Crux latest Nickel Article

For those interested

https://www.cruxinvestor.com/posts/take-advantage-of-nickel-supply-shortages-expected-q1-24

• Nickel price have fallen recently as expected but is finding support around $17,000-17,500/tonne.
• Further brief dips are possible but prices are expected to recover through year-end as demand rebounds.
• EV sales continue growing sharply, up 39% year-to-date. Restocking after the destocking cycle will tighten the nickel market.
• Indonesia is close to maxing out nickel production capacity. Supply growth constraints emerging.
• New nickel projects are needed to meet long-term demand but low-grade uneconomic deposits are unlikely to succeed.
• Canada Nickel stock is undervalued relative to the quality of the asset. An off-take agreement could serve as a catalyst.

Nickel Market Overview and Outlook: Supply Shortages Expected Despite Current Downturn

The nickel market has experienced significant volatility in recent months, with prices falling from over $20,000 per tonne to around $17,500 amidst broader economic turbulence. However, industry expert Mark Selby predicts supply shortages and rising demand from the electric vehicle sector will drive prices back up in the coming year.

Selby, CEO of Canada Nickel Company, provides an overview of current nickel market dynamics and his outlook for the future in a recent interview. Despite market weakness, Selby remains confident that fundamentals point to higher prices as demand growth outpaces new supply.

Nickel Prices Finding Support After Steep Sell-off

After peaking above $20,000/tonne earlier this year, nickel prices on the London Metal Exchange plunged as low as $15,500 in July before recovering to current levels around $17,500. Selby notes prices are now finding support around $17,000-17,500, with the potential to dip briefly to $16,500-16,000 through year-end.

“We might break to $16,500-$16,000 briefly, but we'll largely be in the $17,000 to $17,500 range through year-end when I think we'll start to see demand reassert itself,” he states.

Rising EV Demand Despite Economic Headwinds

Selby counters narratives that EV demand is collapsing amid higher interest rates and incentives rolling off. Year-to-date global EV sales are up 39% in 2022, reaching over 7 million units. September sales rose 23% year-over-year.

“Despite interest rates, despite the end of some subsidy programs, despite all this noise...year-to-date [EV] sales up 39%,” he highlights. “I would hardly call that a collapse in sales going forward.”

Once destocking ends, the EV sector will need to replenish inventory to meet surging consumer demand. This restocking cycle can catalyze significant price increases in niche metals like nickel.

Looming Indonesian Supply Constraints

Selby challenges market concerns that Indonesia will flood the market with low-cost nickel supply. While Indonesia boasts significant production capacity, declining ore grades are limiting actual output volumes.

“Yes, the capacity is there, but that capacity is effectively derated as the average feed grades come off,” Selby explains. “We’ve been in a market where lithium prices have been tanking, so we’ve been destocking in the battery supply chain for most of the year.”

As the top producer, Indonesia’s use of export quotas has provided some temporary relief to nickel prices and alleviated short-term shortages. However, major seasonal rains are now arriving in the Philippines, the number two producer, potentially constraining global ore supplies further.

Long-Term Deficits on the Horizon

Selby remains adamant that nickel markets will face significant long-term deficits absent new projects coming online. He warns of overly optimistic surplus forecasts that underestimate actual demand growth from EVs while overestimating available mine supply.

“The market's going to be way, way, way tighter than the people you're talking to who are talking about the nickel market being in surplus forever.”

Canada Nickel Stock Impacted by Broad Selloff

Despite strong project fundamentals, Canada Nickel’s share price has retreated around 30% from 2022 highs near $4.00 down to the current $1.20. Selby attributes the decline entirely to overall market weakness rather than company-specific issues.

As Selby explains: “Because we're a very liquid stock, we get some of the trading machines using us to help amplify some of these down moves...There’s no, nothing going on at all specifically with us on the downside.”

He expects an expected offtake agreement by year-end to provide positive confirmation of their project's necessity and reignite interest in the stock. Canada Nickel is fully funded through feasibility with no need to raise additional capital.

The Investment Thesis for Canada Nickel:

• World-class nickel sulfide project in a Tier-1 mining jurisdiction with robust economics. Recently boosted resource to be largest nickel sulfide discovery globally in last 20 years.
• Fully funded through feasibility study with backing from Anglo American. Offtake agreement expected by year-end to validate project.
• Trading at a steep discount to peers despite superior asset quality and stage of development. Buy before positive catalysts drive re-rating.
• Significant long-term growth potential through additional exploration upside on a large land package.

Cautious on Marginal High-Cost Projects

Spruce Ridge Resources (TSXV:SHL) is advancing its past-producing laterite nickel project in Oregon which could benefit from US critical mineral security incentives. A recent deal with Canada Nickel shareholder RCF could unlock value.

Horizonte Minerals (LSE:HZM) has delayed its Araguaia nickel project again after an additional 35% cost increase. Construction is being wound down until financing options are secured in 2024. Challenges meeting original cost estimates.

Centaurus Metals (ASX:CTM) has also delayed its feasibility study for the Jaguar nickel project in Brazil due to delays in getting data from suppliers. Shift in projected development timelines.

Talon Metals (TSX:TLO) released positive drill results from 14 holes outside of current resources at the Tamarack nickel project in Minnesota. Continues to expand resource potential.

IGO Limited (ASX:IGO) hit high-grade nickel intercepts in early drilling at its Buckton nickel joint venture project. Signs of a promising new nickel discovery in Western Australia.

Premium Nickel Resources (TSXVNRL) released drill results at its Selebi-Phikwe Ni-Cu-Co project in Botswana. Results consistent with historic resources. Concerns were raised about depth, grade, and jurisdiction compared to alternatives.

Let's Talk about Grade

The grade is just one factor of many which affect the economics. Do not attribute it as the only arbiter of success.

The key message is to focus on quality assets and fundamentals in the current market environment. Volatility creates opportunities to buy strong companies at discounted valuations. Selby highlights the struggles at iGO Limited's Cosmos nickel mine as illustrative of the challenges facing many marginal, high-cost projects. Despite a resource of 10 million tonnes grading 2% nickel, the mine has faced repeated delays and requires billions in capital to expand.

"When somebody has a few hundred thousand tons at 1% or 2% or drilling 1% intervals down deep, it's going to be pretty hard for the math for that deposit to end up working," Selby comments. He believes the issues at Cosmos and the delays at Horizonte Minerals' Araguaia ferronickel project in Brazil reinforce the need to focus on higher-grade, lower-cost operations in favorable jurisdictions. As Selby concludes, "The cliché, 'Grade is King'..when taken on its own, is where people fall down. Grade is not the only variable, there are multiple variables which matter to the economics."

Key Takeaways

• Nickel prices are stabilizing after a steep sell-off and are expected to recover as demand rebounds.
• EV sales continue growing sharply despite economic challenges. Restocking will tighten the market.
• Indonesia's maxed-out capacity will constrain supply growth near-term.
• New projects needed long-term but low-grade deposits likely uneconomic.
• Canada Nickel is undervalued relative to asset quality and stage of development. Off-take agreement could re-rate stock higher.