Nickel Ready for Price Breakout as Strategic Players Position for Demand Surge

Nickel prices have finally broken below the $20,000/tonne level after months of ranging between $20,000-22,000/tonne. This drop has been anticipated for months, and provides an opportunity for a reset before a strong rise into 2024.

Current Nickel Price Weakness Provides Buying Opportunity

The nickel price weakness over the past couple of months down to around $19,500/tonne is seen as a short-term blip within an overall bullish trend driven by electric vehicle demand growth. The price needed to shake out bearish sentiment after ranging for an extended period. Now, the stage looks set for nickel to bottom out over the next 2-3 months around $17,500-18,000/tonne, before starting a new uptrend in early 2023 back above $20,000/tonne. By next spring, momentum is expected to accelerate to reach the $22,000-24,000/tonne range.

Nickel Price Outlook

• Nickel prices have broken below the $20,000/tonne threshold - likely shaking out some speculative bears who were shorting the market. This could bring prices as low as $17,500-18,000/tonne over 2-3 months.
• This is seen as a short-term dip - before a return to $20,000/tonne+ pricing by mid-2023, driven by accelerating demand from EVs. The ongoing restocking cycle in stainless steel also supports demand.
• The “great convergence” - of London Metal Exchange (LME) pricing and intermediate product pricing in China is occurring as new capacity comes online. This will help close the gap over the next 6-12 months.
• By 2024, deficits are expected with few new projects in the pipeline - Prices should trend higher in a new bull run. Always prepare for intermittent “supercycles” that can pay down debt quickly when timed right.
• Nickel Prices Poised to Rebound on Tightening Market Fundamentals - While nickel prices have pulled back recently, the downturn is expected to be temporary as market fundamentals tighten going into 2023-2024. Several key factors support a cyclical rebound in prices‍
• Restocking Cycle in Stainless Steel - Nickel inventory levels declined substantially in 2021-2022 as stainless steel production outpaced nickel supply. This inventory drawdown has begun reversing, with stainless steel mills starting to rebuild stockpiles. This restocking provides underlying support for nickel demand into 2023.‍
• Ramping EV Nickel Consumption - Nickel demand from the electric vehicle market continues to show 50-60% annual growth. Most forecasts have EV nickel demand doubling or tripling within 5 years. This rapidly growing demand base will help absorb any bursts of new nickel supply.‍
• Class 1 Nickel Tightness - The supply of high-purity class 1 nickel required for batteries is particularly tight. This subset of nickel demand is expected to move into deficit as soon as 2024. With long lead times for new mines, deficits would persist for years without substantial new projects starting up.‍
• Limited Development Pipeline - Very few large-scale nickel projects are actually under construction that could provide meaningful new supply before 2030. Lead times of 7-10 years are common from discovery to first production for major mines.‍
• Incentive Pricing Needed - Developing major new nickel mines requires incentive pricing above current levels. Feasibility studies routinely use long-term nickel prices of $10/lb+, versus today's $8/lb spot prices. Multi-year averages above $10/lb will be needed to spur sufficient investment.‍
• Resource Nationalism Pressures - Indonesia's export ban and other resource nationalism policies have increased supply uncertainty from major producing regions like Indonesia and the Philippines. This tightens available nickel outside China.‍
• Low Inventory Buffer - LME warehouse nickel stocks sit under 100,000 tonnes, down 60% from last year. This provides minimal buffer as the new supply ramps up slowly. Inventory coverage is just over 2 weeks of global consumption.

As new supply struggles to catch surging demand growth, nickel prices should strengthen considerably by 2024-2025. This would mirror the dynamics of previous bull cycles. While the timing is hard to predict precisely, the direction seems clear.

Economic uncertainty has caused some pause from investors, but the continued strong electric vehicle growth will assert itself by year-end. Nickel demand from EVs is expected to triple over the next decade just in the US. Major mining companies and auto/battery manufacturers have been aggressively positioning themselves through acquisitions and investments to secure future nickel supply despite the short-term uncertainty. Once the clouds clear, they will ramp up efforts again.

Strategic Investors Focused on Scale, Jurisdiction for New Mines

For new nickel projects, strategic investors are very focused on jurisdictional safety and large, long-life mines when making investment decisions. Projects in Canada tick these boxes.

