Nickel Investors Excited as M&A Hots Up – #4 Mark Selby (Transcript)

Interview with Mark Selby, Nickel Market Commentator and CEO of Canada Nickel Company (TSX-V: CNC).

Stay up to date by listening to our weekly market round up on nickel!

1. Market Update – INSG data is out – Chinese demand almost fully recovered, nickel supported by COVID-19 mine closures, earthquake near Sulawesi helping support ore prices.

2. Market info – Tesla using an LFP battery in one of their Chinese models – is this sign nickel going to be substituted out like cobalt?

3. Industry news – don’t look now – 2 best low-grade nickel deposits quietly acquired in Australia during past month – BHP bought Honeymoon Well project from Norilsk – no price published – Rumour has it they were looking for $100M previously – OZ Minerals paying $76M million for Cassini Resources for remaining 30% of Nebo-Babel project

We Discuss:

  1. The Macro Picture of Nickel: COVID-19’s Impact on Supply & Demand
  2. Solutions for Market Recovery
  3. Erratic Times Call for Erratic Prices: When Will it Normalise?
  4. Clues for the Future from The Largest Markets and The Automatic Sector
  5. Tesla’s LFP Batteries vs Nickel Batteries: Complete Obliteration or Worthy Competition
  6. Battery Standardisation Processes: Who and What Will Decide the Future?
  7. Large Companies Acquiring Minuscule Projects: Implications of M&A In The Sector
  8. Funding Nickel Projects and Getting Exposure to the Market

CLICK HERE to watch the full interview.

Matthew Gordon: Hey, Mark. How are you doing?

Mark Selby: Good, Matthew. Good to see you again.

Matthew Gordon: Well, thanks for joining us. In fact, you are going to be joining us a far more regularly. We have agreed to do a weekly catch up in the world of Nickel now that people seem to be turning their heads towards it.

Mark Selby: After a decade in the woods where people weren’t particularly interested in the metal, I think the EV overlay and I think a lot of people are realising that Nickel is going to be the most important metal and the cathode in the battery,  seeing much more interest. I’m glad people actually want to hear about it.

Matthew Gordon: Oh, they do. They do. And we have had a lot of inbound questions. We’re going to talk about some of those today. And if they want to continue sending those questions in, you will be here to answer them each week. I think that will be pretty exciting stuff.

Mark Selby: Yes, looking forward to it.

Matthew Gordon: Well, let’s start with the macro thing because people need to believe the Nickel macro thesis. There’s been a lot happening.  when we first started talking about this before Christmas, I think you were the first one to call the fact that there would be a dip, and we were  riding on a bit of a high at the back of August, September. And you called that right?

Mark Selby: Now hopefully, you get lucky every once in a while, but hopefully I’ll be a little more right than wrong as we go through. You guys can keep track. I always like to keep track of my predictions. You have got a little scorecard.

Matthew Gordon: We will, for sure. Back to today, obviously COVID has had a massive impact on supply chains all around the world, on all commodities, on all sectors, quite frankly. And I think there’s been a lot of guessing, second guessing as to what the brave new world will look like and, how companies and commodities will fit into that. So, there’s some news out from China, and we did talk about it a couple of weeks ago. You said that they are recovering?

Mark Selby: We talked about a month ago, and I think a month before that, I said, when you get to a bottom, these are the kinds of indicators that give you a good sense that things are moving higher. So, I’m pretty happy that since we talked, we have seen Copper prices move up more than 10%. Some of the other commodities have also moved up in that timeframe. I think you’re continuing to see those macro set of indicators to show that China is giving things a big infrastructure push, and that is translating into demand across the entire metal spectrum, bulk space and so forth. And that’s not going to slow down. I think as the other countries come out of their COVID crunches, you’re going to see similar programs come to the fore.

Matthew Gordon: But if we think about that, obviously COVID has not only affected supply chains across the world but mining specifically; we have produced less of a lot of commodities during this time. Even people who managed to keep the mines open are struggling to some degree or other, and they had some impact on the bottom line. What are these supply deficits going to do specifically in Nickel?

