Mark Selby - BHP Labels Nickel as 1 of its 3 Future Commodities

It's that time of the week again. It's time for another intriguing, hard-hitting review of the latest events in the nickel space. Nickel and EV investors will be well aware that nickel prices are up across the board right now. BHP, one of the world's leading resource companies, has labelled nickel as one of its 3 future commodities (along with potash and copper).

This is yet another confirmation of the vast potential of nickel demand growth that has already been underpinned by exponential predictions. We then keen to explore an area of the nickel space that is permanently relevant: current geopolitical affairs. We talk through the macro picture, with a particular emphasis on the US/China trading war.

We also run through potential EV subsidy and state stimulus packages in relation to carbon credit. Momentum is swelling behind nickel and its market fundamentals are shaping up nicely. Nickel investors need to be paying attention to the wider macro story, the small details and the ESG thematic. Elon Musk's demand for as much green, efficient and sustainable nickel is still ringing in the ears of nickel commentators. To what extent will green mining impact investment?

Matthew Gordon: What’s happened this week?

Mark Selby: It I important to take breaks and yes, you would probably miss two weeks when the Nickel price had one of its major moves, but yes, we're trading t just under USD$15,000 p/t.

There's the momentum that we've talked about: Iron ore prices are up to 6-year highs, Copper prices broke through USD$3 p/lb briefly, that then fell back in, but they look like they're taking another run at it. And then on the fundamental side, as I said before, you need to need to see different parts of the chain line-up: you've got ore prices going up, MDI prices going up and stainless-steel prices going up. We're actually finally getting everything lined up and again, that's why we're seeing prices at just under USD$15,000 p/t or at USD$6.75, p/lb for those who think in dollars per pound,

Matthew Gordon: BHP report talking about the commodities of the future: Copper, Potash – unbelievable, but it's the future. Nickel - you made it.

Mark Selby: As for context, BHP spent most of the 2010s, in fact, seven years of that decade trying to sell their Nickel business. This is a full 180-degree flip in terms of their view on that commodity. So again, I would encourage people that if BHP is thinking this way, there's a pretty good chance that Rio Tinto is thinking this way, Anglo American, Glencore and all of the other mining companies further down the food chain, they're the ones, if you're going to see big take-outs happen, they're the ones who have the cash to be able to do the big takeout. So the fact that those three metals made the list I think is pretty important.

Matthew Gordon: What has the past or history taught us about the way that they go about making these acquisitions?

Mark Selby: In the Nickel space, if you just look, they made this shift around 2017, 2018 and what you saw was 1, they developed the Yakabindie project, which was just up the road from their Mount Keith operation that had operated for 25 plus years, it was a large scale, low-grade mine. And again, I think for a lot of retail investors, it's grade, grade, grade, and high-grade does make things easy, but you typically don't find 30-year mine life, high-grade resources anymore in a jurisdiction that any company would like to operate in. The reality is, for the majors who want multi-decade, multi expansion type resources, that tends to be at the lower grade end of the spectrum. They developed Yakabindie, they just bought Honeymoon Well from Norilsk, which is in the same region in Australia. And again, it's another large-scale, low-grade deposit. It's scale; they want something that they can get multiple lives, multiple commodity cycles out, because they know you may not get it right the first time, but if you still have lots of resource to pick it up the second, third and fourth time, then you've got a better chance of making money over the long term on your investment, which is what those guys are very focused on.

Matthew Gordon: Which are the jurisdictions that they are most likely to be interested in?

Mark Selby: When you look at their asset portfolio today for BHP, Rio Tinto, it's really Australia, South America and North America that are the vast bulk of their assets. Political risks: some companies such as Glencore seems to be more tolerant of political risk. And in some of the larger Chinese companies that have gone abroad are also more comfortable with the degree of political risk. But, , again, as we saw this week with Northern Dynasty in the Gold space in Alaska, they thought they had their permit and then they didn't have their permit. So it's not just a country that has come down to an individual jurisdiction that you, you need to look at. They don't want to have assets turned to zeros or have their values greatly diminished by one political decision making that happen. If you look at their asset allocation breakdown, you'll see it focused in a very small handful of countries.

