Introduction to Nickel Investing
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Nickel is high lustre, silver-white coloured material that early civilizations confused with silver. Unlike “fools gold” this imposter is in no way worthless. The element has valuable applications that have enabled it to carve its own niche in the precious metals market.
Nickel is primarily used as a refined metal with two thirds of global production as a constituent of stainless steel. The aerospace industry prizes nickel for its corrosion resistance, and as a result uses it in spades as a component of “super-alloys”. Remaining consumption is for coins, catalysts and chemicals, rechargeable batteries, foundry products and plating.
Around the globe, top producing countries are: Russia, Canada, Australia, Indonesia, New Caledonia, Colombia, China, and Brazil. The major players in mining are: Norilsk, Vale, BHP Billiton, Xstrata, and Eramet.
As stainless steel is the largest use of nickel, demand is fuelled by developing countries in need of expanding infrastructure. Nickel demand in Europe decreased in the period 2002-2005 before recovering in 2006. In the Americas demand fell between 2002 and 2003 before growth resumed in 2004. Nickel demand has increased strongly in Asia throughout the same period, as hyper-developing China is the largest consumer of Nickel to date.
Nickel exists in the earth’s crust in two main types of deposits, laterites, and sulphides. Each deposit presents unique challenges to the mining companies who try and extract the nickel contained within. Sulphide mining presents difficult geological conditions (the deposits are found very deep in the crust), and variable grades. These deposits are the smaller of the two, with production levels in the 5,000-10,000 tonnes/yr range. On the upside, ore processing of these deposits is quite straightforward. The near-surface laterite deposits are condusive to open pit mining and offer consistent grades. The deposits are larger than their sulphide cousins, providing 30,000-60,000 tonnes/ year. But of course, there is a downfall, and in this case it is the challenging ore extraction process involving leaching with acids at high temperatures.
Nickel prices have seen steep climbs and descents since the early ninties. Because nickel’s chief application is as a constituent of a major building material, nickel use mirrors economic growth. Price volatility began in the early nineties following the collapse of the eastern block. A seemingly overnight halt to eastern economic growth created an over supply of nickel that could be provided to the growing western countries at rates cheaper than they were supplying themselves. Western production grinded to a halt, and the global price of nickel plummeted.
Early in 2001, Nickel prices still reflected the past collapse, resting in a trough of about $4,000 per tonne. In 2003 prices started to reflect the economic growth that the world was experiencing. Prices were gaining momentum and in 2005 a value of $14,000 per tonne was breached. Dramatic escalation occurred through 2006, with a price peak in May 2007 of $52,179 per tonne. The nickel market registered a deficit of about $44,000 tonnes in 2006, highly inadequate for the degree of price escalation experienced through 2007. The collapse of the nickel cash price to an average of $27,652 per tonne in August 2007 indicates that speculative investment as well as strong market fundamentals contributed to a price bubble.
In 2008 the price of nickel has been on a gradual descent, with a current value of $20,600 per tonne. A falling price in no way indicates that an investor should steer clear. When it comes to investing, the trick to making money is to jump on board on an upswing, the sooner you can spot a trend the more money you can make. The next trick is timing when to abandon ship, preferably right before a downswing. Even investors who ride the entire wave are likely to come out ahead if they spot the trend early enough. Those who stayed on the “nickel ride” from 2001 to the present have still made five times their investment. Those who decided to jump off when the price maxed out at $52,179 made a whopping return of thirteen times the initial investment.
There are a few stellar examples of how much money can be made with investors buy into the right junior. From 1999 to 2003 shareholders in Mincor Resources (MCR: ACE) owned a flat-lined stock, resting at $0.06 per share. In 2003, the stock started to show some life; after bouncing around a bit shareholders cashed out in 2005 for $4.70 per share. In the spring of 2007, Canadian Company LionOre Nickel was acquired by the world’s leading nickel producer Norilsk Nickel (GMKN.RU). In the 52 weeks prior to Norilsk’s $6.89 billion offer, LionOre shares reached a low of $6.33. At buyout share values were approximately $27.00. Stockholders had the option to sell off their shares for the current rate, or roll into an equivalent share value of Norilsk stock.
Price bubble or not, nickel has shown that it has the capability to reach very high per tonne value on growing demand. Although talks of a “global recession” may be affecting the values right now, any economic pattern is cyclical and following a recession there will be a period of growth. With a larger population base, the next growth phase is bound to dwarf the one experienced early this century. Next time around, the development will primarily be in the BRIC countries, (Brazil, Russia, India, and China) and their inadequate infrastructure will create an insatiable thirst for stainless steel. Quenching this thirst will require a large amount of nickel, possibly enough to set a new price record.
Tags: aerospace industry, Australia, BHP, bhp billiton, brazil, canada, china, company, corrosion resistance, Europe, fools gold, geological conditions, global production, gold, india, investment, investors, juniors, Mine, mining companies, nickel, norilsk, ore processing, precious metals market, price, producers, refined metal, resource, share, silver, stainless, steel, stock, Xstrata
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July 18th, 2008 at 2:55 pm
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