Charting the rise of nickel in the shadow of Indonesias export flip

A firming nickel price settling around 60 to 70 per cent higher this year, talk of production restarts and expansions, and a ramp-up in exploration are underpinning the confidence within Australias nickel sector

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Cosmos nickel mine surfaces infrastructure. Western Areas

New analysis shows that nickels price surge over 2019 has favoured the big end of town in Australias major producers, but some investor relief for junior explorers may be on the way.

Nickel recently posted its best quarter in nine years, fuelled by fresh supply concerns around the impact of Indonesias sudden decision to bring forward by two years the Nickel Ore Export Ban a ban on exports of raw nickel ore, which will now take effect from 1 January 2020.

The announcement unsettled international commodities markets as well as generated much discussion of the likely reasons for this decision.

Statements by senior Indonesian Government officials, aimed at justifying the 2019 Nickel Ore Export Ban, have been confused and confusing.

Some analysts believe that there is a serious risk that, in bringing forward the Nickel Ore Export Ban, the Government has compounded Indonesias already endemic problem of investor uncertainty, especially in the energy, infrastructure and mining sectors.

In 2017, the Indonesian Government introduced the Export Ban Relaxation, which allowed companies producing concentrate forms of copper and certain other metals, to continue to export their concentrate products in quantities approved by the Ministry of Energy & Mineral Resources (ESDM) for a maximum of five years until 11 January 2022 under certain provisos.

The 2017 Export Ban Relaxation also allowed companies producing nickel ore to resume export of unprocessed ore, with a nickel content of less than 1.7 per cent and in ESDM approved quantities, for a maximum of five years until 11 January 2022.

Under the relaxation, foreign-owned producers had to commit to divesting 51 per cent of their issued shares to local parties within ten years of commencing production, as well as commit to constructing domestic smelters within five years, with smelter construction plans independently verified and approved by ESDM.

Additionally, the foreign-owned companies had to renew their Export Permits every twelve months, and collectively supply 30 per cent of the low metal content nickel ore required by domestic smelters.

The reasons provided by the Government for the current ban are varied and at times contradictory. One thing is certain, the move is anticipated to remove an estimated 350,000 tonnes of nickel ore from the global sea trade.

Nickels price hike has seen it recently dominate the Bloomberg Commodity Index of 23 raw materials, sidestepping broader metals-based equity market jitters around the length and impact of the current China-US trade tensions.

PCF Capitals Principal, Liam Twigger, said that after years of forecasting a recovery in the nickel market, the metal had finally outperformed every other commodity in the past 12 months.

The nickel price is up 75 per cent so far this year on the back of increasing demand from strong electric vehicle (EV) growth and a bigger than expected kick in stainless steel production, Mr Twigger said.

Nickel stockpiles at London Metals Exchange warehouses are falling, with the market further tightened with Indonesias September announcement that it will start the ban on nickel ore exports on 1 January 2020 two years earlier than expected.

These factors, however, had not led to uniformity in share price gains of listed nickel entities.

Looking at the 12 months share price performance of most companies shows that they are up on average 3 per cent year, to date.

The prices of nickel producers are up 37 per cent, but nickel explorers on average are down 11 per cent.

This shows that majority of gains over the past 12 months has been at the bigger end of the market, which reflects the other incredible development over the past year, continued Mr Twigger.

The PCF Capital principal pointed to data released by Morningstar showing that last month was the first month in human history that the sum of money managed by passive index tracking and algorithm-based funds, exceeded that run by humans.

The highly regarded Economist journal noted last week that the rise of the financial robot is not only changing the speed and makeup of the stock market, but it also raises questions about the purpose of markets, the impact on the wider economy and global financial stability, Mr Twigger said.

It also provides the rationale for the lack of investment in nickel juniors in a price high market as many of them are just too small to be on the radar of an ETF or an index tracking fund.

More fundamentally however, no algorithm-based fund has the capacity to assess exploration risk and return, explained Mr Twigger.

