Tesla, “Produce more Nickel. We will give you long-term contracts”

Canada Nickel Co Inc.
  • TSX-V: CNC
  • Shares Outstanding: 57M
  • Share price C$0.92 (02.07.2020)
  • Market Cap: C$52M

Our weekly Nickel Market Insights with Mark Selby, Nickel Market Commentator and CEO of Canada Nickel Company (TSX-V: CNC) will help you stay ahead. Stay up to date by listening to our weekly market roundup on Nickel.

So, what events have transpired in the exciting world of nickel this week? Price movements are at the top of the list: nickel has gone from a low of c. US$11,000/t up to US$13,430/t today. It did actually hit a peak of US$13,512/t last week, but Selby attributes this to nickel trading in synergy with some momentum drivers around the Shanghai Index.

Just as the nickel price was starting to recede, Elon Musk of Tesla, the figure of ultimate encouragement for nickel/battery metals investors, has told nickel miners to produce as more nickel in his quarterly call. He’s clearly gearing up to go big and kickstart the EV revolution in style. After launching the mid-tier Model 3, Musk needs this to be the cash cow for his company. Many have regarded Tesla stock as immensely overvalued given sales figures, but the c. $35,000 Model 3 could be a real gamechanger, building on the success of the Model S and Model X; I’ll hold off on the Cybertruck for now.

Major subsidisation packages in Europe alongside European vehicle manufacturers investing €250B in EV infrastructure, and the Chinese EV space needing to be rejuvenated are compelling reasons for nickel producers to be accelerating their production timeframes.

After touching on some of the macro thematics beneath the surface of the Nickel space, such as the immense difficulties surrounding the production of the huge amount of nickel that may be needed in the next decade, we touch on one of our favourite gold production stories, Karora Resources (TSX: KRR). Selby is already an expert on the Dumont Nickel-Cobalt Project, having developed and de-risked it substantially during his tenure as CEO of RNC Minerals. Karora Resources has sold its remaining interest in Dumont (28%) to Waterton for some cash up-front and a residual payout based on a future sale. The 3 low-grade, bulk-tonnage, advanced nickel projects have all been acquired in the last 6 weeks. BHP, OZ Minerals and Waterton have all moved to secure projects early. Is this a major sign of things to come? Time to invest into nickel?

We Discuss:

  1. 2:42 – Tesla’s Quarterly Call: “Nickel Miners – Don’t Wait!”
  2. 8:54 – Innovations in the Space: How Can it Get Better?
  3. 14:51 – Environmental and Efficient: Impact on Investment
  4. 20:17 – Ways of Validating Company Claims for Retail Investors
  5. 24:09 – Giga Factories and Nickel Uses
  6. 26:45 – Nickel Price Drop: What Happened?
  7. 27:49 – M&A News: Karora Resources Sell Dumont Stak

CLICK HERE to watch the full interview.

Matthew Gordon: Mark, how are you doing, sir?

Mark Selby: Excellent, sir. Good to see you once again.

Matthew Gordon: You are here for our weekly catch up on Nickel. And, we were both listening to the Tesla Quarterly call. I thought it was really interesting. I thought it was fascinating because it was quite insightful as to the way that Elon Musk and Tesla are thinking, and others will follow suit quite quickly.  the one big phrase that stood out for me was, ‘Please mine more Nickel. Don’t wait for the price to go up.’

Mark Selby: Yes.

Matthew Gordon: That’s more easily said than done. What was your take on the call?

Mark Selby: Oh no, it was fascinating. To me, firstly I would encourage people who are into Nickel to listen to those two minutes of it so that you can actually hear what the context was. For me, the fact that he was answering and came up to that response to the question of overall battery constraints; so, an investor was asking him, it sounds like you might be less concerned with battery constraints and he launched straight into: ‘Please mine more Nickel.’ And there were several dimensions to that. The key is A) don’t want for the price to move. B) if you can do it in an environmentally sensitive way. And C) if you can do it efficiently. So I thought those are the three key things that they are thinking about, and obviously they haven’t quite got there because he also talks on the call about how he doesn’t need any Cobalt but he has signed a couple of Cobalt deals but he hasn’t signed any Nickel deals at this point. That his comments really highlight some of the key constraints in this industry that we have started talking about on these calls. But he drove it home to what the exact theme is.

