Nickel Miners Poised for Breakout Ride the EV Wave

2022 Nickel Market Summary

Overview

• The nickel market has experienced significant volatility in 2022, with prices reaching record highs in March above $100,000/tonne due to the Russia-Ukraine war and subsequent sanctions on Russia, a major nickel producer. Prices have since pulled back but remain elevated compared to recent years.
• Demand growth is being driven by the stainless steel and electric vehicle battery sectors. Supply growth is constrained in the near term, leading to projected deficits.
• Key factors to watch include the ramp-up of new nickel supply, particularly from Indonesia, as well as the pace of electric vehicle adoption and battery chemistries used. Policy shifts around Russian nickel exports could also impact market balances.

Supply

• Nickel mine supply registered a strong rebound of 15% in 2021, recovering from pandemic-related disruptions in 2020. Output from Indonesia continued to drive growth, increasing 18%.
• However, 2022 production may be impacted by Covid-related absenteeism, torrential rains in Indonesia, and energy supply issues. Mine supply is projected to grow just 4% in 2022.
• The market was rocked in early March when Tsingshan announced it would buy large amounts of nickel on the LME to reduce its short exposure, leading to an unprecedented surge above $100,000/tonne and suspension of trading.
• Sanctions on Russian nickel exports could tighten availability. Russia accounts for around 20% of Class 1 nickel supply. Stockpiling occurred ahead of sanctions, but risks remain.
• New projects in development are concentrated in Indonesia, led by the planned Halmahera and Morowali projects. Supply growth is backloaded, with deficits projected through 2024.

Demand

• Nickel demand rebounded 10% in 2021, recovering from a 6% drop in 2020. Demand is projected to increase 6% in 2022 and 4% in 2023.
• Stainless steel accounts for over 70% of nickel consumption. This end-use should see steady growth of 2-4%/year. Nickel improves stainless steel's corrosion resistance and physical properties.
• The fastest-growing demand segment is electric vehicle batteries. Nickel is used in lithium-ion batteries to improve energy density and storage capacity. Demand from this sector could grow 30%+ annually out to 2030.
• Class 1 nickel's use in batteries is projected to quadruple between 2020-2030. However, the nickel intensity per battery is uncertain and dependent on the battery chemistries used.

Nickel Market Balance

• The nickel market has been in surplus for most of the past decade, until a small deficit emerged in 2021. The deficits are projected to widen to 166kt by 2024.
• However, balances could shift depending on the pace of new supply ramping up, notably in Indonesia, as well as demand growth in the battery sector. Stockpile depletion or builds will also impact balances.
• There are risks that deficits get larger if new projects are delayed or demand grows faster than expected. The potential for deficits has contributed to the bullish price environment.

Nickel Prices

• Nickel prices ranged from $13,000-16,000/tonne between 2017-2019 before declining during the pandemic. The price recovery began in late 2020.
• Prices really took off in early 2022 following the Russia-Ukraine war, spiking briefly over $100,000/tonne before LME trading was halted. Sanctions raised supply concerns.
• After pulling back from the spike, prices have traded in a $24,000-34,000/tonne range. This still represents a doubling from the 2017-2019 period.
• Stocks can influence price moves. LME inventories remain low from March's drawdown. Shanghai Futures Exchange stocks have fallen by 75% over the past year.
• The nickel market is expected to remain tight over the next couple of years, supporting strong prices well above historical levels. Any supply delays or stronger EV demand could push prices higher.

Indonesia Dynamics

• Indonesia policy changes have enabled a rapid increase in nickel pig iron (NPI) production used in stainless and batteries. NPI capacity could reach 1 million tonnes by 2024.
• The country relaxed its export ban in 2017, leading to exports jumping from nothing to 400kt annually. An export tax between 5-15% applies.
• Environmental policy has resulted in the closures of nickel miners not yet operating smelters. But smelter development has progressed, increasing economic benefits retained.
• Indonesian production is dominated by lower-grade nickel ore. There are challenges to converting NPI to high-grade Class 1 nickel desired for batteries, but progress is being made.
• The competitiveness of Indonesian NPI compared to Class 1 nickel hinges on energy costs. Recent policy shifts aim to ensure domestic supply for smelters at fixed prices.

ESG Trends

• Investors are increasingly focused on environmental, social and governance (ESG) criteria when evaluating nickel projects and producers.
• On the environmental side, carbon emissions from HPAL and NPI production have been a concern. Some firms are targeting net zero emissions. Energy sources and land/water use are considerations.
• From a social perspective, community relations, labor relations and safety records matter. Companies aim for shared prosperity with indigenous groups near mine sites.
• Governance relates to executive compensation, accountability, board independence and business ethics. Anti-corruption policies are scrutinized in high-risk regions like Indonesia.
• Overall ESG strategies have become priorities for nickel firms. Those viewed as leaders can garner favor with investors focused on sustainability.

