major correction coming

The correction is up! Got your attention?

Turning to nickel, there is a similar situation of a decline in LME stocks leading to a sharp increase in the nickel price - as depicted in the 5 year charts of LME nickel prices and stocks:

There is a current shortage of refined nickel of about 100,000t tons per annum. Despite new production expected over the next few years from Ravensthorpe, Voisey's Bay, Goro and a variety of brownfield expansions, Steve Barrett, the President of the Nickel Institute, in a recent presentation at the Nickel Conference in Perth, indicated that the production shortfall would not only continue, but actually increase, through 2010. The main drivers on the demand side being increased stainless steel capacity installed in China and Korea.

What is the nickel price outlook in these circumstances? Barring a world depression, it seems that nickel will continue to rise in price, possibly for a decade. I have a target price of US$25 per lb during the next year or two, compared with the current price of around $15 per lb.

This forecast price (or even the current price) will do wonders for the earnings of a number of small Australian nickel producers. One of these is Mincor (MCR on the ASX), which is the stock that I have chosen to highlight. Here are a few salient facts about Mincor:

Mincor details.
Issued capital - 195m shares.
Share price (30 Oct 2006) was A$1.80, hence a market capitalisation of A$350m
No debt. Cash on hand at 30 Sept 2006 was A$69m.
Enterprise value thus A$350m-A$69m cash = A$271m.
Mine life is expected to be 7 years but new discoveries seem certain to extend this.
Strong geological exploration team. Many new exploration prospects.
Some hedging (approx 30%) in place to December 2007, but minimal thereafter.
Target production is 15,000 tons nickel in concentrate per annum, (30m lbs).
Payable nickel is 65% of nickel in concentrate, i.e. about 9,750 tons (19.5m lbs).
By-product revenue (copper and cobalt) is running at about A$18m per annum.

The following analysis shows the gearing related to higher nickel prices. Profit estimates are done at nickel prices of US$15 lb (current price); US$10 lb (a 33% reduction) and US$25 lb, which is my expectation for the nickel price in the next year or so:

NB: These figures include corporate overheads but exclude exploration expenses and amortization/depreciation charges.

The point of this exercise is to show that these shares are discounting a return to a nickel price of US$10 per lb. There is no public enthusiasm in the MCR share price, all the blue sky is still available. MCR is not trading at a "bubble" valuation and there is spectacular upside in the stock if my US$25 lb forecast for the nickel price eventuates. In fact, MCR could earn the entire current Enterprise Value of the company in one year with nickel at US$25 per lb.