZ) and Dundas Minerals (a new float).

North Vietnam focused Blackstone Minerals (ASX: BSX) has seen its shares rocket up by $0.23 (48%) to $0.70 over the past month as interest grows in its proposed Ban Phuc nickel-copper-PGE project and downstream refinery in Vietnam.

Where’s nickel heading?

Nickel’s reputation for mercurial price moves has generally been associated with squeezes on supply caused by workplace industrial action.

The US$27,000/t price seen by Morgan Stanley in its bull case for nickel is a repeat of the supply factor, this time with Indonesia’s plans for tax hikes potentially causing a decline in production in the world’s biggest producer of the metal.

But the long-term outlook for nickel, and the reason big miners such as BHP and entrepreneurial investors such as Forrest and Harmanis are back in the game is all about the combination of supply tightness and rising demand, especially from battery makers.

Nickel stocks in the warehouses of the London Metal Exchange have been eroding for the past four years, down 64.5% from close to 400,000t of 142,000t.

A slowdown in Chinese stainless-steel production could see the nickel price ease over the next few months, but strong EV demand and limited supplies is likely to support the price well into the future.