Six nickel stocks to snap up as prices surge
When I last looked at nickel stocks in July 2021, the future for the metal – and the companies that produce it – was looking good, with demand set to surge. At the time, I wrote, according to a 2021 report from the International Energy Agency (IEA), electric-vehicle (EV) battery and clean energy demand will drive a total demand increase for nickel, between 2020 and 2040, of between seven times and 19 times.
At the time, nickel was trading at US$18,756 a tonne. It is double that now, at US$37,115. A couple of weeks ago, nickel briefly surged above US$100,000 a tonne – it doubled in a day.
In US$ per pound terms, nickel started the year at $9.49 a pound (it rose 27% in 2021), and by March 10, it had surged 130%, to $21.88. Nickel has receded to $16.835 a pound. But it is still trading 160% above its 2021 average price.
To put it mildly, there is a lot going on in the nickel market.
With nickel being a critical ingredient in the lithium-ion battery cells used in most EVs, and also hugely important to the energy storage systems used in renewable energy, the underlying trend for nickel is strongly positive.
But add to this the impact of the war in Ukraine, and you have the ingredients for a spike.
Russia supplies 10% of the world’s nickel. Sanctions applied to Russia by the West will curtail the supply of nickel produced and exported by Russia. So, there was a supply disruption to deal with.
However, there is yet another ingredient in the mix. In the London Metals Exchange (LME) nickel market, producers usually contract with users and it is all very staid. But earlier this year, Chinese billionaire Xiang Guangda, the chairman of Tsingshan Holding Group – one of the world’s largest producers of crude stainless steel – reportedly decided to short-sell nickel. According to Bloomberg, Xiang – who is known as “Big Shot” – had built a massive short position in nickel futures, and when the sanctions on Russia sent the price jumping, he was in big trouble, facing US$8bn ($11bn) in mark-to-market losses, with huge margin calls to keep his position alive.
The LME gave Xiang more time, and temporarily suspended nickel futures trading – between March 8 and March 16 – after prices briefly topped the US$100,000 mark. It has come back to US$37,115 a tonne.
On the back of all this, nickel has been gyrating like crazy. Longer-term, battery and EV makers all expect to pay higher prices for nickel – but they probably don’t expect to pay these kinds of prices for it.
But the long-term story remains the same as it did last July. Nickel is in a great position as the world intensifies its efforts to “decarbonise” and move to perceived cleaner energy sources than fossil-fuel power and engines. The metal is a crucial component in producing stainless steel – about two-thirds of nickel production goes to this use – and that bedrock use is only increasing. But on top of that, nickel is a vital constituent in lithium-ion batteries, which are considered the key to EVs and the storage of renewable energy; nickel also goes into the actual generation infrastructure in solar and wind farms.
Here are the stock price rises from that July 2021 article:
- IGO (IGO): from $8.40 to $12.02, up 43%
- Western Areas (WSA): from $2.31 to $3.54, up 53.2%
- Mincor Resources (MCR): from $1.14 to $2.04, up 78.9%
- Poseidon Nickel (POS): 10 cents to 9.3 cents, down 7%
- Nickel Mines (NIC): $1.08 to $1.26, up 16.7%
- Panoramic Resources (PAN): 15.2 cents to 30 cents, up 97.4%
Let’s examine how these producers look now in the context of higher nickel prices.
1. IGO Limited (IGO.ASX, $12.02)
Market capitalisation: $9.1bn
12-month total return: 90.5%
FY22 estimated yield: 0.8%, fully franked (grossed-up, 1.2%)
Analysts’ consensus price target: $13.00 (Thomson Reuters, 11 analysts), $13.18 (FNArena, 4 analysts)
Stock price chart of IGO Limited (IGO.ASX).
Source: nabtrade
Diversified miner IGO has a portfolio of high-quality assets with exposure to nickel, copper, cobalt and lithium both upstream and downstream. IGO’s flagship asset is its wholly-owned Nova operation (360 kilometres southeast of Kalgoorlie, in Western Australia), with revenue generation currently split across nickel (77%), copper (19%) and cobalt (4%). In December 2020, IGO diversified into the lithium business, buying a 25% stake in the world’s largest hard-rock lithium mine, the Greenbushes mine in WA, and a 49% stake in a lithium hydroxide being built at Kwinana, south of Perth.
In December 2021, IGO agreed to acquire 100% of Western Areas (WSA) – see below – at $3.36 per share. But earlier this month, IGO announced that it would delay the acquisition of Western Areas, because of the significant volatility in nickel prices. Instead of being completed in April 2022, as was the original plan, the deal is now anticipated to be completed either in May or June 2022.