Mark Selby: So that’s a great point. COVID has had as much of an impact on different metal supply situations. And that’s, I think, critical to understand which metals are going to come out of this better, better than others.  Where Nickel was really impacted was, Indonesia not so much, but the Philippines, which supplies the bulk of the ore that is needed to make Chinese Nickel pig iron. Large portions of those mines had to shut down. So, you had literally, INSG put out their April numbers a little bit ago, and you had global supply strength by about 12% year over year. And a big chunk of that was in the Philippines. You had a few other remote mines shut down during that timeframe, but that huge chunk of ore not being there caused ore stockpiles in China to drop down to multi-year lows. That is what helped push Nickel up. Nickel went first versus some of the other metals back in March, April, because it was clear to the producers there; it was like, ‘Oh geez.’ The Indonesian ore ban came into place in January. Our really only source of Nickel ore is going to be the Philippines and COVID just shut that off as well. So that caused a little bit of not panic, but concern which led to people really restocking material to make sure they had it just in case the Philippines ore ban shut down for longer.

Matthew Gordon: What is the impact of something like that? Because if I look in the Uranium space, you’ve had two very big producers shut down because of COVID. They are still not back up and running. They’ve got a whole different bunch of issues around pricing, et cetera, price discovery. But in this instance, do people like the Philippines say, I tell you what, we have been shut down, but we’re going to play catch up here. Or do they say, well, actually it suits us well because it could be the beginning of driving the Nickel price back up. How do they react?

Mark Selby: Typically, the mines have some ability to crank it up a little bit, but in this case, a lot of those mines are able to  push out capacity as much as, they’re literally just digging up dirt. That’s what that laterite ore exports look like. They have pushed to capacity already. And where they sometimes are able to provide more supply is where they may have lower grade stockpiles that they don’t ship because it doesn’t meet a minimum cost. But because the Indonesian ore ban was pulled forward to January of this year, those Philippine ore stockpiles basically any Philippine ore that people could get their hands on went into China already in the second half of last year.

It where really has an impact is, there’s an X amount of production that’s not there. That’s going to reduce X amount of stockpiles, which is just going to tighten up the supply-demand balance in the material available for that particular metal. So, no, coming back out of it, the Philippines won’t be able to  turn it up another 25% or 30%. They were planning to do that already because of the Indonesian ore ban. So yes, they are not going to be able to fill it up too much.

And the big issue for this fall, so I think we’re going to trade sideways with Nickel through till September, October as here it is rain season – you can’t dig up dirt when your trucks just sink into the mud. There’s a 4-month period where Philippine ore exports drop off. And the same thing used to happen in Indonesia. And when both of them were there they were a little bit off sync. So, in terms of supply to China, across the entire year it was relatively smooth. But now that Indonesia is out of the picture, the Philippines now needs to produce everything, not just for a 12-month period, but basically to produce everything for a 12-month period and get it shipped out in 8-months. The Chinese market is going to have 4-months where there is not going to be a lot of ships coming in from anywhere with ore supply. So that’s going to create an interesting dynamic in October, November, December, January, later in the year.

Matthew Gordon: It started to get really interesting because you’ve got Indonesia out of picture. I get it. We have talked about that previously and we’ll put a link to that video in here. Philippines, struggling. Rainy season is a big impact. I hadn’t appreciated that. We have had a big supply disruption for the last 3-months or so. I’m trying to understand pricing. It has been a fairly erratic pricing. We talked about super cycles and we have talked about scrap impacting pricing, and now you’ve got all of these issues that we have just discussed. When is Nickel going to find its feet? When are things going to settle down in terms of the supply in the market? The demand is there, but when are they going to be able to get control again?

