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Stocks are low, demand is strong, so is the nickel price getting set for a significant boost?

Nickel is used in stainless steel and to make batteries for electric vehicles

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There has been a small uptick in price already in 2019

Sherritt International Corporation (TSE:S) bills itself as “The Name in Nickel”.

And with a market capitalisation of around C$200mln, it is one of the go-to nickel names on the Canadian market.

Nickel price the key

But how much of an attraction its tagline is at the moment, is open to question. Because shares in Sherritt are trading at 10-year lows

The company’s mines in Cuba, Canada and Madagascar aren’t the problem. The Moa joint venture hit guidance at production of 30,700 tonnes in 2018, and although Ambatovy came in a little bit below guidance in the wake of hurricane damage, that shortfall isn’t what’s derailed Sherritt’s shares.

Rather, it’s the nickel price.

At the current US$5.64 per pound, or US$12,430 per tonne, the nickel price is a shadow of where it was in the glory days of the latter part of the last decade, when it hit upwards of $23 per pound, or US$50,000 a tonne.

There has been a small uptick in recent months, and it’s perhaps worth saying that today’s price is two-and-a-half times higher than the metal’s 30-year low of slightly less than US$2 per tonne.

Even so, recent years haven’t exactly been propitious for nickel investors or for the development of new projects.

Sherritt notes that during 2018, the price dropped further, from highs of US$7.26 per pound, such that in the third quarter, the average price was around US$6.00, and in the fourth, it was just US$5.20.

But at these levels, it’s not just fundamentals that are driving the price, it’s also sentiment. Thus, concerns about the trade dispute between the US and China played a key role in keeping buyers out of the market last year, while short-lived bearishness related to speculation about potential production from a new Indonesian nickel facility also played a part.

Nevertheless, the softening of prices in 2018 is not the whole story.

At the end of 2018, combined nickel inventories on the London Metal Exchange and the Shanghai Futures Exchange rang in at 219,804 tonnes, 8% of the third quarter total.

What’s more, the decline in inventory for Class 1 nickel, which is used in batteries for electric vehicles, was even more dramatic at 55%.

If that trend continues, the market is likely to swing into a significant structural deficit, and it’s perhaps in anticipation of that development that prices in the first quarter of 2019 have already risen by approximately 12%.

Certainly, demand growth looks set to continue. Analysis from industry consultant CRU shows stainless steel demand is expected to grow at an average annual rate of approximately 4% in the next four years, driven by China and Indonesia.

READ: Horizonte Minerals bullish on nickel price as study for second project gets underway

It’s against this background that Horizonte Minerals PLC (LON:HZM)(TSE:HZM), which is currently in talks about financing for its Araguaia project in Brazil, cites a consensus pricing forecast that nickel price will reach US$16,792 per tonne by 2022.

That would be about the time that Araguaia would be hitting its stride, assuming the financing comes in.

Horizonte is notable as being one of the few companies around that’s been able to continue making progress with nickel development projects in the face of such low prices. That’s because Araguaia has scale, following Horizonte’s merging of an old Teck project with an old Glencore/Xstrata project, and because the production costs look set to be relatively low.

Horizonte is also currently modelling a stage two expansion phase for Araguaia, which uses a base case US$14,000 nickel price. The net present value rings in at US$741mln, with the internal rate of return set at 23%, which isn’t bad for a project of this scale.

The crucial hurdle of course, will be financing, as investors and lenders may be wary of putting up money in such a weak market.

But the mining industry is famously cyclical, so Horizonte, and other developers like it, can plausibly argue that there is no better time than now to put money into a market that’s already long way through the down-stretch. The drawdown in stocks can be cited as a crucial indicator of that dynamic.

Meanwhile, another hardy perennial pressing ahead with nickel projects is Amur Minerals Corporation (LON:AMC). Amur has one of the world’s largest nickel sulphide projects currently under development, at Kun-Manie in Russia, and is currently in the process of working out the parameters of a full bankable study. That economic study follows on from several years of successful resource drilling and metallurgical testwork which shows the amenability of the ore to standard processing techniques.

It will be interesting to see what sort of economic numbers get wrapped around Kun-Manie in the current pricing environment, given that there is significant infrastructure investment required too.

At this point, the high quality of the ore from Kun-Manie still seems to be mitigating in the project’s favour, although as with Horizonte, the proof of the pudding will come when financing talks get underway.

Any rise in the nickel price would, of course, be welcome. But in the meantime, Amur’s directors and senior managers are keeping the faith – eight of them bought shares under the company incentive scheme in mid-February.

Quick facts: Horizonte Minerals PLC

Price: 3.75 GBX

AIM:HZM
Market: AIM
Market Cap: £54.24 m
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