NICKEL FINGER OF FATE
Nickel is as good as gold for investors as world prices hit three-year-highs and the industry predicts supply deficits.
The Speculator has been breathing easier since nickel markets failed to sell off last week after Inco resolved its lengthy strike in Canada. Prices, hovering at around $US8000 a tonne ($12,450/t) before workers downed tools in June, have actually struck new three-year highs in the days since work resumed. Stockpiles are low, and there are predictions of supply deficits in each of the next three years, even with Inco's giant Sudbury complex back at full tilt. The price is now nudging $US10,000, and it isn't likely to fall far anytime soon.
Investors have already made tidy gains by backing Australian nickel explorers and miners. In our portfolio, Independence Gold, Allegiance Mining and Image Resources are sitting at nearly double their purchase price. Plenty of others are thriving too, including Mincor Resources, Jubilee Mines, Titan Resources, Tectonic Resources, Fox Resources and Western Areas. Given the funds being committed to drilling in highly prospective areas, the good news should continue.
There are two key factors driving the market. One is the growth in demand from China, where an economic revolution is taking place. At such times, it is normal for the intensity of metal usage to rise. Macquarie Equities researcher Jim Lennon noted in a recent report that the trend started in China about four to five years ago, and could have longer than that still to run. He estimates that imports of nickel during the first half of this year alone soared by 45.6%."There is simply not enough raw material availability to sustain the rates of growth seen over the past two years in China," Lennon notes. There will be, he adds, "severe shortages".
The second factor is Inco's Voisey Bay nickel project, which comes into production from 2006. By the time it is fully operational in 2011, the $3bn mine will add an extra 10% to current annual global refined nickel supplies of 1 million tonnes. Only the lowest-cost rival projects will be able to compete against this monster. There is plenty of time beforehand, however, to make hay.
Allegiance (ASX code: AGM) is one company preparing to grab its opportunity. In coming days, its board will receive a pre-feasibility study on the development of the Avebury deposit near Zeehan on Tasmania's west coast. It is a foregone conclusion that they will quickly move to the project's first stage by digging a $7.5m decline down to the nickel mineralisation. Drilling will be conducted along this underground roadway to prove up reserves and identify any unfound offshoots. While 4 million tonnes grading 1.5% nickel has been outlined to date, there are expectations that this could be raised considerably.
While the company has only about $500,000 in cash reserves, the good news is that there are plenty of offers of financial help. Chinese and Japanese trading houses are interested. Nearly every major player in the nickel industry has also been knocking on the door. There is also the possibility of debt finance after the recent appointment of Société Générale as an adviser. But Allegiance is biding its time, wanting to maximise returns for existing shareholders because it knows the market is in its favour.
To start the mine Allegiance will need an extra $4m in working capital. It is hoping to save $36m on a mill by contracting to use the idle tin facility at Renison or even the one at the old Hellyer base metals mine.
The beauty of Avebury is that it should produce concentrates with a very high nickel content of about 22%. There will only be minor traces of other minerals, such as cobalt, making it easy to smelt. The estimated 400,000 tonnes of ore mined each year should yield 5000 tonnes of refined nickel.
What makes this project better than most is that Avebury is just one of several nickel deposits outlined by Allegiance. Indeed, there have been significant exploration results at three sites, while one is yet to be drilled. The company is sitting, therefore, on a new province in a state never known for its nickel. That means there is considerable blue sky.
Unlike the better-known West Australian deposits, Avebury's ore is unique. Geologically, it is called pentlandite and was formed when an ancient nickel deposit was altered by an upthrust of granite. It was squeezed between the granite and an overlaying cap, giving it a uniformity of grade not often seen elsewhere. Its existence is not obvious to many explorers, having fooled RTZ when it initially drilled the area searching for zinc.
Allegiance shares have gained in recent weeks, but the company itself is often overlooked. It may not have an address like Kambalda or Forrestania in Western Australia, but it is still going places.
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