Mark Selby: Nickel has always been volatile, and I think it’s going to continue to be volatile. So, if you look back over the last 12-months, so we first talked in September last year, it was $18,000/t, they said, hey, that’s not sustainable. Scrap and Nickel pig iron production is going to take it down to $12,000/t to $13,000/t. COVID took it down to $11,000/t in February. We saw the market, because that supply from the Philippines came out, that really tightened up the market in China, so we started moving back up to say, $12,000/t relatively quickly. And we have flirted with getting up to $13,000/t in the last few weeks. But with the macro indicators in the March, April timeframe, that sucked a bunch of material into China. You had people export to finish Nickel to China. In China right now, everything is, stockpiles are starting to creep up again. Pricing has come off a little bit. And so, yes, that’s why I think from now until October the gap that opened up in March, April has now been filled up. And I think we are going to trade sideways here for 3 or 4-months. And the big question for next fall is going to be okay. Yes, Chinese NPI is reliant on this material coming from the Philippines. Indonesian NPI is ramping up. You’ve got a bunch of plants ramping up as expected, and you’ve got large amounts of Nickel pig iron coming from Indonesia to China. The key question in that October, November, December, January period is: okay, how much stronger is Chinese Nickel and stainless-steel demand growth going to be? I think it’s going to continue to be strong as China and the world tries to reflate its economy. Indonesian Nickel pig iron will be strong. They are going to continue to push out as much as they can out of Indonesia as these plants ramp up. And then it’s going to be, how much ore is the Philippines actually going to be able to deliver in time and build up stockpile. You need to build up stockpile for that 4-month period. And what’s that going to look like? It’s going to be an interesting 4-month period. It’s going to depend on the rains in the Philippines. The ramp up in Indonesia. And then where global stainless demand is going to come out. I think we’re going to be at a net positive by January, February, we’re going to be up 5% or 10% from here. But it’s going to be that dynamic between those three key variables.

Matthew Gordon: Okay. And there’s also been an earthquake.

Mark Selby: Yes, things popped up a little bit last week or two, because there was a, I think, a magnitude five, literally just off the coast of Sulawesi where there’s a bunch of plants. I don’t think there was any significant damage, but it allowed the traders to squeeze out a few more dollars per ton than they otherwise would

Matthew Gordon: China. Okay. China. It is always China. They are going to spend a lot of money trying to get the economy going. Big infrastructure projects. I haven’t seen the same moves from anywhere else in the world at the moment. You must look at the macro story in it because you’ve got all of this quantitative easing going on. There is lots of money being pumped into the economy and different countries are approaching it in different ways, but are there any clues there on the macro side that suggests the US is going to do infrastructure projects which they’re going to need Nickel for? Or across Europe, or any other big centres? Because I’m not seeing it yet. But if it does come, it would be quite an interesting spot for Nickel. And I guess the other question is, what’s your view on the automotive sector as well? During the crisis people were a bit nervous about, consumers wanting to spend a lot of money on a big unit cost like a car, having just experienced one of the worst periods of their lives, probably.

Mark Selby: No, I think where it’s going to be more manifest, globally, there will be some infrastructure spend, in the West it’s consumer spending, that’s the big driver and then consumer goods that consume a lot of metals. And, I saw your interview with Andy Home, I always enjoy his commentary, and I would really want to echo his comments there; I think that the theme that you’ve heard from politicians in the West is that we need to reshape our economies, because let’s take advantage of this catastrophe, in terms of the COVID crisis, as an opportunity to reshape our economies in the way that we want to. Politicians have realised, okay, we now have license to spend a lot of money.

I think you’ve already seen it in Germany and France. You’ve seen, I think Australia, New Zealand are looking at incentives. I think, one of the big winners of this is going to be electric vehicles. Let’s take this opportunity to get people, to spend money by buying cars, because they are big ticket items. And the incentive is going to be to buy electric vehicles. China has made steps down this path. France and Germany have as well. And I think you’re going to see programs all around the world that will incentivise people to go more towards electric vehicles, which is just going to pull that curve forward than it otherwise would have been. Nickel, Cobalt, Lithium: all the battery materials are going to be the big winners in that environment.

Matthew Gordon: Well I hope so. I hope we do take the opportunity to reshape our future and redesign it. And, obviously, I think batteries; people were unsure for a period there, but I think you’re right. That’s the feedback we are hearing. And Andy Home was a great proponent of that. He is the Reuters Senior Metals Correspondent. We spoke to him last week, but others too. I’m trying to find unbiased voices saying the same thing, it is important, but then there’s some clues in the marketplace.