Matthew Gordon: Slightly conflicting messages about Cobalt. He is talking about Cobalt-free batteries, then he comes out and then he says, go and invest in some Cobalt. But let’s break it down on more of the stuff that we did understand, which was the phrase he says to Nickel miners, ‘Don’t wait.’ What did you read into that?

Mark Selby: Yes, what that fundamentally is reflecting is that at USDUSD$6/lbs today. There really is no project outside of Indonesia that could go ahead, assuming a long-term USD$6/lbs Nickel price, or at least for a period of time until the capital is paid back. For most projects, anywhere from USD$6.50 to USD$7.50/lbs is required. We are hoping that our project, given what we are seeing so far might be a little bit below that, but realistically, for the next set of projects to be developed, that is the price range that you need. , this is wishful thinking: the Nickel price isn’t quite there. The big miners before they are very confident or before the price is in that range before they are going to push a button on any expansions. So that is the issue there that he is really driving home.

Matthew Gordon: Someone like him who has got all the money in the world, they have no problem raising money. There nothing is impossible. But for miners, there are different constraints, price being one of them and the cost of money being the other.

Mark Selby: No, the key thing is it is always tough, even for someone who is a pretty bold innovator like Elon Musk, is you haven’t seen yet a car company invest directly into a mining company.  if you want Nickel at a price that is going to start at USD$6/lbs rather than higher, then he is going to have to think about that. It just takes corporations time to get around to think about what model might work for them. So, there have been models that have worked for Japanese trading companies in terms of how they invest in projects when other people are investing in joint venture in projects.  that the Tesla’s of this world need to think about how they do it.

To me, one model that makes a lot of sense is, Eric Sprott does a great job of advancing 50 different Gold projects simultaneously. He is not funding them 100% of the cost for each one of those, but he makes a 5% to 10% investment in a company which allows that company to probably raise double that. And once they have been Eric Sprott-endorsed, it makes it much easier for them to raise capital from the group of individuals and funds who follow along with Eric. He is able to put a little bit of his capital in, and all of the smart mining people are really good at using other people’s money to multiply the value on their money.

I’m pretty sure that Tesla is thinking about those types of models, and to me, that would be one way to do it. , you don’t need to pick a winner and you don’t have to bet USDUSD$100M, USDUSD$200M at this point. But even just endorsing two or three companies that could potentially get there. If you want that Nickel in 5 or 10-years, you are going to have to start doing something like that. And, a Tesla-endorsed company, whoever gets those first couple of investments will be well off to the races because all of a sudden there will be a slew of institutional and retail money come at that company to be able to advance that Nickel project.

Matthew Gordon: You are encouraging Elon Musk to be more like Eric Sprott. I am coming at from the point of view that shouldn’t we be encouraging people like Eric Sprott to be more like Elon Musk. How do you innovate in this space, not just Nickel. I have come from outside of the mining space originally and you see these innovators in different sectors solve problems which people who have been in there too long can’t. Do you think, is that coming through AI? How do we get better at doing what we are doing?

Mark Selby: AI on the exploration side is definitely going to open up a huge amount of doors, and you are already starting to see that.  we are just in the early stages. To my mind, we have gone through several exploration waves. If you look at, just as an example, the great VMS deposits that have been discovered globally, in the early 1900’s, you had the  walk-on ones, where a prospector was banging through the bush, saw some interesting-looking rock, banged it, caught an assay and was like, look; I found millions of tons of Copper and Zinc and Silver. And things like Sullivan, in Canada anyway, as examples there are the Sullivan Mine, the Hud Bay and so forth. And so, that was that generation. Then we had the second generation when geophysics started to be really well-used during the late 1950’s, early 1960’s, people stopped finding deposits at surface because they had walked everywhere where potentially you could find one, and then they found deposits like Kidd Creek, in Timmins New Brunswick, sitting not very deep below the surface, but below the surface so they had been missed at that time.

