Volatility in the gold market continues.

I’m not sure when it will end.

With the gold market moving mostly sideways, base metals have been on my mind as of late.

Copper, zinc and nickel are all seeing nice strength in their price.

Will it continue?

That’s a great question.

One of the biggest lessons I have learned over the last few years is that markets are complex and, therefore, impossible to predict with any consistency.

As such, I don’t let my view on the metal price dictate how I invest my money in the junior resource sector.

Remember, junior resource companies are speculations on management’s ability to pick the right projects, form action plans to add value and, of course, raise the money needed to execute on their action plan.

Without successful execution, it doesn’t matter how high the metal price goes, there is a high probability of losing money.

With that said, I do like to understand the metals markets as best I can and form a view of where the market is and where it is going.

Let’s take a closer look at the nickel market.

The Musk Effect

“In the short-term, the market is a voting machine and in the long-term, it’s a weighing machine.” ~ Rick Rule

Sentiment or narrative can be a major driver of a market in the short term, however, in the long term, the fundamentals of a company or a metals market need to be solid for gains to be sustained and perpetuated.

The cream always rises to the top.

In my view, the current nickel market is driven more by sentiment than its underlying fundamentals and, therefore, I’m skeptical of whether the nickel price can continue on its trajectory upwards.

Nickel’s bullish sentiment, I believe, has been derived from the comments made by Elon Musk, Billionaire Founder of Tesla, earlier this year.

Musk made a reference to nickel during one of Tesla’s post-earnings conference calls saying,

“Well, I’d just like to re-emphasize, any mining companies out there, please mine more nickel. Okay. Wherever you are in the world, please mine more nickel and don’t wait for nickel to go back to some long — some high point that you experienced some five years ago, whatever. Go for efficiency, obviously environmentally friendly nickel mining at high volume. Tesla will give you a giant contract for a long period of time, if you mine nickel efficiently and in an environmentally sensitive way. So hopefully this message goes out to all mining companies. Please get nickel.”

In my view, these comments set off two narratives;

The first, and arguably the most potent, is Musk’s request for efficient and environmentally sensitive nickel mining.

The second is Musk’s general request for more nickel to be produced.

Environmentally Sensitive Nickel Mining

A big question for me is whether Musk really understands what he is asking for when he says,

“Tesla will give you a giant contract for a long period of time, if you mine nickel efficiently and in an environmentally sensitive way.”

Efficient and environmentally sensitive mining, I find that very vague.

Does it mean he is making a distinction between nickel sulphide and laterite mining?

Or, does it mean, nickel mining operations that derive their power from renewable sources?

Or, is it nickel mining operations that are carbon neutral?

If this narrative is driving the market, more questions need to be asked.

Class #1 Nickel – Sulphide Versus Laterite

For those who don’t know, nickel sulphide mines produce nickel concentrates that are sold to smelters, which then convert the concentrate into the chemical nickel sulphate which is used by battery manufacturers.

In the case of nickel laterite mines, the ore is mined and then processed through a high pressure acid leach (HPAL) circuit, which is then further processed to produce nickel sulphate.

To add, the HPAL process is more complex, requiring more steps to get to the end product and, generally speaking, has a higher carbon foot print due to emissions from the process.

It, therefore, could be the distinction that Musk is trying to make with his comments.

It’s hard to tell.

Renewable Energy Source

No matter how you slice it, most of the energy generated worldwide is still derived from fossil fuels.

Therefore, even if the mining operation is fully electrical, to be deemed environmentally sensitive, you must determine how the electricity was produced.

Was it via nuclear power or renewables?

In fact, you really have to go a step further and realize that the dams for the hydro power, the construction and materials used in nuclear power plants, the solar panels and the wind turbines were all made with metals and/or concrete, which were mined and by equipment that was most likely fueled by fossil fuels.

My point?

Stating a nickel mine has to produce its nickel in an environmentally sensitive way needs to be further defined before it’s a realistic narrative driving the nickel market.

With this said, at the moment, I’m only aware of one junior nickel company that can actually say that it has the potential to be carbon neutral.

That company is FPX Nickel Corp. (FPX:TSXV).

This isn’t meant to be an advertisement for FPX, but the reality is, it’s the only junior nickel company that I can see could even come close to fitting Musk’s criteria.