Mark Selby: I think, just watch the programs as they are, we are going to be tracking that, encourage investors to see, if, heaven forbid that the United States actually does something like that in more states, either at the federal level, it won’t be the federal level under Trump, but maybe the next government, or at a state level. Because the key thing here is one of the challenges about selling the electric vehicles future is that it’s going to be cleaner, and people go, okay, well, how clean can the air be? But because of COVID and traffic disappearing in so many places all around the world, people are like, ‘Oh my God, that’s what blue sky actually really looks like. It’s like this is how clean the air could be.’ I think there’s a real generation of people who are very focused on it. And I think they have actually seen this very credible, a real sign of this is what it could look like every day. I think that is going to help drive the politicians to do something to get there.

Matthew Gordon: That’s assuming there is Nickel in batteries. Because if I listen to Tesla, LFP batteries are the future.

Mark Selby: Yes. Oh no, that was… it’s all over. Nickel is done before it even got started. No, I think the key piece here is, the battery component of an electric vehicle and that whole delivery of electricity into the motors, that’s going to be the key differentiator for electric vehicles. Like the engine is for a car. We don’t have one engine for every single car globally. And it’s going to be the same thing for electric vehicles. You’re going to have a small, low-end option, the 1.2 litre or the 1.6 litre, and then there’s going to be the 2-litre turbo equivalent. And in this case, it’s going to be around range and energy density.

So, you’ll have a low-end, a medium, and a high-end. Nickel is what gives the batteries the range. In China it was a specific situation. They needed to hit a specific price point. In a low end, if you need something that’s going to go a few hundred kilometres, if you have 2 cars or if you live in a very dense city, that’s all you need. My view was always, and I think I’ve said it in one of my videos earlier, that I’ve always seen that this is the way the market is going. To have a very cheap battery chemistry that will be short range, but it is perfect in North America for a second car and perfect in Asia and highly dense cities for that scale. You are going to have your mid-range ‘Camry’, Honda Accord, Civic, whatever the equivalents are in Europe of your average car. And that’ll be a good Nickel chemistry battery. And then there will be the high end that gets you 200 extra kilometres and gives you this much faster discharge so your car can go even go 300km kilometres, zero to 300km in 4 seconds, as opposed to 5 seconds,  and that’ll come at a premium.  But Nickel is going to be a big part of that battery.

So what I was surprised at is just before COVID got going and  got lost in the COVID noise, was that GM, who is very middle of the road, I was shocked that they basically said, look, we have got one major battery technology and we’re going to use that as the base battery for our platform. And it’s 90% Nickel. The same amount of Nickel that Tesla is using in the rest of its batteries, GM is planning to use that as their base battery across the bulk of their fleet. I think it underscores, A – the damage that the massive price spike in Cobalt did to its market. People accelerated that switch to 80% or 90% Nickel batteries. I think that the fact that they know that that’s the key to customer acceptance is you don’t have to worry about running out of the battery at some point during your day, you’re going to have more than enough range to get wherever you need to get to go.

Matthew Gordon: It is fascinating times. Obviously, it is very early days. That said, it is a nascent industry in that sense, where we’re going to have to work out are there going to be some standardisations of batteries, not just in one auto manufacturer, but across several? Will there be specialist battery manufacturers, or will the automotive companies want to retain that control in-house? Because it will become very, well, critically important to their brand.

Mark Selby: I think if you look at  what Tesla has done, over the last 10-years the battery has been a key focus for them because they realise, okay, they have grand plans and they’re going to get very big, but they’re competing against Toyota, GM, Volkswagen, who have tens of millions of car units. The scale of those businesses is always going to give them some advantage. They realise the one component in the electric vehicle, which is unique to the electric vehicle is that battery component. They need to get as far ahead of everyone else on the scale curve and on the product development curve to try and keep two steps ahead of the giant elephant that could come in and squash them.

So that’s why they are getting right out of the gate. He was talking about a Gigafactory and you think, oh, they sell a thousand cars. Why is he building a plant to supply batteries for 50,000 cars? It is because he realises that he needs to always stay ahead of everyone else on the scale curve. Like everything else, if you look at all the key components of the automotive, you will end up with a handful of winners who will become the main battery component suppliers. And for the big, big companies, they don’t make much of their cars anyway, they just assemble them, right? And they rely on their partners to build the various components. I think you’ll have a few electric vehicles specialists who will maintain control over as much of the supply chain as possible. And then for all the other car companies, it’s yes, there will be 4 or 5 key battery supplier winners who will provide most of the batteries for all of the cars sold.