The large multi-decade mines provide higher returns through:

• Multiple cycles to benefit from occasional price spikes
• Optionality to expand and leverage higher prices when they occur

• Mining giants like BHP and Vale have been uncharacteristically aggressive, acquiring most major nickel sulfide deposits worldwide over the last 3 years.
• These types of mines are the focus of acquisitions lately by major miners like BHP and automakers like Toyota. This underscores the long-term confidence in nickel demand growth.
• This secures future supply ahead of massive demand growth.
• One Korean battery maker alone will consume more nickel than the entire U.S. market today. U.S. demand is expected to triple in the next decade.
• The current economic uncertainty may cause a temporary pullback in deals by the strategics. However, the underlying EV demand picture remains bullish over the long term. Once sentiment improves, mining firms will again compete for battery metal assets.
• It’s a “once in a generation opportunity” to develop mines in North America given government incentives in Canada and the U.S. Canada specifically can see new mines developed faster than the U.S

Roskill Cites 150% Growth in Nickel Demand by 2035

Roskill forecasts nickel demand growth of over 150% by 2035 driven by electric vehicle battery requirements. This translates to over 4 million tonnes of new nickel supply required in that time frame. With long development timelines, now is the critical period for projects to be defined and funded.

Class 1 Nickel Facing Supply Deficit

Nickel supply suitable for batteries (Class 1 nickel) is expected to fall into deficit as early as 2024. This deficit would grow rapidly in the following years without new mines starting up. However, there is a lack of large-scale Class 1 nickel projects actually under construction today. This sets the stage for much higher prices that incentivize new mine investments.

Analysts' Caution Contributes to Limited Mine Development

Part of the challenge is conservative nickel price assumptions used by analysts for modeling projects. This stems from a lack of familiarity with nickel market dynamics compared to markets like gold and copper. Using long-term nickel prices of $8-9/lb versus current $10-12/lb prices understates potential returns.

More research is needed on realistic nickel demand growth from EVs and the resulting incentive pricing to develop new mines. Projects can still provide attractive returns at conservative nickel prices if designed well.

Nickel Sulfide Best Positioned to Supply EV Battery Market

Nickel sulfide deposits offer the best product match for the high-purity nickel required by lithium-ion batteries. They also have significantly lower carbon intensity than laterite mines. However, few new nickel sulfide projects have been developed in the past decade. Existing sulfide concentrate supplies are locked up on long-term contracts, leaving little spot material available. This makes new sulfide projects highly desirable for offtake agreements.

• Understanding nickel is complex, as different pathways to various end products exist, unlike simpler metals like gold and silver.
• Historically, a few nickel smelters dictated punitive terms to miners, keeping new supply out through the 60s and 70s.
• For battery supply chains, working with experienced partners is key to maximizing the value of mined concentrate. Avoid costly intermediate steps.
• Delivering a product close to LME grade avoids the typical Chinese conversion costs that often erode value.

Canada Well Positioned to Attract Strategic Investors

• The Canadian government has positioned the country extremely well to attract investment into critical minerals projects like nickel. In addition to the critical minerals tax credit, there are also tailor-made investment incentives and streamlined permitting processes not widely available in other countries.
• This makes Canada one of the most attractive destinations globally for auto and battery companies to invest in nickel projects to secure future supply.

FPX Nickel Lands Deal with Toyota for Baptiste Deposit

FPX Nickel recently signed an MOU with Toyota and its battery materials joint venture to look at developing its Baptiste nickel sulfide deposit in British Columbia and associated downstream processing. This highlights the strong interest from major auto manufacturers in securing nickel supplies even at an early stage.

Baptiste is an attractive large-scale project due to its long estimated mine life of over 35 years. The project aims to produce 90,000 tonnes of nickel annually plus cobalt as a byproduct once ramped up.

• FPX Nickel has signed a Memorandum of Understanding (MOU) with Toyota Tsusho Corp and Toyota Motor Corp regarding its Baptiste nickel project in British Columbia.
• Partnership demonstrates the large size and long mine life of FPX’s deposit is attractive for electric vehicle supply chains seeking future resources.
• FPX has a relationship with Japanese nickel exploration firm Jogmec, who helped connect them with Toyota. This highlights the importance of partnerships.
• The MOU covers mine development, processing and downstream supply chain development in North America. Automakers want local supply chains.