Remember from my update on FPX earlier this year, I mentioned that UBC and Trent University were collaborating on a research program which is investigating carbon capture and storage at mining sites.

FPX’s Decar Nickel District is at the centre of this research as the study looks to maximize the reaction between carbon dioxide and magnesium silicate mine tailings.

The Decar mine waste is high in Brucite, which makes it a prime candidate for carbon sequestration.

It’s, therefore, possible that a future mine at Decar could be carbon neutral.

Class #1 Nickel

On to the 2nd narrative – Class #1 nickel supply.

I’m bullish on nickel; my bullishness is supported by the overall fundamentals of the market and the potential for the increase in Class #1 nickel demand.

For those who don’t know, 2/3s of nickel demand is from stainless steel.

Therefore, undoubtedly, if you’re bullish on nickel, you’re bullish on stainless steel.

While stainless steel represents the backbone of the nickel market, however, it’s battery demand that holds the potential to really disrupt the nickel market in the future.

Currently, battery manufacturers make up less than 5% of the global 2 Mt nickel market.

Roughly half of the 2Mt market is derived from Class #1 nickel and this is where it gets really interesting.

In 2018, Glencore commissioned CRU to model the metal requirements of a 30% adoption rate of EVs in the global vehicle market.

The results revealed the following:

As you can see, a 30% adoption rate would result in roughly 1.1 Mt of Class #1 nickel demand.

This is interesting because, as I mentioned, the current Class #1 nickel demand worldwide is roughly 1 Mt.

Given the long duration and expense of exploration and development, which is at least 10 years from discovery to construction, it begs the question, where will the nickel come from?

This is a great question and really speaks to the amount of disruption that could occur.

The next most obvious question, therefore, is what are the odds of the EV adoption rate hitting 30% within the next 10 years?

For me, it will be determined by the following points:

• In the short term, what is the affect of a 2nd wave of Covid-19 in the last QTR of 2020?

There are a lot of unanswered questions regarding the last quarter of the year, especially when it comes to a 2nd wave of Covid-19. Further lockdowns would be devastating to the economy.

• What is the health of the global economy?

High unemployment and a stagnant economy could stall adoption of EVs for as long as the recession or depression lasts.

• Will governments around the world give further incentives to purchase EVs?

Especially in the case of poor global economics, I believe governments will have to continue, if not increase, subsidies for EV adoption. For example, we have seen in China, when the subsidy is removed, people stop buying them.

• EV infrastructure spending

Large scale EV adoption will require more EV infrastructure to be built, at home, at work and in the public realm – malls, restaurants, highways, etc.

If left to the free market, I would say we are still a ways away from adopting EVs into our everyday life.

But we don’t live in a free market.

Governments around the world are becoming larger and larger parts of the economy and, therefore, destroy any of the logic or economic factors that usually control markets.

I can’t say with any certainty what will or won’t happen, but what I can say is that if the government decides that the push is toward renewable energy and EV adoption, that is where the money will flow.

For instance, it’s rumoured that the Canadian government will soon unveil their version of “The Green New Deal.”

If true, I would guess that it’s very likely we would see some incentive for EV adoption.

The Canadian market is small and, therefore, I don’t foresee it actually making a discernible difference to the EV market on a whole, but if this is indicative of a broader trend, things might actually fall in place.

Future Role of Nickel Laterites

As I outlined earlier, nickel laterites can be processed into Class #1 nickel with the help of the HPAL process.

Back in 2018, Tsinghan, a Chinese company, made the headlines within the nickel space as they toted the ability to construct a 50,000 tonne per year HPAL plant in Indonesia in just over a year, for $700ishM.

Tsinghan has a great reputation in the market for the pioneering of the NPI processing, which revolutionized the nickel market in the early 2000s.

This proclamation was, therefore, taken literally.

The nickel price sunk, as the market determined that the affect of an increase in demand to Class #1 market over time would be quelled if Tsinghan had this ability to construct a HPAL plant of this size, on the tight construction schedule and for under a billion dollars.

In the 2 years since, Tsinghan has experienced many of the historical delays associated with building a HPAL plant.

They have delayed construction and added upfront capital expenditures to continue to move forward with development.

With that said, in my view, I do believe that Tsinghan will be successful in constructing the plant.