As such, junior nickel explorers are completely avoided as an investment vehicle.

Mr Twigger believes that the other impact is the fallout from artificially low global interest rates possibly 3 per cent lower than they might otherwise be.

Mr Twigger noted that the current market upside for those in good shape with nickel production and cash flow, was the enormous leverage they had over the juniors, presenting some fabulous opportunities for acquisitions, joint ventures and corporate deals.

We note that retail investors might be waking from their slumber as Australias nickel explorers are up 32 per cent over the past three months on the back of renewed volume and interest.

Philippines

Many analysts believe that Philippine nickel mining companies are likely to boost ore production in 2020 when Indonesia bans exports of the raw material but may still not be able to fill up the supply gap.

The Southeast Asian neighbouring countries are the biggest suppliers of nickel ore to China, the worlds largest stainless steel producer and home to some of the biggest makers of batteries for electric vehicles.

The ban will encourage Philippine miners to start ramping up ore output when the local mining season resumes next year, Dante Bravo, president of the Philippine Nickel Industry Association told Reuters.

The Philippines, which has 29 nickel mines and two nickel processing plants, usually ends its mining season in October when heavy rains and strong winds hamper mining and shipping operations. Production is anticipated to resume in March or April next year.

Even though Indonesian ore is generally a higher grade than ore from the Philippines, Chinese smelters have been able to process the lower grade ores coming from Philippines.

Nickel Asia Corp, the leading nickel ore miner in the Philippines, expects the supply outage to be massive as Indonesia plans to export about 20 million tonnes this year alone.

Nickel Asias Senior Vice-President and CFO Emmanuel Samson believes that Philippines will have a difficult time covering that gap.

Nickel Asia, which accounts for about half of the Philippines nickel ore production, expects to book windfall gains from the supply disruption that will keep nickel prices high.

Australia

The strengthening nickel price and growing consensus that longer-term demand will outpace supply will further underpin the development of a new AU$299 million nickel production hub in central Western Australia according to developer, Western Areas.

Being eyed as the second major WA nickel production centre for the Perth-based producer, the hub will be underpinned by a new high-grade underground deposit, Odysseus, part of Western Areas broader existing Cosmos mining operations near Leonora and for which studies for Odysseus have already determined a minimum 10-year profitable mine life.

Western Areas Managing Director, Dan Lougher, said the recent completion of early works at Odysseus had helped keep the project on target for planned first nickel concentrate production early in 2023.

Of the estimated pre-production capex of AU$299 million for Odysseus, our updated development expenditure profile is now FY20: AU$80 million; FY21: AU$66 million; and for FY22/23: AU$143 million, Mr Lougher said.

Odysseus currently contains 165,000 tonnes of nickel Ore Reserves (within 8.1mt @ 2.0 per cent Ni).

The Company completed the definitive feasibility study for Odysseus a year ago and immediately embarked on an early works program on site.

This has included decline rehabilitation to 500 metres below surface, new underground pump station construction, new water management ponds, improved camp accommodation, and purchasing from South Africa a high quality, second-hand head gear and winder. According to the company, this system is significantly more economical than trucking the ore to surface.

There is further significant upside from the AM5 and AM6 deposits close to the three Odysseus ore bodies and which contain in their own right, an Indicated Mineral Resource of 57.6kt of nickel that was not included in the DFS used to give the project the go-ahead, explained Mr Lougher.

Completion of the underground rehabilitation programme down to the AM5/6 ore bodies will allow the new decline development towards the Odysseus deposit.

Mr Lougher also revealed that the current firmer market conditions was bringing additional potential customers to the table for the Companys overall output with two major offtake agreements due to expire in January next year.

The Companys existing output is taken up equally by offtake agreements with BHP and Tsingshan Chinas largest stainless-steel producer which accounts for approximately 25 per cent of Chinas nickel demand.

*Article published in the October-December 2019 issue of The Asia Miner