The Western Areas deal should lift IGO’s production profile from 25,000 tonnes–27,000 tonnes of nickel metal a year to 41,000 tonnes–44,000 tonnes a year. But even if it were not to happen, IGO’s numbers are excellent: at Nova, IGO has a nickel cash cost of production of $1.86 a pound (December 2021 half-year), but it received $11.82 a pound for its metal. That’s some margin – and analysts still see a bit more scope for capital gain in IGO.
2. Western Areas (WSA.ASX, $3.54)
Market capitalisation: $1.1bn
12-month total return: 72.2%
FY22 estimated yield: no dividend expected
Analysts’ consensus price target: $3.36 (Thomson Reuters, 8 analysts), $3.25 (FNArena, 4 analysts)
Stock price chart of Western Areas (WSA.ASX).
Source: nabtrade
Western Areas – which is expected soon to merge with IGO – operates two of the highest-grade nickel sulphide mines in the world, at its Forrestania operation near Leinster in WA, the low-cost Spotted Quoll and Flying Fox mines. The high-grade nickel ore mined from Forrestania is processed through the company’s Cosmic Boy concentrator and sold into offtake agreements with Chinese stainless-steel producer Jinchuan Group, and the BHP Nickel West operation.
WSA is currently developing a third mine, the Odysseus underground mine, which will go under the old Cosmos open-pit nickel mine. The Cosmos operation produced more than 127,000 tonnes of nickel, at an average grade of 4.8%, between 2000 and 2012: Odysseus is expected to be a long-life operation (at least ten years), producing a potential 2.1 million tonnes. WSA expects to mine the first tonnes from the site in the 2021 September quarter, with the operation scheduled to commence nickel concentrate production during FY23. This is well-timed, given that Flying Fox is expected to end life in 2023 and Spotted Quoll in 2024.
In the December 2021 half-year, WSA produced nickel at a cash cost of $4.91 a pound, against a realised price of $12.57 a pound. Again, great margins – but analysts see WSA as fully valued, with entering the merger through IGO a better option.
3. Mincor Resources NL (MCR.ASX, $2.04)
Market capitalisation: $988 million
12-month total return: 106%
FY22 estimated yield: no dividend expected
Analysts’ consensus price target: $1.95 (Thomson Reuters, 3 analysts), $2.10 (FNArena, 1 analyst)
Stock price chart of Mincor Resources NL (MCR.ASX).
Source: nabtrade
Mincor Resources is focused on re-establishing sustainable, high-grade nickel production in the Kambalda historic mining district of WA. In March last year, Mincor opened the Cassini nickel mine, located just south of the town of Kambalda – the first new nickel sulphide mine in the region in more than a decade, on a deposit it discovered in 2014. Mincor – which mothballed its Kambalda nickel production in 2016, at a time of historically low nickel prices – is back with a vengeance with Cassini, from which it aims to become a high-grade nickel sulphide producer, and capitalise on the new era of demand for nickel.
Mincor has signed a deal to sell its nickel concentrate to BHP’s Nickel West operation, ultimately to be processed into nickel sulphate for use in EV batteries. In February, the maiden parcel of high-grade nickel ore from the re-opened Long and Durkin North mines was sent to BHP Nickel West’s Kambalda nickel concentrator. The first ore from the flagship Cassini mine (a greenfields discovery by Mincor) is expected by the end of the month – Cassini is forecast to contribute 56% of the total nickel-in-concentrate production over the initial life of the project.
The feasibility study for the project was based on a forecast nickel price of US$7.14 a pound, with life-of-mine unit cash costs of operations at Cassini averaging just US$1.90 a pound. That would represent very sound economics – but unfortunately, MCR is fully valued on the ASX.
4. Poseidon Nickel (POS.ASX, 9.3 cents)
Market capitalisation: $285 million
12-month total return: 52.5%
FY22 estimated yield: no dividend expected
Analysts’ consensus price target: 13 cents (Thomson Reuters, 1 analyst), 13 cents (FNArena, 1 analyst)
Stock price chart of Poseidon Nickel (POS.ASX).
Source: nabtrade
Poseidon Nickel Limited is a nickel sulphide exploration and development company with three projects located within a radius of 300km from Kalgoorlie in the Goldfields region of WA and a resource base of about 400,000 tonnes of nickel and 180,000 ounces of gold. Its key asset in the near term is the Black Swan/Silver Swan project, where drilling is underway to define a high-grade ore zone dubbed “Golden Swan,” discovered in March 2020. Along with the Swans, Poseidon’s WA assets include 149,000 tonnes of nickel in resource at Windarra and 52,000 tonnes of nickel in resource and a 1.5 million-tonnes-a-year processing plant on care and maintenance at Lake Johnston.
