Elon Musk Statement Shakes Up Nickel Market – Time to pick some Winners

Canada Nickel Co Inc.
  • TSX-V: CNC
  • Shares Outstanding: 68M
  • Share price C$1.78 (17.08.2020)
  • Market Cap: C$121M

With nickel shooting up to US$6.50/lb, the nickel space is finally starting to deliver on its lionised potential. Most excitingly, things might just be getting started.

So, what are the main catalysts behind this nickel value bump? The Chinese reflation is ongoing, with infrastructure and industry experiencing heavy investment. Considering that the primary driver for nickel market growth right now is industrial demand for stainless-steel, it is no surprise that demand fundamentals suggest there is more to come.

Ore imports for June 2020 have dropped YoY, primarily because Philippines miners can’t make up for the shutdown of the key Indonesian nickel projects. Whilst ore stockpiles are growing, they are only increasing slowly. There will need to be a huge multi-million tonne build up during the Phillipian wet season and ore imports drop off.

Matthew Grdon talks to Mark Selby, July 2020

Another bullish stat is found in stainless steel imports, up substantially YoY. A leading, reputable nickel analyst has claimed there is enough NPI currently floating around to cover all nickel demand until 2025.

Then, came the real surge of momentum: a CEO of a major EV manufacturer talking up nickel demand. We’ve all heard Elon Musk’s comments in his most recent quarterly conference call. He stated that Tesla wants nickel producers to produce as much clean, green and sustainable nickel as possible, and it sent a wave of bullishness through the industry. If, as the aforementioned analyst claims, nickel is covered by Indonesia until 2025, why did Musk talk about nickel as a primary constraint for the growth of Tesla, and why did he ask for nickel producers to pull the trigger now rather than waiting for higher prices?

However, whilst nickel is up >5%, it doesn’t yet appear there has been any fundamental change to nickel market dynamics. This appears to be the first indication of what to expect in the near future. There is still no clear and definitive support for higher nickel prices right now, and nickel supply/demand fundamentals remain nebulous for the time being with no concrete numbers on the table. Moreover, there is yet to be an outright number communicated to the market regarding the quantity of nickel sitting in inventories. We all know what a lack of certainty equates to in the world of investment. In the meantime, let’s explore what we do know.

Some industrial metals with major EV battery applications have been performing exceptionally, even more so than the soaring gold market if you can believe it. If copper investors picked a copper winner like CS, TKO, or any other copper stock with liquid high torque at the right time, their investment would have outperformed the majority of gold companies. If that isn’t a reason to be bullish and believe in the macro story, I don’t know what is.

Nickel commentator Mark Selby, CEO of Canada Nickel (TSX-V: CNC), recently spoke to us about Musk’s demand for a new wave of nickel production. We covered some really eye-opening topics about nickel and arrived at some robust conclusions based on what we know rather than what we might know somewhere down the line.

A common misconception in the nickel space is that there is a premium for nickel sulphate. Around 40,000t of the highly soluble blue-green salt is produced each year, and it is predominantly used for electroplating for nickel. Selby was keen to dispel any misconceptions: the nickel sulphate premium is not sustainable. There will always be additional transformation costs, but by and large, the premium should be zero or close to zero.

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We then touched on a topic we’ve previously mentioned in an article: Class 1 (battery-grade) and Class 2 (NPI, etc.) nickel. It has been getting a huge amount of air time from many, with many commentators seeming to think it is an integral part of market dynamics. However, as we previously concluded, it is not really an issue of note. Nickel will flow through from ore source to end product regardless of its purity or status as an intermediate. This is because of simple supply-demand laws and the ability of the Chinese, the biggest consumers of nickel to quickly respond to any market arbitrage opportunities. China will always ensure it has sufficient processing capacity to produce enough nickel for its needs. This renders the intricate chemical differences almost irrelevant in an investment context. However, nickel sulphide vs nickel laterite vs nickel saprolite vs nickel limonite is an entirely different debate…

EV investors have seen the sky-high projections for nickel demand. It is the largest metal by mass in the cathodes of most EV batteries. Its main competitor is lithium iron phosphate streams. However, nickel will have a unique, symbiotic duo of growth drivers: industrial and EV. If we look at the nickel that is coming out of Indonesia, most analysts are expecting the country to be producing 900kt pa more nickel by 2025 when compared to 2018. While some may use this statistic as a means to fortify the argument that Indonesia has got nickel covered, where is the remaining 1.6Mt going to come from by 2030? It quite clearly doesn’t add up, and the supply deficiencies of nickel are now beginning to be exposed for all to see. New capital will need to start flowing into some of the better junior nickel projects, and Canada Nickel’s Crawford Nickel-VMS project will look to benefit.

Nickel is very high growth and very volatile. Some years it grows 8-10%, which exemplifies just how much value investors can squeeze out of nickel investments if they know how to play the market. However, there are also years when nickel dwindles and grows 0% to -2%, which we have been going through for the last year-or-so. Investors should note that when nickel rebounds, it has always rebounded with sizeable YoY growth. On a peak-to-peak basis, nickel ends up with a 4-5% trend for demand growth.

Realistically, with no definitive forecast from consumers on their electric vehicle consumption, analysts will really struggle to produce an aggressive forecast for nickel supply-demand. It is all up in the air at the moment, and investors should take all forecasts with a pinch of salt.

So, whose responsibility is it to provide the data that the nickel analysts need to gear up and produce it? The onus clearly lies with auto manufacturers; they are the ones asking for more nickel than ever before after all! It is obvious that every automaker’s projection will be idiosyncratic and proprietary, but they can at least provide a range to the market so there is some transparency. If the automakers don’t release such numbers, investors will not cotton on to the nickel value proposition, and the automakers will have to pay more to access the limited supply of nickel. It is in everybody’s best interests that we now mobilise the nickel industry and start edging towards the EV revolution with more unity and less uncertainty.

Selby had a final few areas of interest he discussed with us. First, the high-carbon, non-Chinese ferro-nickel producers will be squeeze by this new ESG/green wave of momentum, and he expects this to offset the rest of nickel supply growth from Indonesia. Western automakers will quite simply never use high carbon footprint nickel in the production of their vehicles. Does this mean they won’t be relying on Indonesia/China as a primary source? Will they instead be looking for greener, cleaner nickel sulphide projects? Canada Nickel’s Crawford Nickel-VMS Sulphide Project certainly has the scale to be relevant here because of its unique carbon credentials. Check out my next article to see exactly why…

Company Website: https://canadanickel.com/

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