, we really haven’t had that next revolution of exploration discoveries, and I really do think that AI is going to be that, because  we have walked on pretty much everywhere we can go. We have seen the shallowest places where we most likely think about where things could be, and so now we need to use big data with some smart mines to understand where we could find deposits that we hadn’t found before. That’s on the exploration side. And Nickel, we don’t have a large project pipeline. That’s a critical issue in the Nickel space so there’s a significant amount of effort that’s needed on that point just to start of finding some new discoveries.

In terms of the rest of the sector, it really comes down to competition for capital. Mining has always done such a horrible job of destroying capital and not doing a very good job at actually returning much capital to shareholders. At some point, and what I’m excited about is having Tesla in that world to make that connection to the mining space is that if we are able to get some patient, private equity money into this space, then  that will allow more junior mining companies, more different stage mining companies make smarter decisions. Because, private equity; they invest in lots of high-risk businesses, , , things like pharma, high tech, it’s not like every investment you make is a home run, but once  that there is a funding pipeline behind you as opposed to, okay, the price popped today, investors are interested, I’m going to takes as much money as I can right now because I don’t know when the windows are going to open, it just creates a lot of really bad behaviour on both sides that  doesn’t help with the ultimate goal of creating value and returning capital to shareholders in the future. I hope that Elon’s discussions here will lead to more private equity start to look at mining because there is a massive amount of value to be unlocked here if it is done properly.

Matthew Gordon:  You said patient private equity. And coming from a private equity world, patient is definitely not a word I would put with private equity. And because of the impatient nature of private equity, it drives people to do better. And it might be beneficial. That’s why I am intrigued by curious minds like Elon Musk approaching the mining sector and putting a rocket under it, with the luxury of a lot of money behind him too.

Mark Selby: There is one venture: KoBold Metals, that has attracted a bunch of basic private equity money. And this is a venture that has basically said, we need more Nickel and Cobalt outside of high-risk areas and we are going to start to apply big data to solve that problem. That to me was quite encouraging. What was also encouraging was their first land-acquisition was next to a company that I am on the board of called Orford Mining,  the data has pointed to 6 or 7-years ago, but we need more of those types of ventures and we need more of those types of investors in this space if we are going to get all the Nickel that Elon says he needs in the next 5 to 10-years.

Matthew Gordon:  Elon Musk’s statement was, ‘Mine more Nickel’. It came with some conditions to it: it needs to be environmentally friendly and efficient, which I am reading as economic.

Mark Selby: Where that’s really coming from, and I hinted about this in the past and it is something I will be spending a lot more time talking about this, when you look at where most of the Nickel supply growth has come from in the last 5-years, it has been Nickel pig iron (NPI) from Indonesia. Before that it was Nickel pig iron in China and then looking forward over the next 5-years, literally, I don’t know the exact number but it will probably be more than 100% of the supply growth, because there are other supply operations that are still shrinking, it will come from Nickel pig iron and other projects in Indonesia.

The challenge with Nickel in a place like Indonesia is that processing laterite ore requires a huge amount of electricity, and in Indonesia, with the exception of PT and Inco who have built a series of hydro-electric dams in Sulawesi, it all comes from coal-fired power, and then you need to use some more coal to change the mineral into a metal. To make 1 ton of Nickel at one of these NPI projects, you are using 25t to 30t of coal, and when you multiply that by 2.8 it gives you 75t to 90t of CO2 per ton of Nickel. So even if you took 50kg of that and put it in a battery, I’m not sure Elon Musk would like 1t or 2t of CO2 strapped to his Tesla because he used some Nickel that came from that source.

The other projects that are being considered in Indonesia are looking at Hpal projects, and we have talked about Hpal from time to time. The problem with Hpal is you are taking about 1% of the material and you end up with about 99t of it, of tailings for every ton that you process. Piling up that type of waste in a highly seismic area, it is not necessarily, we have seen issues in certain areas when it is not done properly. A bunch of those operations are looking at deep-sea tailings. VW, BMW, Tesla, I don’t think are very happy knowing that the product that they might be purchasing is spewing 99t of tailings in an uncontained way into the sea to get the Nickel and Cobalt that they need. Tesla is stepping back and looking and saying, okay, in this industry, all of this growth is coming from these particular projects which have a pretty high environmental footprint attached them. So that’s where his environmentally sensitive parts are coming from. We have some nice inherited advantages in our project that we’ll be talking about a lot more in the coming weeks here.