The nickel resource at the Swans is currently about 400,000 tonnes of nickel metal and growing. Poseidon is targeting nickel production during the first quarter of 2023.
Earlier this month, Poseidon and partner Pure Battery Technologies (PBT) Pty. Ltd. secured a $119.6 million Modern Manufacturing Initiatives (MMI) Grant from the Australian government for their proposed development of a battery cathode active material refinery hub in Kalgoorlie. The Hub could be of great benefit to Poseidon by maximising the margins on concentrates supplied to the refinery and potentially unlocking further value by treating a broader range of concentrate specifications. PBT is targeting initial production of up to 50,000 tonnes a year of precursor Cathode Active Material (pCAM) from the refinery, expandable over time.
Analysts think that Poseidon remains an under-valued story.
5. Nickel Mines (NIC.ASX, $1.26)
Market capitalisation: $3.3bn
12-month total return: –9.8%
FY22 estimated yield: 4.7 % unfranked
Analysts’ consensus price target: $1.60 (Thomson Reuters, 9 analysts), $1.53 (FNArena, 4 analysts)
Stock price chart of Nickel Mines (NIC.ASX).
Source: nabtrade
Nickel Mines is a different kind of nickel exposure: it produces at its Indonesian operations nickel pig iron (NPI), a semi-refined product and a cheaper alternative to pure nickel metal, in making stainless steel. NIC is a top ten nickel producer, with projected production of more than 40,000 tonnes of nickel over 2021, from its Indonesian assets.
NIC, which listed on the ASX in 2018 at 35 cents, has integrated operations in Central Sulawesi, Indonesia, where it holds an 80% interest in four rotary kiln electric furnace (RKEF) NPI production lines with Shanghai Decent Investments (SDI), a subsidiary of Tsingshan Group, the world’s largest stainless steel producer. The RKEF lines are located in an existing, fully integrated stainless steel production facility, the Indonesian Morowali Industrial Park (IMIP).
Unfortunately for NIC, Tsingshan – whose owner is at the centre of the nickel price surge – is not only its largest shareholder (with an 18.7% stake) through its subsidiary Shanghai Decent, it takes all of NIC’s production.
That relationship has seen the NIC share price fall 30% in March.
But analysts don’t appear to believe that Tsingshan’s owner’s difficulty paying margin calls are going to bring the company down, and leave NIC looking for a new nickel customer – they see a lot of value in Nickel Mines.
6. Panoramic Resources (PAN.ASX, 30 cents)
Market capitalisation: $615 million
12-month total return: 114.3%
FY22 estimated yield: no dividend expected
Analysts’ consensus price target: 34 cents (Thomson Reuters, 3 analysts), 34.5 cents (FNArena, 2 analysts)
Stock price chart of Panoramic Resources (PAN.ASX).
Source: nabtrade
Panoramic Resources operates a nickel sulphide mine and processing plant in the East Kimberley region of WA, the Savannah nickel project. The project was previously operated between 2004 and 2016, before being put on a care-and-maintenance basis. It was then recommissioned in 2018 following the discovery of the Savannah North orebody but suspended once again in 2020 as COVID-19 hit.
But Panoramic is officially back in business, with the first shipment of nickel-copper-cobalt concentrates to China heading off in December 2021, and a second in February this year. Savannah is officially generating cash again from the operations and has secured a five-year nickel and copper concentrate offtake agreement that starts in February 2023, with Singapore-based commodity trading company Trafigura Group, which has granted PAN a $45 million loan financing facility which, along with the projected revenue, is expected to cover entirely the costs of the mine restart.
Savannah is expected to mine and treat 10.6 million tonnes of ore grading 1.23% nickel, 0.54% copper and 0.08% cobalt. All-in-sustaining costs are expected to be about $6.14 a pound of nickel, including byproduct credits, to generate pre-tax cashflow of $820 million a year.
Savannah’s numbers could easily be improved by exploration success – to underline this point, just last week Panoramic has uncovered a new nickel zone at the project. Analysts still see 15% or so of upside value in PAN in the near term.
All prices and analysis at 21 March 2022. This information was produced by Switzer Financial Group Pty Ltd (ABN 24 112 294 649), which is an Australian Financial Services Licensee (Licence No. 286 531This material is intended to provide general advice only. It has been prepared without having regard to or taking into account any particular investor’s objectives, financial situation and/or needs. All investors should therefore consider the appropriateness of the advice, in light of their own objectives, financial situation and/or needs, before acting on the advice. This article does not reflect the views of WealthHub Securities Limited.