Two stocks worth their weight in … nickel
An occupational hazard of writing a weekly share market column is becoming so focussed on finding new ideas for readers that you forget about older themes that still have legs.
Consider nickel. I first featured small-cap producer Western Areas (WSA) in this report in July 2019 ('Three undervalued stocks to consider") at around $2 a share.
I followed that with a longer piece in August 2019 ("Nickel looks a star in base-metals revival") arguing that the unfolding electric-vehicle boom would be a multi-year tailwind for the metal.
Western Areas soared to $3.48 in October 2019 as the market reassessed nickel’s prospects. After a rollercoaster ride this year due to COVID-19, the stock now trades at $2.66.
Other nickel stocks have rallied. Nickel Mines (NIC) has doubled to 58 cents since its March low. Mincor Resources (MCR) has risen from a 52-week low of 38 cents to 73 cents.
The larger IGO (formerly Independence Group) is up from a low of $3.27 to $5.19 since March. IGO offers nickel-copper-cobalt exposure through its Nova operation and has an interest in the Tropicana Gold Mine through a joint venture with AngloGold Ashanti.
Corporate action in nickel and talk of quickening sector consolidation are fuelling these share-price gains. IGO added $13million to its stake in Mincor through the latter’s recent $60-million capital raising.
OZ Minerals in June agreed to acquire joint-venture partner Cassini Resources in the West Musgrave nickel/copper project.
BHP Group announced in June it had purchased Norilsk’s Honeymoon Well Project in WA. And Western Areas in May acquired 19.9% of rival Panoramic Resources.
Nickel attracted my interest last year because the price was starting to rise after being in the doldrums for years, as this chart shows.
Moreover, the share market was underestimating the effect of electric vehicles and demand for nickel used in second-generation lithium-ion batteries.
Granted, I did not predict takeover activity in Australia’s nickel sector. But that is a consequence of big mining companies re-rating nickel’s potential and snapping up undervalued assets.
So, is it too late to buy nickel stocks after recent rallies?
No. Share-price gains will be slower from here and regular readers know I never suggest companies on the basis of takeover potential alone. A better approach is investing in quality, undervalued companies that are good long-term investments, with or without takeover.
I remain bullish on nickel for three reasons. First, the market is underestimating a medium-term (1-3 years) recovery in base-metal prices. COVID-19 will, of course, weigh on short-term consumption and nickel demand, but base metals generally have good rebound prospects.
Like other commodities, base-metal prices are factoring in global recession due to COVID-19. The pandemic’s devastating effect on the global economy has undone about two years of the nickel recovery in just a few months.
As bad as it feels now, I still believe a modest global economic recovery will emerge later in 2021 as China continues to strengthen and the US economy recovers.
That will encourage analysts to use higher nickel prices in their forecasting models, driving up earnings and valuations for nickel producers.
Macquarie Wealth Management this week estimated the earnings upside (using the spot nickel price) for Independence Group is 12% and 46% in FY21 and FY22 respectively. The upside for Nickel Mines is 44% and 36%, and for Western Areas it is 37% and 40%.
Macquarie said its commodity strategy team believes demand growth for all base metals is at or below its respective 10 and 25-year compound annual growth rate (CAGR). Copper is also starting to look interesting – a story for a later column in this report.
The second factor supporting my positive long-term nickel view is the electric-vehicle (EV) megatrend and its effect on battery demand and nickel consumption.
As I wrote in this report last year, early EVs used lithium-ion batteries made of lithium iron phosphate and lithium manganese oxide. There was no nickel. A lower battery life meant a reduced driving range for EVs and a reason for people not to buy them.
Second-generation lithium-ion batteries use nickel manganese and cobalt, creating higher energy densities and thus a longer driving range. Overseas research has shown nickel is quickly gaining a higher share of EV batteries relative to other metals.
By 2040, about 30 per cent of the global passenger fleet will be electric, forecasts Bloomberg. If that view is correct, demand for EV batteries and the nickel in them will rise sharply.
The third reason for my view on nickel is the “smart money”. It is one thing when small miners do deals and another when BHP Group makes a big play on nickel.
BHP last year retained its WA nickel business when the market had earlier expected it to divest it. In June, BHP’s acquisition of Norilsk’s Honeymoon Well Project and other assets gave it a larger tenement package in the WA’s Northern Goldfields region.
BHP said in its announcement: “Nickel continues to be an essential input into new technologies that will improve the battery storage needed for renewables and electric-vehicle manufacturing. Consistent with our strategy to invest in future-facing commodities, this transaction gives us access to explore and develop these prospective nickel sulphide tenements.”
Here are two ways to play the nickel outlook:
1. Western Areas (WSA:ASX)
Western Areas remains my preferred play for nickel exposure. It offers the highest leverage to higher nickel prices within the sector over the next few years.
The company’s flagship asset is its fully owned Forrestania Nickel Operation, which has two operating mines: Flying Fox and Spotted Quoll.
Western Areas in June announced encouraging drill results at its Western Gawler Project in South Australia, boost the share price. That followed news a few days earlier of Western Areas’ stake in Panoramic Resources, capping a strong period of news flow.
Macquarie has a 12-month price target of $3 for Western Areas, suggesting about 13% upside from the current price. That looks reasonable given the potential for higher nickel prices.
Chart 1: Western Areas
2. Nickel Mines (NIC:ASX)
The producer of nickel pig iron, a cheaper alternative to nickel, has economic interests in the Hengjaya Nickel and Ranger Nickel projects in Indonesia.
Nickel Mines (NIC) listed on ASX in August 2018 through a $200-million Initial Public Offering (IPO) at 35 cents a share. It was one of the few mining IPOs of note to get away in the last few years.
The company successfully completed a $235-million equity capital raising in May to move to 80% ownership of the Indonesian assets.
Nickel Mines is building a strong footprint in Indonesia, a key nickel producer. It has a strategic relationship with Tsingshan, the world’s largest stainless-steel producer and is within 15-kilometres of its Indonesian Morowali Industrial Park and its infrastructure.
Operating in Indonesia adds a significant layer of sovereign risk to Nickel Mines. But the company has a key strategic relationship in that market and several growth options.
Macquarie’s 12-month target of 75 cents compares to the current 58 cents.
Nickel Mines has had a good run from its 52-week low of 29 cents in March and is probably due for a share-price consolidation or a pullback.
If, like me, you believe in the long-term potential of nickel as EV demand rises, gaining exposure to Australian companies with promising Indonesian nickel assets appeals.
Nickel Mines suits experienced, risk-tolerant investors who understand the nature of investing in emerging mining companies in developing nations.
Chart 2: Nickel Mines