Also, I think that as long as the Class #1 nickel market doesn’t require a certain environmental standard in the future, HPAL processing of nickel laterites will help quell some of the disruption caused by the potential surge in Class #1 nickel demand, albeit at a nickel price higher than US$10/lbs.

Nickel Market Fundamentals

Supply and demand fundamentals must be solid for any market to be strong over the long-term.

As I said, in my view, the current uptick in the nickel price is mainly driven by sentiment rather than underlying supply and demand fundamentals.

With that said, I think that there are many points to be bullish about.

Nickel Inventory

Over the last 5 years, the LME nickel inventories have been trending in the right direction.

As you can see from the graph, the inventory levels have steadily fallen since 2017, with a dramatic draw down in 2019.

The dramatic draw, however, was met with almost as dramatic a spike in the 10 months since, and now sits above the 200kt level.

The LME warehouses an inventory of Class #1 and is a key factor in gauging the health of the nickel market.

If we were to begin to see inventories drawn down once again, it would be very bullish for the nickel price, with the proviso that the reason for its depletion could be linked to a sustained source of demand or a permanent loss of supply.

As it stands right now, in a post pandemic world, nickel market analysts are calling for a surplus of supply to end 2020.

This is in sharp contrast to the pre-pandemic nickel market, where analysts were calling for a supply deficit.

NorNickel Corp Presentation – May 2020

Nickel Sulphide Supply

What I find most interesting about nickel sulphides is that not only are their production figures predicted to curtail over the coming years, but the amount of projects awaiting development is low.

 Why is this?

In my mind, there are 2 reasons:

• First, a bear market in the nickel price, which pre-dates 2016, has stunted exploration.
• Second is the fact that exploring for these deep deposits is very costly. Drilling for a deposit at depths greater than 500m adds up quickly.  Plus, if you add in the costs associated with tough terrain and weather, you have the perfect storm for short and costly drill seasons.

NOTE: A high percentage of nickel sulphide exploration is concentrated in cold climates – Russia, Finland, Greenland and Canada. Why? Most of the discoverable nickel sulphide deposits found around the equator or in hotter and wetter climates have mostly been converted, by nature, into nickel laterite deposits. Thus, nickel laterite deposits account for up to 70% of the known crustal nickel deposits on the earth.

Constrained nickel sulphide supply has the potential to be very bullish for the nickel price moving forward, however, it will have to be mixed with strong demand to be fully realized.

Nickel Demand

In my view, nickel demand is the key to understanding where the nickel price is headed in the future.

As I outlined earlier in the article, increased demand for Class #1 nickel from battery manufacturers and/or speciality steel makers has the potential to dramatically disrupt the nickel market.

Demand in the range of 500kt to 1Mt of Class #1 nickel per year by 2030 would very quickly reveal the short fall in supply from the nickel sulphide producers, and require much higher nickel prices to allow HPAL processing to economically participate in actively supplying the market.

Concluding Remarks

Generally speaking, I’m very bullish on the long-term potential for higher nickel prices.

With that said, I remain skeptical of the short-term longevity of the current run in the nickel price.

The global economy remains in disarray and, although governments have pledged unlimited amounts of QE to stimulate inflation, I’m still left with many questions about the remaining 3.5 months in 2020.

How will the U.S. election result affect both the U.S. and world economy?

Does a Trump re-election mean the broader stock market can continue upward?

Does a Biden win result in more socialist government policy? If so, what is the fall-out for the American economy?

Will there be a 2nd wave of Covid-19? If so, will governments revert back to complete lockdowns of their economies?

Is the U.S. headed to war with China? The world’s two largest economies remain at odds, with potential conflicts on a range of topics such as, the South China Sea, Covid-19, and human rights violations.

In my view, the next 3.5 months should provide us with a few of the answers to these questions, which will allow us to see more clearly into where things are headed in 2021.

In the end, the fact remains that markets are impossible to predict with any consistency.

Instead, I believe it’s pertinent to remain focused on the reasons why we are speculating in the junior companies.

Understand why a company is undervalued and how they will unlock that value through the execution of their action plans.

Time will tell where we are headed.

Until next time.

SOURCE: https://www.kitco.com/commentaries/2020-09-21/Nickel-market-is-a-boom-or-bust-ahead-of-us.html