Matthew Gordon: What's happening in the US versus China?

Mark Selby: Right now, the China reflation trade is happening. The pace of it has slowed down a little bit, but where you see commodities, across multiple commodities setting new multi-year highs, which we have seen it in a bunch of commodities, that says the reflation trade is on. Whereas for China, Q1 was the bottom, and you're seeing good quarter over quarter, they've reflated so hard that you're seeing good year over year numbers. In the rest of the world, Q2 numbers are coming out. For most of the rest of the world outside China, Q2 is going to be the bottom so you're going to start to see good quarter over quarter numbers emerge in a number of jurisdictions.

On the Nickel front, with China being the bulk of stainless-steel growth and the bulk of both Nickel supply and demand, with Indonesia, the 17% growth we talked about last time, year over year, we're seeing that continued strength in August and into September. There are no signs that is slowing down. The fact that we're seeing stainless steel prices up more than 10% last week, that's a major increase that says that rebound in demand in China is not slowing down anytime soon. It is a very good sign for where the Nickel market is headed before year end.

Matthew Gordon: Iron Ore as well is up: 6.5-year highs. It's incredible.

Mark Selby: It is. China is trying to reflate the economy, they have gone to the same playbook that they've done multiple times of the past two or three decades, and again for those of us in the commodity space, it's a welcome push and it looks like it's going to continue to be sustained through the end of the year and beyond at this point.

Matthew Gordon: Some of them have been converted into autonomous vehicles. It's kind of exciting to see, but also 100,000 electric vehicle charging points across China. When the Chinese say, we're going to do it, it gets done.

Mark Selby: Yes. There are some benefits of living in a state-controlled authoritarian regime where the punishment can be pretty severe for not achieving a goal. I think the other really key piece of this, I mean, we all focus on cars and Teslas, but when you look at the entire vehicle market, the city of Shenzhen had electric cars and an all-electric bus fleet a year or two years ago. So that whole shift in a whole range of vehicle fleets, and again the battery that's going to be in a bus is much larger than it is for a car. Now, given the distance that a lot of buses travel, you're going to see a lot of lithium iron phosphate be used in those applications because they don't need to drive 500 miles, they're doing a relatively short loop for certain number of hours a day. That's not going to translate directly into all Nickel demand, but again, when you get to the Tesla semi-truck, and you're going to see semi-trucks elsewhere in the world, end up shifting to electric, those are going to be great, big, long-range, lots of Nickel batteries that are coming down the pipe. That's where really, automobiles are really just the tip of the iceberg, and you've got buses, trucks, and a whole bunch of other vehicle fleets underneath that are coming to the fore.

The other part is California; there was a news story that there was power outages, and they're talking about having more battery storage in their grids to be able to balance the loads because of solar and wind, the sun doesn't always shine and the wind doesn't always blow when you want it to. And so, they had to do that in South Australia, Tesla put a big set of battery packs in there. You're seeing that happen now in California. And again, you'll see, as renewables become a bigger share of the grid, having these kinds of batteries to help balance out some of those loads is going to become more important. Again, not always Nickel, there's other technologies that are very suitable for standalone storage, but Nickel will be a part of that. It's just one more battery application that's going to need a lot more Nickel in the future.

Matthew Gordon: There are going to be different batteries for different solutions, and there's going to be different designs out there, but it's all of the above, not some of the above that's going to be required.

Mark Selby: That again ties back to the earlier comment in terms of BHP’s view on future-facing metals; they're not looking at this as a two-year trade in Nickel and Copper and Potash, they think in multi decades, so this is a theme that they think, when they say publicly like this, that this is where their commodity focus is going to be, this will be where their commodity focus is not just for the next year or so, but in their mind, if they've done it, right, this is something they'll be focused on for the next 10 to 20-years.