Matthew Gordon: It’s not just Elon Musk that that is going to influence, but it’s the big funds. We have spoken to the Fidelity’s and the BlackRock’s of this world who are moving over to their ESG-led investing thesis. That’s going to influence their ability to get financed when they go to the investment committee and say, ‘well, should we be investing in this Hpal project or a Sulphide project?’ You’re going to get 2 very different answers.

Mark Selby: Yes, I know. That’s where mining companies really need to… what worked in the last century, in the last millennium, isn’t going to work in this next one. You really need to think about how are we going to design and construct and operate our project in a way that’s going to have the lowest environmental footprint possible. Because mining, a big part of it is a capital intensive industry, and it’s about competing for… if you’re able to compete for capital, if you are more competitive and you’re able to get it at a lower price, that is going to have, in terms of Elon Musk’s other goal of having the most efficient and lowest cost type of metal to market, if you can do the thing that gives yourself the broadest investor base possible, then you’re going to be a winner. We are going to be talking about that at Canada Nickel, because we realised that we have to start mining for the new millennium and get away from the way we’ve been doing it in the past.

Matthew Gordon: How can a retail investor best validate the claims of a company as it relates to their assets?

Mark Selby: Yes, that’s a challenge. A retail investor can’t go out and hire an engineering consulting firm to evaluate that an institution or a strategic investor could do. I would say there’s 2 things to do: 1) in Canada you get access to the full 43-101 report.  On the ASX, you get the press release that’s attached when they complete the report, but you can’t actually get the full report. But you do get a bunch of the information in the press release. Look at who did the work. We’ve talked about this on another call, but there’s basically, there’s 2 groups of engineers. There’s people who do studies that get hired by junior mining companies to come up with good numbers that someone can sign off on, but they’ve actually never built anything or haven’t built anything in 30-years. So put a big question mark around the quality of those estimates. And then there’s the engineering firms that, actually not just do studies, but actually build things and have built things within the past decade. So, in terms of the quality of the estimate, you’re going to get a much better estimate from those group of companies. If it’s a mining company that’s serious about actually advancing their project, they are not going to use, ‘Joe Engineering Co’ or ‘Jane Engineering Co’. They are going to go with the person who has the reputation that when they go to pitch the project to joint venture partners and other larger mining companies, those companies know they can rely on those numbers.

2) try and find projects that have been built within 5-years or 10-years. Try and find, if it is using Nickel for example, look at Ferro-Nickel projects that have been built in the last few years. Look at HPal projects that have been built in the first few years. And, it doesn’t take a lot of, and maybe this is something we can put together in the next few weeks; just some historical benchmarks that just, look at the capital cost; look at how many tons of ore are they going to process; how many tons of metal; where are they going to produce?; what’s the operating costs?; what’s the capital costs? You don’t need to go through 20 numbers, it’s just pulling those 7 or 8 numbers and looking at those 7 or 8 numbers for some historical projects and just to see, ‘okay, how in line are they?’ And if they’re significantly different and they haven’t explained why they are significantly better, then there is probably a good chance that they are actually not going to be significantly better. So, that’s what I do when I’m looking at other projects and I’ve done a corporate development role. That’s what I would encourage people to definitely go and do.

Matthew Gordon: If we could help maybe be put together the 7 or 8 numbers that people should be looking at.

Elon Musk talks about his Gigafactories. And we talked last week about the fact that currently Nickel is used mostly in stainless steel. But going forward, the Gigafactories are going to be built. Is there a number that people are attributing to them as a percentage of the Nickel market?

Mark Selby: Glencore has put out a few numbers and they’ve probably got as much market presence as anybody and their forecasting a few years ago that we would need 1.3Mt by 2030, and that’s equal to about 60% of what Nickel supply was in 2018. So, and that’s on top of the Nickel growth that’s still not a huge amount that’s basically getting to 25% to 30% of the market going towards electric vehicles being sold on that basis. There are forecasts now that once you get to a certain tipping point, you’re going to see things accelerate much more quickly than people think. I wasn’t surprised to hear Elon Musk talk about constraints around, when the question about constraints came up, he immediately leapt to Nickel, because to even to produce that much Nickel by 2030, in addition to all the growth Nickel is required for stainless steel and all the other applications, in my mind it is going to be extremely challenging.

