Reasons to keep digging (even in nickel) IT IS the equivalent of...

Reasons to keep digging (even in nickel)

IT IS the equivalent of finding reasons to get out of bed in the morning or, if you are a mining investor, keep digging. The Metal Detective explains why the mining recovery should keep on trucking for a while yet. By Stephen Bell

Mining shares, in general, have staged a solid recovery over the past year. But despite some stocks looking toppy there are good reasons to stay invested in our miners.
In some ways, the market has been a hodgepodge: Gold has been up and down in tandem with Trump’s twitter feed; lithium is either euphoric or lethargic; nickel has been through a political whirlwind; and iron ore has behaved irrationally.
Nevertheless, the overall trend is definitely your friend.
The S&P/ASX 300 Metals and Mining Index is up more than 70% from this time last year – a result that most industry participants would have accepted with open arms in the depths of the downturn.
Given the handsome gains in some big end stocks – Fortescue has more than trebled in 12 months – there must be punters (still filled with memories of the bust) wondering if it’s time to head for the exits.
Not according to Deutsche Bank, which insist there are five reasons to stay dug in:

• Miners are still in an earnings upgrade cycle – shares prices look to be factoring in consensus earnings forecasts, but spot prices imply large upgrades (more than 50%) to predicted earnings
• The cheque’s in the mail – high commodity prices and “restrained” capex should create record free cash flows, ensuring sweeter dividends and potential buybacks
• Foreign punters are ready for the plunge – offshore investors have been reluctant to jump into resources stocks, which aren’t popular with analysts and have already risen sharply in value. They may get “squeezed” into the market
• China syndrome – China’s cyclical upturn looks to have momentum. Nominal GDP growth has doubled to reach 11% and lead indicators are positive
• Fake news? – the China overinvestment story (used to be called ghost cities back in the day) is overcooked. China’s steel use per person is still 20% below where Japan was during its development phase in the 1960s/70s

There are, as always, risks to this particular rosy view.
DB lists these as rally fatigue, slowing Chinese growth, pressure on the Renminbi, or a strong US dollar hurting commodity prices.
Moreover, DB’s view of mining is very narrow: big end stocks BHP Billiton, Rio Tinto, South32, Fortescue and Whitehaven.
The question MD poses is, “Do we dig into the unfashionable stuff, like nickel?”
Mincor is looking for gold; Panoramic spun off its gold; Western Areas is pure nickel put isn’t averse to lithium; and Independence is gold-tipped nickel spiced with copper and a hint of cobalt.
If it’s not confusing enough, what about the endless gyrations in market forecasts?
The on again/off again Philippine and Indonesian export bans have befuddled both investors and the producers of the stainless steel additive.
Just as we’d got our heads around Indonesia reversing its ban, in comes the bigger-than-expected impact of the Philippines’ environmental audit.
Depending on what you read, the Philippines has decided to close 23 mining operations and suspended a further six.
Of these, 15 of the closures and two suspensions are nickel mines.
Philippines president Rodrigo Duterte, best known for his brutal war against drug barons, still has the power to intervene.
He is to decide on the finality of closures, while suspended mines have 3-6 months to "get their act together", Credit Suisse says.
Nevertheless the combination of the resumption of some Indonesian exports and the slashing of Philippines exports by up to 50% leads CS to expect significant (+100,000t) market deficits to persist over the next three years.
In consequence, it advises investors to dig into Independence Group shares, upgrading its rating of IGO from “neutral” to “outperform”.
On the demand side, Deutsche Bank could be right – China’s rebound looks sturdier than expected, always good news for stainless steel consumption.
If not, growing demand for battery powered automobiles will prove nickel’s long-term saviour, right?
Wrong. Unlike lithium, which is used in every Li-ion battery, nickel is used in just two of the five prevailing Li-ion battery chemistries, Macquarie Research says. These are NMC (20% Ni content) and NCA (48% Ni, used by Tesla).
While both of these chemistries are dominant in Western World-produced EVs, in China, where lithium-iron-phosphate is favoured (and which contains no nickel), the demand case for nickel is “much less compelling”.
The bank says nickel demand in EVs could grow from about 10,000t in 2016 to 38,000t in 2021, which equates to “strong growth, but from a low base”.
So nickel fanciers keep digging to find that motherlode.

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