Nickel's Strategic Rise: Supply Squeeze & Government Support Signal Strong Investment Potential

• Nickel prices have been hovering around $16,000-$16,500 per ton, with expectations of reaching $20,000 by year-end.
• Indonesia is importing ore from the Philippines, equivalent to 3% of global supply, due to limitations in its own ore production.
• The average NPI (Nickel Pig Iron) grade has dropped from about 13% to below 12%, effectively derating production capacity.
• Global stainless steel consumption remains robust, with nickel demand up 8% year-over-year in the first half of the year.
• There's increasing government support for midstream processing capacity in North America, as evidenced by Electra Battery Metals' recent funding from the U.S. Department of Defense.

The Nickel Market: Current Trends and Future Outlook

The nickel market has been a subject of intense scrutiny in recent months, with investors and industry experts closely monitoring price fluctuations, supply dynamics, and demand trends.

Market Pricing & Projections

According to Selby, nickel prices have been oscillating around the $16,000 to $16,500 per ton range in recent weeks. While this might seem stagnant, Mark Selby, CEO of Canada Nickel, remains optimistic about the market's trajectory. He states:

"Still on track for $20,000 by year-end, but I think it'll be later in September, into October, when we see things start to move."

This projection is particularly noteworthy for investors, as it suggests a potential 20-25% increase in nickel prices over the next few months. However, it's crucial to approach such forecasts with caution and consider the various factors that could influence market dynamics.

Supply Dynamics: The Indonesia-Philippines Connection

One of the most intriguing developments in the nickel market is the shifting supply dynamics between Indonesia and the Philippines. Selby revealed that Indonesia, traditionally seen as having an almost unlimited supply of nickel ore, has been importing ore from the Philippines. This import volume is significant, equivalent to about 3% of global supply. Selby explains:

"It turns out Indonesia doesn't have quite as much ore, obviously as ore prices going up. But up until June, they've now been ramping up imports of ore from the Philippines."

This shift has several implications:

• It challenges the assumption of Indonesia's unlimited ore supply.
• It indicates potential constraints in Indonesia's domestic production.
• It could lead to tighter global supply, especially during the Philippines' rainy season.

NPI Grade Decline & Production Implications

Another crucial factor affecting the nickel market is the decline in the average grade of Nickel Pig Iron (NPI). Selby notes that the average NPI grade has dropped from about 13% to below 12%. While this might seem like a small decrease, its impact on production is significant.

"What that drop in grade means is effectively derating that capacity," Selby explains. He further elaborates that at a 1.8% ore grade, production is about 8,000 tons, while at 1.5%, it drops to about 6,500 tons. This reduction in grade means that more iron needs to be melted to produce nickel, potentially leading to even lower nickel production.

This grade decline could have far-reaching consequences for the global nickel supply, potentially leading to tighter markets and supporting higher prices.

Chinese Market & Global Demand

Despite concerns about the slowdown in the Chinese economy, Selby remains optimistic about global nickel demand. He points out that global stainless steel consumption, a major driver of nickel demand, continues to be robust. Nickel demand has seen an 8% year-over-year increase in the first five to six months of the year.

Selby states:

"As long as we end up in high single digits, maybe we won't get to my double-digit forecast that I was expecting earlier in the year, but I expect that we'll stay in that high single-digit range, potentially low double-digit range."

This sustained demand, coupled with potential supply constraints, could create a favorable environment for nickel prices in the coming months.

Government Support & Strategic Importance

One of the most significant developments in the nickel industry is the increasing government support for domestic processing capacity, particularly in North America. This trend is exemplified by the recent funding received by Electra Battery Metals from the U.S. Department of Defense.

Selby emphasizes the strategic importance of this support:

"As much as governments are fussed about having enough mine production that's "safe", that doesn't come from China or Indonesia or the Congo, they are equally or even more fussed about having that transformation capacity occur in North America."

This government backing could have several implications for the nickel market:

• Increased investment in North American nickel projects.
• Potential premium for nickel produced in "friendly" jurisdictions.
• Acceleration of domestic processing capacity development.