Matthew Gordon: I want to know more about this because there are so many derivatives and spinoffs and there’s going to be end of life battery recycling requirements, all the people who maintain your cars and your fleets, if you’ve got a corporate fleet. You’re going to have battery experts rather than engineers. For us, it’s a really big change to society in the way we behave, because it’s hopefully cleaner, cleaner fuel, but there’s also going to be a lot of new industries spinning up as a result. It is absolutely fascinating.

We should talk about what’s happening out there in the world of mining because this is all very interesting to have batteries in the future and so forth, but us investors want to make some money and we want to see what is happening. We have talked about your projects, your business model about getting to market quickly. You have got a very accelerated timeframe, and we’ll talk about that another time as well, but you have identified a model that is going to work for you during the cycle. But I want to talk about some of the M&A activity that is happening in the market. I think BHP and Oz Minerals have been busy, but it seemingly doesn’t look that exciting, but it probably is. This low-grade Nickel – is that interesting?

Mark Selby: It’s fascinating. So for context; BHP spent most of the 2010s trying to sell their Nickel business. In fact, in the early 2010s, the rumour on the street was that they were negotiating with the buyer for the payment that BHP would have to pay them to take the asset and assume the large environmental liability that was in place. That was how much BHP didn’t like Nickel back a decade ago. Fast forward and you now have the CEO talking about it, and to their credit, they are putting their money where their mouth is. Three years ago, their Mount Keith was the template for the large, low-grade mining operation. It opened in 1995 and has been running during that time period, but it’s coming to the end of its life. And they spent money about three years ago to open up a second deposit nearby. And they’re going to maintain production out of that operation. And it’s a fraction of the sexy, high-grade core that you see in a lot of places. And what was fascinating in the past two weeks, I did not expect it this quickly in the cycle, but BHP Billiton bought another large, there are two good large, two of the better low-grade Nickel sulphide assets in Australia. And both of them are now gone. BHP just bought a project called Honeymoon Wells from Norilsk. They didn’t disclose the price tag. I know, 10-years ago, a rumour on the street was they were looking for around $100M, in that dollar range. I don’t know if we’ll be able to see from anybody’s financial statements, whether it shows up in a note somewhere. But the second one, which was a clear market, one was Oz Minerals has a joint venture with a company called Cassini Resources for the Nebo-Babel deposit. This was discovered in 2000 by WMC and has been advanced. And it’s in a more remote location, which if you’re going to build a low-grade operation it is tough because you need a lot of infrastructure and capacity to process that material. But yes, they paid AUD$75M roughly for 30% of the project that Cassini own. So that put a $250M price tag on that asset. And I valued it at 0.3x, 0.4x NAV of the Pre-Feasibility Study (PFS) that they had done on the project. We’re just getting started in the Nickel space, and Oz Minerals has made several smart deals over that time period. It is nice to see smart money starting to pick up Nickel assets this early in in the story. I think it bodes well in terms of what might be coming down the pipe.

Matthew Gordon: It does. It does bode well. But I’m interested in the types of deals that the big companies are looking at what are these big companies looking for?  BHP – they need scale, right? That’s fine. But there is going to be more and more M&A activity. Because there are companies out there with Nickel projects that haven’t got the funding, are incapable of getting the funding because they don’t have the management team to give confidence to institutions or family officers to get them over the line. There are stranded assets out there. Do you see more M&A coming up from Nickel, if not this year, next?

Mark Selby: For sure. I guess a couple of things: one is in terms of large, low, lower-grade deposits. Looking at the Copper space, BHP and Rio Tinto, I’m sure would love to buy a 2% or 3% Copper project that can produce hundreds of thousands of tons of copper a year for 30-years. But I think we found the last one of those deposits in 1910. So, where they are now is that their portfolio, the majors, the mid tiers, their portfolio of Copper is 0.4% to 0.5% Copper. Some new discoveries are a little bit higher than that. But that’s what they buy because they need something that’s going to generate multi-hundreds of millions, or billions of dollars in revenue for 20 or 30-years.

