Nickel LME Inventories Fall Sharply, Putting Nickel Miners on Investor Radar
Commodities / Nickel Jun 23, 2010 - 12:27 PM GMTBy: Richard_Mills
London Metal Exchange (LME) nickel inventory levels are down 20% from their peak in February and the latest International Stainless Steel Forum (ISSF) production data suggests that the nickel market will remain in deficit for 2010 and 2011.
Barclays Capital is forecasting nickel spot price increases of 30% over the next 24 months - this is supported both by China's furious pace of industrialisation and weakness on the supply side due to labour disputes.
That forecast rebound in Nickel prices by Barclays is already happening. Spot prices have surged 10% in the last week to the current price of $9.15\lb.
Rio Tinto is alert to the impending supply/demand imbalance. On June 16th they announced a $469 million investment in their Kennecott Eagle mine.
Russian export data predicts a 55,000 tonne nickel deficit in the Russian market for 2010. Demand is growing in step with domestic stainless steel output.
Mincor Resources (MCR-AX) announced last week that it is reactivating its mothballed Australian mine. Mincor is targeting an annual production rate of 5,000 tonnes of nickel concentrate from this restart to meet the increased demand from global stainless steel makers.
Nickel is a critical ingredient in the production of stainless steel and industrial alloys - the demand for nickel rises directly in step with the growth of emerging economies.
Unlike gold there is no “emotional” component to the value of nickel. It isn’t hoarded in safes, given as wedding presents, or dangled around women’s necks. Instead you find it in buildings, cars, trains and bridges.
China is the leading consumer of nickel and is competing for supplies with recovering US industrial demand, as well as India, Russia and Brazil.
When you compare the performance of the Dow Jones-UBS Nickel Total Return Sub-Index (JJN) to that of the Dow Jones-UBS Aluminum Total Return Sub-Index ETN (JJU) - over the last 12-months - you can see how well nickel has done.
Both of these indexes are composed of futures contracts traded on the London Metal Exchange. Although both metals are tied to infrastructure growth aluminum has a softer market with more competing products, like glass and plastic. In the last 12 months nickel investors have dramatically out-performed aluminum buyers.
The largest nickel producing companies, Norilsk, Vale and Xstrata don’t actually provide a lot of leverage to nickel as they are diversified miners - meaning they also produce iron, manganese, bauxite, aluminum, copper, coal, cobalt, potash, platinum-group metals, gold and silver.
Pure nickel exploration plays aren’t common but there are a few nickel juniors in Canada. One of the most active is Knight Resources (KNP-TSXv).
Knight holds a 45% interest in a joint venture with Anglo American at the West Raglan nickel project in northern Québec, Canada where one of the most profitable nickel mines in the world is located - and a second one is about to be built.
Xstrata’s Raglan nickel mine is located 90 kilometers east of Knight’s West Raglan Project. Resources, reserves and mined ore to date at Xstrata’s mine total 35 million tonnes averaging 2.9% nickel and 0.8% copper with significant platinum group elements.
Goldbrook Ventures and Jien Canada Mining, a Chinese company, bought out Canadian Royalties, in late 2009, for their nickel deposit just south-east of West Raglan. Goldbrook also has a very active exploration program in this new nickel hotbed of northern Quebec.
KNP has identified several high grade nickel zones that look very similar to Xstrata’s. The short drilling season (June to September) has pushed the stock down to eight cents. The last drill hole returned values of 28.28 meters of 3.21% nickel and 1.3% copper (in case you were wondering the total gross metal value per tonne in that rock would equal US$715.53 at today’s spot prices for nickel and copper). Knight has just completed a financing and are about to begin drilling.
Timing, as always in this business, is everything. All the macro fundamentals (surging demand, limited supply, declining inventories, rising spot prices, little new investment) point to nickel as a solid investment for 2010.
The leverage to rising nickel prices should be in the juniors. A nickel junior or two should be on every investors radar screen.
Is one on yours?
By Richard (Rick) Mills
Copyright © 2010 Richard (Rick) Mills - All Rights Reserved
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