5 Things you Need to Know about Nickel Investing

• Class 1 and class 2 nickel refer to purity, not deposit type; class 1 is 99.8%+ purity
• Nickel sulfate demand is surging for EVs but price premiums are disappearing as supply grows
• Nickel units are key, not sulfide vs laterite; China building lots of processing capacity
• Look for nickel deposits with large scale, high grade, good infrastructure and low political risk
• Producing nickel sulfate on-site often uneconomical; better to ship intermediate product

Nickel Demand Creates Opportunities for Savvy Investors

Nickel has emerged as a critical metal for the clean energy transition, with demand surging due to its use in electric vehicle batteries. For investors looking to gain exposure to this trend, it's important to understand the dynamics shaping the nickel market. In a recent interview, nickel industry veteran Mark Selby shared his insights on key factors to consider when evaluating nickel investment opportunities.

Class 1 vs Class 2 Nickel

A common topic of debate is the distinction between class 1 and class 2 nickel. As Selby explains, this refers to the purity of the end product, not the type of deposit it comes from. Class 1 nickel has a purity of 99.8% or higher and is suitable for use in high-end applications like alloys, plating, and increasingly, nickel sulfate for EV batteries. Class 2 nickel is less pure (<99%) and is mainly used in stainless steel.

While battery-grade nickel sulfate requires high-purity class 1 nickel, Selby cautions against equating specific deposit types like sulfides or laterites as being only suitable for certain classes. Nickel deposits come in three main forms - limonite laterite, saprolite laterite, and sulfides. Limonite typically feeds high-pressure acid leach (HPAL) operations, saprolite can produce ferronickel or nickel pig iron, and sulfide ores are concentrated and smelted. However, Selby notes these are just "intermediate products which can be smelted or refined into a whole range" of class 1 or class 2 products.

Nickel Sulfate Demand and Pricing

With the EV boom, demand for nickel sulfate is seeing tremendous growth. However, Selby points out that while nickel sulfate traded at a $2000/ton premium to the metal 18-24 months ago in China due to a demand surge outpacing new supply, that premium has now evaporated as more capacity has come online.

He expects significant overcapacity in nickel sulfate production to be built, remarking "The Chinese are going to build way more capacity than the market needs just like they do for every other product." As an example, he cites how China went from 3% to 50% of global cobalt production within 5 years. For investors, the implication is to not get too enamoured by eye-popping premiums that are likely short-lived.

Focus on Nickel Units

The most important factor is having enough overall nickel supply to feed both stainless steel demand and rising EV battery appetites, in Selby's view. "The real issue is we need to make sure we have enough nickel units, period, to meet the growth for stainless steel and to meet the growth for electric vehicles going forward," he remarks. Investors shouldn't get hung up on deposit types, but consider if a project can supply the market with adequate nickel.

With ample processing capacity on the way, Selby sees nickel-containing ores, concentrates and intermediate products all being readily refined into suitable end products, whether class 1 or class 2, depending on the market's needs. The historically "oligopolistic" nickel sulfide smelting and refining sector will see lots of new entrants, particularly from China.

Evaluating Nickel Projects

When looking at nickel project investment opportunities, Selby advises investors to focus on scale and grade. Ideally, a project would have both, but depending on the mining method, the grade threshold for what's considered economic varies.

For open pit sulfide mines, 0.7-1%+ nickel is considered high grade, while underground operations require 2-3%+ nickel. Anything lower is considered low grade, though a large scale can compensate for this. He cites the Dumont and Crawford projects as very large, low-grade, open-pittable deposits that work because of their immense scale and accessible infrastructure.

In terms of scale, Selby suggests a minimum production level of 20-30kt nickel/year for at least 10-20 years is required to be taken seriously by larger players. Projects that can demonstrate this are most likely to attract major miners who can fund large capex requirements and reward investors with buyouts. He points to the multi-billion dollar acquisitions of Nova-Bollinger and Voisey's Bay as examples of projects with the magic combination of scale and grade.

Jurisdiction and Infrastructure

Beyond the physical characteristics of a nickel deposit, Selby emphasizes the importance of geography. Jurisdictions with low political risk and pre-existing infrastructure are highly advantageous. Remote locations that require expensive new infrastructure can add billions to a project's price tag.

Having roads, power, labour, and processing facilities already in place is a major benefit, allowing operators to focus on just building the mine itself. Selby notes this is a key advantage for projects like Dumont and Canada Nickel's Crawford project.

Pitfalls to Avoid

For earlier-stage projects, Selby cautions investors to be wary of deposits that have been around for decades but never advanced. "If something's been around for 30 or 40-years, unless there's a really compelling reason why they should buy it now, they're [major miners] probably not going to get there," he comments. A fresh take or new approach is needed.

He's also skeptical of junior miners touting plans for integrated nickel sulfate production. Because nickel sulfate is only 22% nickel, he sees shipping it over long distances as uneconomical due to high costs to crystallize, transport and re-dissolve the material. The exception is for HPAL projects located close to end users.

Battery makers are also likely to demand increasingly high-purity nickel sulfate. Selby questions if miners will want to constantly invest in upgrading their processes to meet ever-rising standards, or if they'd prefer to just sell high-purity nickel metal and let the end user handle further refining.

The Investment Thesis for Nickel

• Look for nickel projects with large scale (20kt+ Ni/yr for 10-20+ yrs), high grade (0.7-1%+ open pit, 2-3%+ UG), and access to infrastructure
• Favour low political risk jurisdictions
• Don't chase unsustainably high price premiums for products like nickel sulfate; consider long-term supply/demand balance
• Focus on nickel units; both laterites and sulfides can produce class 1 nickel with the right processing
• Be cautious of projects touting low capex integrated nickel sulfate production; often uneconomic
• Consider development stage; be wary of long-stagnant projects without a new approach
• the Monitor impending nickel processing overcapacity from China, which will open up new supply sources

With the clean energy transition accelerating, nickel demand is poised for robust growth in the coming years. Astute investors will look past some of the market's fixations on price premiums and product classifications, and focus on projects that can deliver large volumes of nickel units over a long mine life. Scale, grade, jurisdiction, infrastructure and the right team are key attributes to look for. By taking a holistic view of the nickel project landscape, investors can position themselves in the most compelling opportunities and ride the wave of rising nickel demand.