The best Nickel discoveries of the last decade, the high-grade Nova Bollinger was the one that got acquired in the mid-2010s. And that was the best discovery of that decade. But that started with a 300,000t Nickel resource that produces about 25,000 tons of Nickel per year. That was a perfect deal for Independence Group, given the size they were, that materially moves the needle for them, but that barely scratches the needle for a Rio Tinto or BHP. I think they want assets that are of a scale and have a life span that do it. And in the Nickel space, it’s either large Nickel laterite deposits, which have their own challenges, or are typically found in some higher-risk jurisdictions. But in the low-risk jurisdictions, it’s basically the only deposit that fit that bill are these larger scale, low-grade deposits.

I’m not surprised to see these start to go already. But I think that’s the thing investors need to get their head around is that, oh, okay, why didn’t BHP go buy some of these new high-grade discoveries that look, from an investor perspective? Oh, that core is very shiny. That’s exciting.  Why didn’t Oz Minerals buy one of those projects?  It’s like, no, they need something that moves the needle, and you need to find a large enough resource to be able to move the needle for these companies.

Matthew Gordon: But there is going to be, I don’t know if there’s going to be, but do you think there’s room for consolidation in this space? If people can get the money. Because once the price gets back up, the bankers start listening and they start sniffing around and they are asking how they, they’re trying to work out how they deploy capital. We used to do it. We used to chase deals. Okay. And when we were chasing these deals, the most fun we had was consolidation, because you could put something together, sum of the parts, et cetera, and you could walk away and everyone has made a lot of money, so it’s great. But then you have got to make those things work, which is the operation team’s problem, not the bankers. So, are you seeing talk like that in the market or has everyone just got their head down at the moment, focused on their own projects?

Mark Selby: No, the tough part for Nickel is relatively consolidated already. Most of the supply growth has happened in Indonesia, which is a no-go place for most Western mining companies. The issue that they’re more struggling with is, okay, how do I get a toehold? How do I get a foothold in this business? From a portfolio perspective, the majors for the last 10-years have really been about the bulks, right? Thermal coal, iron ore, thermal coal, well, thermal coal for the majors is now on its way out. And the challenge in China going forward is, you’re going to have the new course of the scraps steel are now ramping up in China in a big way, as scrap becomes a bigger part of that market.

Iron ore and met coal is going to be a little more of a challenging market going forward. They need to find some more ways to keep moving the needle for their hundred billion-dollar businesses. And battery metals is attractive because it’s going to be a very high growth metal for a period of time. But the challenge is that Nickel and Lithium are the only 2 that are big enough as a space that matters. And there’s just not that many big assets outside of Indonesia for companies to get to.

I know a number of corporate development people at some of the larger mid-tiers, and they started looking at Nickel a year and a half ago, and they’re trying to think through, okay, we want exposure to this and how do we do it? Do we buy, let’s say, Vale has been focused on iron or do they still want their Nickel business? Are they going to sell pieces of that Nickel business off? The mid-tiers are thinking, do I, should I buy parts of an existing producer who might be a seller at this point in time? And there’s just not, unlike in Copper where you’ve got First Quantum and Freeport, so you have got the big, the BHP, Rio Tinto, Glencore at the top of the food chain, then you have these large specialists, to an extent. And you’ve got First Quantum and Freeport McMoran, right. And then beneath that, you’ve got large, larger-ish, of various sizes, but in the Copper space in Canada, we have Capstone and Taseko and Hudbay minerals, and a number of other players. There’s a whole tier with a bunch of different assets in the Nickel space.  You have Norilsk, Tingswan Valet’s Nickel business, Glencore’s Nickel business. And that’s a big chunk of what’s not in Indonesia, in the Philippines. So, Nickel assets, when they are required, because there are so few new discoveries, they always tend to trade out at a premium because there’s just very little new product on the shelf, decade-in, decade-out.

Matthew Gordon: That is interesting. It is fascinating to me. It is certainly becoming fascinating to us at the moment. Because you are at an interesting point in the cycle, you have been affected by a lot of different moving parts at the moment. Well, look, Mark, I think we better wrap it up there for our weekly, we are in danger of getting into next week’s topic. So next week, we’re going to look at a few charts. We’re going to look at a few graphs and try and help people understand a little bit more about the world of Nickel. So, I appreciate your time today. Thank you.

Mark Selby: No, thank you. And we’ll see you next week.

Check out another interview with Selby here.

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