Company Updates & Industry Developments

Canada Nickel Company

Canada Nickel's flagship Crawford project continues to show promising results from its drilling program. Recent highlights include eight mineralized holes, with the best showing 100 meters of over 0.4% nickel and 40 meters of 0.54%. The company believes Crawford will be their first, but not best, project. With seven drill rigs operating on five other targets, the company is aggressively exploring its land package. The scale of the Crawford deposit and its location in a mining-friendly jurisdiction make it an attractive project in the nickel space. Investors should watch for further drilling results and progress towards a feasibility study.

Electra Battery Metals

Electra Battery Metals has recently secured significant funding from the U.S. Department of Defense, receiving approximately $20 million USD. This funding is aimed at supporting midstream processing capabilities, particularly in cobalt processing, addressing a critical gap in the North American battery metals supply chain. The company's focus on establishing cobalt processing capacity in North America positions it uniquely in the battery metals sector. Electra plans to source feed material sustainably from the Democratic Republic of Congo, including from Glencore and another producer, demonstrating evolving attitudes towards responsibly sourced materials from the region. The substantial government support, relative to the company's market capitalization, underscores the strategic importance of Electra's operations in the context of North American industrial policy and supply chain security. This backing reflects a broader trend of increasing support for domestic processing capacity, driven by concerns over reducing dependence on potentially unfriendly nations.

Power Nickel

Power Nickel has completed its winter drilling program and is gearing up for the next phase. The company's project is described as a high-grade copper PGM deposit, which could provide exposure to multiple in-demand metals. Recent drill results, while on the edges of the deposit, still showed promising grades. The company's focus on high-grade mineralization in a stable jurisdiction could be attractive to investors looking for near-term production potential. Key things to watch include the results of the upcoming drilling program and any progress towards resource definition or economic studies.

SPC Nickel

SPC Nickel's open-pittable deposit stands out in the nickel space, as most nickel sulfide deposits require underground mining. The company's ongoing infill drilling program is delivering intervals and widths that appear better than what is in their existing resource. This could potentially lead to an increase in the resource size or grade in future updates. The open-pit nature of the deposit could translate to lower capital and operating costs compared to underground mines. Investors should monitor the progress of the infill drilling program and any updates to the resource estimate or economic studies.

Premium Nickel Resources

Premium Nickel Resources recently published its initial resource for its projects in Botswana, showing a substantial increase in overall contained nickel. This marks a significant milestone for the company and provides a basis for future development plans. The company's focus on Botswana, a stable mining jurisdiction in Africa, could offer a balance of geopolitical stability and geological potential. Key factors to watch include any follow-up exploration to expand the resource, progress towards economic studies, and the company's strategy for advancing the project towards development.

These developments indicate ongoing exploration and development activities in the nickel sector, which could potentially lead to increased supply in the medium to long term.

Investment Climate & M&A Potential

Despite the challenging market conditions for junior miners across all commodities, Selby sees potential for increased investment and M&A activity in the nickel sector. He notes:

"I can tell you firsthand that, you're seeing significant private investors, who believe in the the energy transition."

This interest from smart money investors could be a precursor to broader market interest in nickel companies. Selby suggests that the current valuations of some entities make it "almost stupid for them not to get involved."

However, he also cautions that major mining companies like BHP, which have publicly expressed pessimism about the nickel market, may not make immediate large-scale investments. Instead, the initial wave of investment is likely to come from private investors and funds focused on the energy transition and critical minerals.

Future Outlook & Investor Considerations

Looking ahead, Selby anticipates that the interest in critical minerals and national security-related metals will continue to grow. He expects to see the "first leg" of this trend emerging through October and November, potentially leading to increased valuations for companies in the sector.

For investors, this presents both opportunities and challenges:

• Potential for significant price appreciation in nickel and nickel-related equities.
• Increasing strategic importance of nickel in the context of energy transition and national security.
• Possible M&A activity, providing exit opportunities for early investors.
• Continued volatility and uncertainty in the short term.

The Investment Thesis for Nickel

In conclusion, the nickel market is showing signs of tightening supply and robust demand, supported by its critical role in the energy transition and increasing government focus on secure supply chains. The projected price increase to $20,000 per ton by year-end, if realized, could significantly benefit nickel producers and near-term development projects. However, investors should be aware of the inherent volatility in commodity markets and the specific risks associated with mining projects. The increasing strategic importance of nickel, particularly from stable jurisdictions, may create opportunities for well-positioned companies. As always, thorough due diligence and a diversified approach are recommended when considering investments in the sector.