Giga Metals Releases Positive PFS for Turnagain Mine

Giga Metals published a PFS for its Turnagain nickel sulfide deposit in northern British Columbia. The project has an after-tax IRR of 11% and NPV of US$1.1 billion at base case nickel and cobalt prices. It would produce 33,000 tonnes of nickel and 2,000 tonnes of cobalt per year over a 21-year mine life.

Notably, the effective tax rate is very low due to the Canadian critical minerals investment tax credit. This improves after-tax returns compared to other jurisdictions. While an 11% IRR is lower than some projects target, Turnagain provides exposure to higher nickel prices with its large resource size and multi-decade mine life.

• Giga Metals recently released a Preliminary Feasibility Study (PFS) for its Turnagain nickel deposit in northern British Columbia.
• The project has an 11% after-tax IRR at a conservative long-term nickel/cobalt price deck of $21,500/tonne and $58,000/tonne.
• The large resource supports a multi-decade mine life when developed, with a capital cost estimate of $1.9 billion.
• Annual production potential of 35,000 tonnes of nickel and 2,000 tonnes of cobalt. Cobalt is a significant by-product credit.
• The low double-digit IRR is reasonable for a long-life mine. The upside if nickel prices run higher in future.
• Giga is one of only a handful of projects that could start by the early 2030s to meet demand. Despite the lower IRR, it merits consideration in a bullish nickel scenario.

Nickel Price Assumptions Reasonable

• Most recent feasibility studies use long-term nickel prices between $8.75-11/lb, averaging around $9-9.50/lb.
• This seems reasonable based on the 90th percentile of the global nickel cost curve today. Historically, prices gravitate to the high end of the cost curve.
• Future analyst upgrades or supply squeezes could push the consensus higher, but $9.50/lb is justifiable currently

Giga Metals' Turnagain Project Built on Realistic Assumptions

Giga Metals' recently released PFS for the Turnagain nickel-cobalt project provides exposure to a potential new supply source with a sizable scale. However, a focus on conservative assumptions improves confidence in the achievable project economics.

Several factors support the credibility of Turnagain's modeling:

• Low Contingency Application - Project contingencies were set at 10-15% on key parameters including capital and operating costs. This compares favorably to industry averages of 20-30% for PFS-stage studies, leaving room for potential improvements.
• Peer Reviewed Process Plan - The proposed flow sheet utilizes a standard flotation process that has been successfully implemented at multiple Nickel sulfide operations globally. This reduces technical risk versus novel processing methods.
• High Value Concentrate - Turnagain's concentrate is expected to be very high in nickel content and low in impurities. This maximizes payability versus the LME nickel price and avoids penalties.
• Favorable Power Supply - The project benefits from proximate access to inexpensive hydroelectric power in British Columbia. This results in competitive operating cost estimates.
• Minimal Byproducts Credited - The economic model only includes modest cobalt by-product credits despite high cobalt grades. Further enhancements from copper and platinum group metals were excluded entirely from the base case.
• Conventional Mining Approach - The mine plan utilizes large-scale open pit mining methods that are standard for the industry and region. This contrasts with riskier underground options.
• Multi-Decade Life of Mine - The 21-year initial mine life allows the project to benefit from multiple commodity price cycles. This reduces risk compared to shorter-lived mines that could miss key pricing windows. The large mineral resource also provides substantial optionality for future expansion and extension.

The company's seasoned technical team leveraged decades of direct nickel development experience to ensure the PFS has a firm grounding. While some assumptions may still prove optimistic, the study provides a credible picture of potential economics.

Canada Nickel Progressing Quickly Through Feasibility Stage

Canada Nickel has advanced its Crawford nickel sulfide project from initial discovery to the feasibility stage in just four years. This has been an exceptionally fast pace.

The feasibility study results expected in the next few weeks will double the planned scale and mine life compared to the PEA. Recoveries of nickel, iron and chromium also look to have improved substantially, which will further enhance project economics.