Matthew Gordon: I think people are waking up to the fact that actually this COVID thing is not getting in the way of these plans, because they've been doing this for 5, 10-years in some cases, getting ready for this moment.

Mark Selby: Yes, I know the gold bugs are all dancing around doing the happy dance, knowing that gold would get to USD$2,000 p/oz. For some people, that only took 20 years longer than they said it was going to. But the reality is, is if you look at the Copper equities and the Nickel equity, the Copper equities performing since we talked in mid-May, and then the Nickel equities just in the last three or four weeks, if you bought companies like Giga or FBX, or asset Canada Nickel in the last three months, you're up as much or more than if you had had that Gold stock. Those are not typical moves. You always see these big moves at the start of a cycle, and you see a couple more big moves in this cycle before things peak out and roll over again. But again, it's fun to get in early and there's still lots of money to be made between now and the top of this next cycle.

Matthew Gordon: What you're doing with the Gold bugs? Are you seeing anything? I know you're Canada, but North America generally, or are some of those things going to come to the aid of junior miners?

Mark Selby: Very much so. I will give you a very concrete example: in my decade during my past life advancing Dumont at RNC, there was a certain amount of attention, but again, with the EV shift and the realisation that there was a bunch of strategic metal supply chains that countries really need to focus on. About two weeks ago, three weeks ago, representatives of the US government who were involved in strategic sourcing said, hey, we want to get to know your company. We want to get to know your project because this is something, and again, this is something that's not just Republican or Democrat this is a rare bipartisan support initiative to be able to look at securing those metals, which the United States deemed strategic to their interests.

Nickel has always been one of the metals that has fallen into this category. So that in itself is tremendous that there are levers of government that are willing to work to help you as opposed to slow things down or create bureaucracy or something like that. The nice thing with a project, and again, I really encourage investors to focus on jurisdiction; mining is a risky enough business to start with having a politician make a decision which can vastly impact the value of your asset is very challenging. So again, we saw that with Northern Dynasty just earlier this week.

Matthew Gordon: What happened there?

Mark Selby: They've been looking to advance one of the world's largest Gold and Copper deposits. Unfortunately, it's sitting in close proximity to a sensitive salmon fishery. There's a number of people who are quite concerned about the possible impact of that mining operation on that fishery and the surrounding environment. And so it's been back and forth for a number of decades and it looked like it was going ahead and then there was an announcement this week that the US Army Corps of Engineers who was responsible for granting a certain permit said, oh, we need to have some more information and we need to understand how you might mitigate some of the impacts, that type of thing. I would encourage investors to look at where an operation is and see, okay, have they recently permitted a number of mines in that area, or is this the first new mine in 50 years? Or is this the first mine ever in this jurisdiction? Because it just creates that level of risk, there may be some issues with the community and so forth, the local stakeholders who again, are going to be impacted for many decades. We in the mining industry did a horrible job for a very long period of time in terms of taking that for granted and literally abusing it. Today the industry has come a long way, but we know we can never take it for granted. We need to really make note of the fact that we have an impact and we need to own our impacts on the local community, on the local environment and do everything in our power to make sure that our projects minimize those impacts to the maximum extent possible or mitigate them to the maximum.

Matthew Gordon: Did you see that article, first of all?

Mark Selby: Yes. I did. They did an excellent job. We highlighted in the release where we talked about net-zero carbon, because again, we think we're going to have a relatively low footprint in a number of areas. But that is the real crux of the issue, in terms of Nickel: when you start looking at it and say, let's take out all of that source of supply of Nickel that has a high SO2 footprint in a certain amount of production disappears, let's take all of the Nickel that has deep sea tailings discharge that's associated with that. What we've been talking about before is, how much of this production has a very high carbon footprint associated with that? And you cross that one off the list, and by the time you're finished crossing off from each source of pollution, there's really not a lot of Nickel supply left. , that's relatively low footprint at this point in time.

