Nickel: Supply Constraints & Investment Opportunities

• Nickel prices have rebounded over the past two weeks, supported by positive Chinese PMI data and strong demand from the EV supply chain
• Indonesia is still importing nickel ore from the Philippines despite stable Chinese ore prices, indicating tight supply and supporting higher nickel prices going forward
• Talon Metals and Premium Nickel Resources announced positive exploration results and plans, highlighting the potential for new high-grade nickel discoveries
• Recent mergers and acquisitions activity, such as the Karora Resources and Westgold Resources deal, reflect consolidation and synergies in the nickel mining sector
• Nickel supply remains constrained, with few large-scale projects coming online before 2030, presenting opportunities for producers that can bring new supply to the market

The Compelling Case for Investing in Nickel

Nickel has emerged as a critical metal in the global transition towards a low-carbon economy. As demand for electric vehicles (EVs) and renewable energy storage solutions continues to soar, securing reliable supplies of high-quality nickel has become a top priority for automakers and battery manufacturers worldwide. This article examines the current state of the nickel market, exploring the key drivers of demand, the challenges facing supply, and the investment opportunities that exist for those looking to gain exposure to this essential commodity.

Nickel Prices Rebound on Positive Economic Data

After a period of volatility, nickel prices have staged an impressive comeback in recent weeks. The London Metal Exchange (LME) nickel price surged over 12% to reach $17,800 per tonne in early April, buoyed by stronger-than-expected Chinese Purchasing Managers' Index (PMI) data. The positive PMI readings, which exceeded 50 for the first time in several months, signaled an improvement in Chinese industrial activity and sentiment. This rebound in nickel prices also coincided with a broader rally across base metals, with copper prices rising above $9,000 per tonne.

Mark Selby, a prominent figure in the nickel industry, noted that the recent price action reflects a combination of restocking by EV supply chain participants and tight physical supplies.

"People needed nickel units and were in a bit of a push to get as much sulfate as they could," Selby explained during an interview. While premiums for nickel sulfate, a key ingredient in EV batteries, have eased slightly from their recent highs, demand remains robust as automakers scramble to secure long-term supply agreements.

Supply Constraints and the Indonesian Factor

Despite the recent price gains, concerns persist over the ability of global nickel supply to keep pace with the projected growth in demand from the EV sector. Selby highlighted the scarcity of large-scale, near-term nickel projects, particularly those that can meet the stringent environmental and social governance (ESG) standards required by automakers and investors. "Other than potentially Dumont, there are no other bigger projects in Canada coming online in the latter half of this decade," he noted.

The supply picture is further complicated by Indonesia's ongoing efforts to restrict exports of unprocessed nickel ore and promote domestic processing capacity. Despite stable Chinese ore prices, Indonesia continues to import significant quantities of nickel ore from the Philippines, underscoring the tightness in the physical market. Selby pointed out that every $3 per tonne increase in Indonesian ore prices translates to an additional $300 per tonne in the cost of producing nickel, providing a floor for prices going forward.

1. Indonesian nickel export policies:
   • Indonesia has been implementing measures to restrict exports of unprocessed nickel ore and promote domestic processing capacity
   • Despite stable Chinese ore prices, Indonesia continues to import significant quantities of nickel ore from the Philippines, underscoring the tightness in the physical market
   • Changes in Indonesian export policies can have a significant impact on global nickel supply and prices
2. Chinese economic data and industrial activity:
   • Stronger-than-expected Chinese Purchasing Managers' Index (PMI) data, exceeding 50 for the first time in several months, signaled an improvement in Chinese industrial activity and sentiment
   • The positive PMI readings contributed to the recent rebound in nickel prices, alongside a broader rally in base metals
   • China's economic performance and industrial demand have a significant influence on the global nickel market
3. Environmental, Social, and Governance (ESG) standards:
   • Automakers and investors are increasingly focused on ensuring that nickel supply meets stringent ESG standards
   • The scarcity of large-scale, near-term nickel projects that can meet these ESG requirements adds to the supply challenges facing the industry
   • Adherence to ESG standards is becoming a critical factor in shaping the investment landscape and determining the viability of nickel projects
4. Global decarbonization efforts and the energy transition:
   • The global push towards decarbonization and the adoption of electric vehicles (EVs) and renewable energy storage solutions is driving demand for nickel
   • Governments and automakers are investing in securing reliable supplies of high-quality nickel to support the energy transition
   • The strategic importance of nickel in the global energy transition is attracting increased investment and shaping policies related to the commodity

These geopolitical factors, ranging from country-specific policies to global environmental initiatives, play a crucial role in influencing nickel supply, demand, and prices. Investors and industry participants must closely monitor these developments to navigate the complex and evolving nickel market landscape.