Battery Sector Dynamics

• Demand for nickel in lithium-ion batteries for electric vehicles is expected to grow rapidly, making this the fastest-growing market segment.
• However, there is uncertainty about which cathode chemistries will dominate in the future. This impacts nickel intensity per battery.
• Currently a nickel-cobalt-manganese (NCM) chemistry is common. But high-nickel NCM 811 is gaining a share, requiring more nickel per battery.
• Alternatives like lithium iron phosphate (LFP) have lower nickel intensity. But LFP provides less energy density. Its use may be limited to shorter-range vehicles.
• Supply chain localization trends may benefit North American, European and Indonesian nickel miners versus current Chinese control of processing and refining.
• Battery recyclers could emerge as a meaningful source of nickel supply in the long run. Recycled nickel may account for 15-20% of total supply by 2040. This could lower the demand for mined nickel.

Investor Considerations

• Strong demand growth from stainless steel and especially electric vehicle batteries is expected to drive nickel deficits in coming years, supporting prices at elevated levels.
• Supply availability risks related to Russia sanctions, Indonesian policy changes, ramp-up delays, and ESG developments could exacerbate shortfalls if materialized, providing upside price leverage.
• Monitoring EV adoption rates, battery chemistries, industry stockpiles, and substitutions between nickel and other battery metals will be key to forecasting market balances and price trends.
• Leading nickel producers well-positioned to capitalize on electric vehicle demand growth while maintaining low-cost operations include Glencore, Vale, Norilsk Nickel, Jinchuan Group, and BHP among majors.
• Smaller miners offer greater leverage to higher prices but also higher risk, such as Talon Metals focused on the Tamarack project in Minnesota.
• Diversified exposure can be gained through nickel mining ETFs such as the iPath Dow Jones-UBS Nickel Subindex Total Return ETN.

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Takeaways for investors

• Demand growth for nickel, especially from the electric vehicle battery sector, is expected to drive consistent market deficits over the next few years which should support higher nickel prices.
• Supply availability risks related to Russia sanctions, Indonesian policy changes, new project delays, and ESG considerations could worsen the deficits if they materialize, providing further upside price leverage.
• Monitoring EV adoption rates, battery chemistries, industry stockpiles, and substitution effects will be crucial to forecasting nickel price trends.
• Leading low-cost nickel producers like Glencore, Vale, and Norilsk Nickel are well-positioned for the nickel market outlook, while smaller miners offer more leverage but also more risk.
• Nickel exposure can be gained through both direct mining stocks and ETFs tracking nickel prices.
• Overall, investors should see nickel as a key battery metal poised to benefit from surging electric vehicle demand over the next decade, although some uncertainty remains around end demand and the supply response. Positioning for higher prices seems warranted given the projected deficits.

Key Junior Nickel Companies to Watch

• Canada Nickel (CNC) - Advancing the Crawford nickel-cobalt project in Ontario with substantial scale potential.
• Talon Metals (TLO) - Focused on developing the Tamarack nickel project in Minnesota that could come into production by 2026.
• Grid Metals (GRDM) - Exploring and developing the Makwa-Mayville nickel project in Manitoba.
• FPX Nickel (FPX) - Drilling to expand resources at its Baptiste deposit in British Columbia, which could support 40+ years of mining.
• Premium Nickel Resources (PNRL) - Targeting restart of the past-producing Selebi nickel mine in Botswana. Also exploring nearby open pit opportunities.
• Nickel Creek Platinum (NCP) - Advancing the Nickel Shäw project in Canada with platinum group metals byproduct potential.
• the - Focused on restarting nickel operations in Western Australia taken offline after the prior price downturn.
• Garibaldi Resources (GGI) - Exploring the E&L nickel-copper-cobalt project in British Columbia.

These juniors provide speculative leverage to potential nickel price upside, but also higher risk levels given early development stage.

Large nickel mining companies

• Vale - The Brazilian mining giant is the world's largest nickel producer. It offers stable low-cost production and leverage to higher prices.
• Glencore - The diversified miner has major nickel assets including the Nickel Rim South mine in Australia and Koniambo project in New Caledonia.
• Norilsk Nickel - The Russian company is the second-largest global nickel producer and also offers cobalt exposure. But sanctions create uncertainty.
• BHP - The mining major produces nickel from its Nickel West operations in Australia. It plans to expand production to capture electric vehicle demand.
• Jinchuan Group - The Chinese state-owned firm is the third largest nickel producer globally. It aims to ensure nickel supply for China's battery industry.
• Western Areas - The Australian miner has low-cost nickel operations and promising development projects in the country.
• Independence Group - Another Australian nickel miner focused on local projects like Nova, which produces high-grade concentrate. The combination of major low-cost producers and smaller developers provides the broad investor exposure to the potential upside in the favorable nickel market.

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Canada Nickel

Canada Nickel is emerging as a major player in the nickel mining sector through its 100% owned Crawford Nickel Sulphide project in Timmins, Ontario. Crawford is the largest nickel discovery since the 1970s and is located in an established mining jurisdiction with good infrastructure. Through over 20 transactions, Canada Nickel has also consolidated a vast regional land package 50 times larger than Crawford with 20 additional targets, demonstrating the potential for further substantial discoveries and resource growth. With its significant existing resource, low carbon production potential and exploration upside across its district-scale land holdings, Canada Nickel is well positioned to become a leading nickel producer.