I think that's the real opportunity, not just in Nickel, but across the entire sector. Mining companies need to not to talk about it in a 2050 timeframe but get going and really look for those opportunities where you have an ability to create a net carbon or low carbon mining operation. And that needs to be a key part of your checklist going forward in terms of those assets you're going to look at acquiring.

Matthew Gordon: You're saying this kind of clean Nickel/dirty Nickel conundrum is fine right now, when you can control that. And you can take advantage of that, whether you can charge a premium for it or something, how is it going to work?

Mark Selby: I think we're where it's going to be is, this first step is a preference; so if I have Nickel from two suppliers or metal from two suppliers, one is low carbon, one is high carbon. I will always choose the low carbon alternative first. And if I run out of that, then I will use the other one grudgingly. I think the second thing. And I think that the kind of mechanisms that the EU is looking at in terms of carbon taxes and equalizing or charging for importing materials that have a high carbon footprint attached to them. To me, with our net-zero initiative, is quite exciting because if they're going to have effectively, one of the structures they're looking at as a value added tax, based on the carbon added tax, basically on how much carbon is coming in, so all of a sudden if instead of, okay, well, it's the same price. I'll choose one versus the other as a preference, which again, I think it's the first step, then you move into, oh well, I import this one, I have to pay a 15% carbon-added tax to the EU. And if I import your product, then that comes in at a 0% tax. That allows me, as a supplier, to capture as much of that 15% or whatever the tax is going to look like gap as a premium, as a supplier. So that's where the global markets are headed. And so again, those companies that are able to get in early and grab those handful of assets where you can do this, they are in great shape.

I think since that article has come out, you have seen companies like Giga and first point that again, have a Nickel hosted in similar mineralisation that we do that, , that has that zero carbon potential, have all done very well in the past few weeks here.

Matthew Gordon: It is early days I guess, but is there a kind of band of people that are lobbying or talking to government or state to try and understand what the world could look like going forward?

Mark Selby: Yes, it is all just theory. The key thing to do is to advance your project in a timeline, given the regulatory framework that exists, and being sensitive to that regulatory framework could change fairly dramatically. Our net zero approach is, again, because of the unique nature of the rock and the location and the ability to potentially process downstream, it allows us to take advantage of that. But by focusing on that, I don't have to worry about, oh, if the government slaps on a massive carbon tax on diesel fuel, because I'm going to be using less diesel fuel than most other Nickel mining operations. If the governments decide that, if you are responsible for generating downstream carbon, I'm going to somehow go after you for that because you made a profit on that. Again, I'm not going to have to worry about that.

For us, having that net-zero focus from day one allows us to minimize the risk of any changes in government policy going forward.

Matthew Gordon: Any thoughts you want to leave us with, with regards to Nickel?

Mark Selby:  Sure. We've been talking each week in terms of that real key triangle that's going to determine where prices are going by year end. So, it's Chinese demand, it's Philippine ore supply and it's Indonesian NPI production. What has really tip the scale this week and why you saw another major move in Nickel prices over the last two weeks is that, again, that big surge in Chinese Nickel demand that we saw in June looks like it's going to carry through easily through the fall. We had a stat come out that said the Nickel content of Philippine ore supply had dropped by double digits during the first half. And so now, Indonesia NPI production, again, when people are looking at their forecast, it's a big ramp up, but given what they're seeing on the other two parts of that triangle, they're not sure that it's going to be able to ramp up enough to fill that gap. I would say, where I was fairly cautious a few weeks ago, the balance is tilting around to where I think we've seen a nice price move. Rather than stepping back, as I talked about before, I think we've got flat to higher upside from here, depending on how ore supply continues over the next few weeks here from the Philippines

Matthew Gordon: I do appreciate that. We're getting lots of positive feedback on the show, some great questions sent in. We've got a few questions in about your company, Canada Nickel Corp, which we may pick up next time you are on the show, and maybe help us try and understand what net-zero carbon is, how you can prove it? What you know today and what you're doing about trying to discover about what you've got there. So we'll see you again next week shall we?

Mark Selby: Sounds good, see you then, Matt, take care.