Exploration Successes and M&A Activity

Amidst the supply challenges, several junior nickel explorers have reported encouraging drill results and outlined ambitious exploration plans for the year ahead. Talon Metals, which is advancing the high-grade Tamarack project in Minnesota, announced a comprehensive exploration program aimed at extending the existing resource and testing new targets on its properties. The company has secured substantial funding from the US government to support its exploration efforts.

Similarly, Premium Nickel Resources provided an update on its Selebi project in Botswana, highlighting the potential for additional high-grade discoveries. The company hosted a detailed webcast outlining its exploration strategy and the compelling geology of the project. These exploration successes underscore the potential for new high-grade nickel discoveries to help bridge the looming supply gap.

The nickel sector has also witnessed increased merger and acquisition activity, as companies seek to consolidate assets and realize synergies. The recent merger of equals between Karora Resources and Westgold Resources, which will see Karora's Beta Hunt nickel mine combined with Westgold's operations, is a prime example of this trend. The deal, which comes with a range of identified synergies, highlights the value that can be unlocked through strategic combinations in the nickel space.

1. Talon Metals
   • Advancing the high-grade Tamarack nickel project in Minnesota
   • Announced a comprehensive exploration program to extend the existing resource and test new targets
   • Secured substantial funding from the US government to support exploration efforts
2. Premium Nickel Resources
   • Provided an update on its Selebi nickel project in Botswana
   • Highlighted the potential for additional high-grade discoveries
   • Hosted a detailed webcast outlining its exploration strategy and the project's compelling geology
3. Karora Resources
   • Involved in a merger of equals with Westgold Resources
   • Karora's Beta Hunt nickel mine will be combined with Westgold's operations
   • The deal comes with a range of identified synergies, highlighting the value that can be unlocked through strategic combinations in the nickel space
4. Westgold Resources
   • Merging with Karora Resources in a deal that will combine Westgold's operations with Karora's Beta Hunt nickel mine
   • The merger is expected to realize synergies and create value for both companies

These companies represent a mix of established nickel producers and junior explorers, each playing a role in the evolving nickel market. Talon Metals and Premium Nickel Resources are focused on advancing high-grade nickel projects, while the merger between Karora Resources and Westgold Resources demonstrates the potential for consolidation and value creation in the sector.

The Investment Thesis for Nickel

• Robust demand growth from the EV and renewable energy sectors, driven by global decarbonization efforts
• Constrained supply outlook, with limited near-term production growth and declining ore grades
• Emergence of high-grade nickel discoveries, offering the potential for low-cost, ESG-friendly production
• Increasing the strategic importance of nickel in the global energy transition, attracting investment from automakers and governments
• Positive long-term price outlook, supported by structural deficits and rising production costs

Actionable Advice for Investors:

• Gain exposure to nickel through investments in established producers with high-quality assets and strong balance sheets
• Consider investing in junior explorers with promising nickel discoveries in stable jurisdictions, particularly those with strategic partnerships or offtake agreements in place
• Monitor developments in key nickel-producing regions, such as Indonesia and the Philippines, as changes in export policies and ore prices can have a significant impact on the market
• Stay informed about advancements in nickel processing technologies and the adoption of ESG standards, as these factors will increasingly shape the investment landscape

The nickel market stands at a critical juncture, as the world grapples with the challenges of meeting soaring demand for this essential battery metal while adhering to increasingly stringent environmental and social standards. The recent rebound in nickel prices, underpinned by positive economic data and tight physical supplies, highlights the underlying strength of the market. However, the path forward is not without obstacles, as supply constraints and geopolitical factors continue to pose risks.

For investors, the nickel story presents a compelling opportunity to gain exposure to a commodity that is poised to play a central role in the global energy transition. By carefully evaluating the fundamentals of individual companies and projects, and staying attuned to the evolving market dynamics, investors can position themselves to benefit from the long-term growth potential of this essential metal.