The other part that he did talk about on the call is that is that they very much see 2 strata. They have lithium iron phosphate, which is for the low end lower-end part of the market. And they then talk about their Nickel-based batteries for the upper end of the market. And that’s the way they are thinking about a lithium ion phosphate supply chain and the Nickel supply chain. Their battery technology day is coming up so the fact that they haven’t stopped talking about Nickel says that Nickel is going to be playing a pretty essential and long-term role as part of their battery platform.

Matthew Gordon: They were talking about mega packs.  They’ve got big plans. The Nickel price has fallen back a bit this week. Why?

Mark Selby: I was surprised that it moved higher and it was trading alongside some momentum drivers around the Shanghai index and then the Copper prices had moved and so had moved along with it. Both of those have come off and it came off until Elon talked last night, and Nickel is now back up USD$0.20, up over USD$6.10/lbs. He is the guy that can move markets. My question is do I fully believe in medium and long-term fundamentals, but I’m not sure that the near-term fundamentals support pricing above that. So we’ll see whether that Nickel price erodes back to USD$6 here over the next month or in a year or so from now, 6-months, a year from now, if he opens his mouth and the market is a lot tighter, then those are the kinds of things that all of a sudden you wake up and the price is up USD$0.50 to USD$1 in over week.  Hopefully we’ll see that sooner rather than later, but it’s not going to happen in the next few weeks.

Matthew Gordon: A little bit more M&A in the market.

Mark Selby: Yes. A project I’m extremely familiar with. Karora Resources, which was RNC minerals, sold the remaining interest in Dumont to Waterton for some cash up front and then some residual pay out based on a future sale. A big plus, a big thing there is you now have all of the 3 large-scale, advanced low-grade Nickel sulphide projects have all been acquired in the past 6-weeks. This is far faster than I thought they would. You’ve got BHP acquiring Honeyman Well Minerals. Oz minerals acquiring the 30% of Nevo Babel that they didn’t own by taking over Cassini resources. And now Waterton consolidating their ownership in RNC minerals. So now you’ve got the 3 large-scale Nickel sulphide assets owned by 3 very tight-fisted owners who will not part with them, or either will never sell them or will only part with them at a pretty high valuation. It’s helpful for the Canada Nickel story and then the other earlier stage Nickel sulphide developments out there.

Matthew Gordon: Discretion may be the better part of valour here, but the market seems unsure. It was effectively USD$10.7M cash, and up to USD$46M, depending on where Nickel goes going forward. Do you feel that’s a good to deal?

Mark Selby: Yes, I know you had 2 specific groups with very specific different sets of interests at this point. Karora is now very focused on Gold. And knowing the gold assets they have, we acquired Beta Hunt and Higginsville while I was there, and they were both spectacular assets. So the opportunity to get some more cash now to unlock even more value at those assets made a lot of sense, and they still retain some upside if and when the project gets sold. But you could easily contemplate a scenario where a transaction for Dumont doesn’t happen for 4 or 5-years because Waterton is going to wait for the absolute peak and then a cold market before they exit that position. In every deal, you have to make a few trade-offs. And that given where Karora Resources is that deal definitely made sense for them.

Matthew Gordon: Another week in the world of Nickel. What’s interesting is the amount of M&A that’s happening in this space now. It helps with Elon Musk saying what he said.

Mark Selby: We said all along that there is only a handful of Nickel assets. It’s not like Gold where you’ve got literally hundreds of gold companies and new ones emerging at every stage. There’s a very short list of Nickel companies. Nickel hasn’t started to move yet, but you can that see one comment from Elon makes the Nickel price go up 3%. I would encourage investors to not wait too long, and then make sure you’re positioned because 3 assets have gone in the last 6 or 7-weeks here that I didn’t think we would see transacted on for at least another year or two.

You can watch, listen and read Mark Selby’s insightful weekly Nickel investing commentary at cruxinvestor.com/club

Company Website: https://canadanickel.com/

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