In addition to the critical minerals tax credit, Crawford is expected to qualify for a carbon capture and storage tax credit given the plan to utilize tailings for permanent carbon sequestration. This will provide a further boost to the project's NPV and IRR.

Canada Nickel Engaging Downstream Partners

Offtake and financing discussions are accelerating with multiple parties as Canada Nickel has positioned itself as one of the only large nickel projects in North America on track to start up this decade. The company is leveraging its uniquely high-iron nickel concentrate to engage stainless steel as well as battery sector partners. This provides optionality to maximize value.

• Canada Nickel is nearing completion of a feasibility study for its 100% owned Crawford nickel-cobalt sulfide project in Ontario.
• The project timeline has been accelerated, with only 4 years from the first drilling to a feasibility study. This distinguishes it from other developers.
• Crawford aims to double previous production plans to 60,000 tonnes per year, with a mine life of 25+ years. Among the largest nickel mines in the world if developed.
• Improved recoveries for nickel, iron and chromium are also expected, enhancing project economics.
• Two Canadian government tax credits will improve IRR and NPV - the critical minerals credit (30%) and carbon capture credit (est. +$100M).
• Canada Nickel has already spent $50M on project development. It has also completed the first phase of federal permitting. Both advantages accelerate timelines compared to peers.
• With the feasibility study imminent, off-take and financing discussions are poised to advance quickly. Crawford could be the only new Canadian nickel mine of size before 2030.

Global Search for Reliable Nickel Supply

Canada Nickel will be meeting with policymakers in the UK and France this coming week as part of a Canadian government delegation. The goal is to highlight opportunities for North American nickel and cobalt production to improve supply chain resilience. Global policymakers are increasingly focused on stimulating investment to develop mines in reliable jurisdictions like Canada after facing supply disruption from major producing countries.

Class 1 Nickel Prices to Normalize Relative to LME

The long-standing premium for nickel suitable for batteries relative to LME nickel price looks set to dissipate over the next 12-24 months. This premium was initially driven by limited Class 1 supply, forcing Chinese refiners to convert LME nickel into sulfates at a higher cost.

With an increasing portion of nickel feed now coming from Indonesian NPI rather than LME warehouses, Chinese refining economics have shifted. As a result, nickel sulfate prices have already converged back closer to NPI nickel pricing, giving up most of the earlier premium to LME prices. This trend should continue until typical conversion margins are restored.

Byproduct Cobalt Supplies Pose Risk

An estimated 41% of global copper production could come as a byproduct by 2030. While this would boost copper volumes, an influx of cobalt byproducts from these mines could depress cobalt prices unless demand keeps pace. Since many nickel-cobalt HPAL projects generate 70-80% of revenue from cobalt at current prices, cobalt price weakness would severely impact their economics. This makes primary cobalt projects less attractive.

• The fundamentals favor nickel over cobalt in the long run. Existing and new supply will impact cobalt faster than nickel.
• In Indonesia, large HPAL plants will produce 1 tonne of cobalt for every 10-15 tonnes of nickel. But only 1 tonne of cobalt is needed for every 25-30 tonnes of nickel demand.
• Byproduct cobalt supply will flood the smaller cobalt market well before nickel. Estimates suggest cobalt prices could hit the single digits with oversupply.
• Investors should be cautious about investing in standalone cobalt mines producing a potential glut through the 2020s.

Conclusion - Fundamentals Aligning for Nickel Bull Market

The macroeconomic uncertainty clouding metals markets currently is expected to dissipate by mid-2023 as inflation comes under control. This sets the stage for a surge in strategic investment in nickel as the realities of long-term supply shortages and massive demand growth from EVs take focus.

Jurisdictional risk and carbon intensity will become increasingly important investment criteria. Projects located in top-tier mining jurisdictions like Canada with a lower carbon footprint will attract premium valuations. Large, scalable nickel sulfide deposits with multi-decade mine lives will be the biggest beneficiaries in this bull cycle. Investors need to position in the next 6-12 months ahead of broad-based institutional investment flowing back into nickel equities.

Investors should look to the historical behaviour of the battery metals market and start to position themselves to take advantage of the coming metals supercycle.