Nickel price continues to shine
Metal has shot up 53% this year driven by strong demand
By WENDY STUECK
00:00 EDT Monday, October 13, 2003
VANCOUVER -- Nickel prices continued to climb last week, with the share prices of producers and would-be producers following suit, and analysts say the pattern is likely to continue in coming months.
"The price of nickel equities today reflects the fact that [investors have] taken a while to understand how tight the nickel market is and how well supply and demand functions in the nickel business," said Terence Ortslan, a mining consultant at TSO & Associates in Montreal. "It is not a short-term phenomenon -- it's not a blip. It will take a while before the market finds a balance."
The price of nickel, used primarily to make steel, has climbed 53 per cent so far this year, driven higher by strong demand -- especially from China -- dwindling inventories and limited supply. The metal closed down 2 cents to $4.97 (U.S.) a pound on the London Metal Exchange Friday, and in recent weeks broke through levels last seen in 1990.
Many observers expect nickel prices to stay strong for at least the next two years and possibly longer. In a recent speech, Inco Ltd. chairman and chief executive officer Scott Hand said current market conditions are similar to those in 1998 and 1999, when a tight nickel market saw prices average $6 a pound in the two-year period.
Major new sources of supply, such as Inco's Voisey's Bay in Labrador and Goro in New Caledonia, are not expected to come into production before 2006. Even with some recent reports that hedge-fund buying has pushed nickel prices higher than they should be, based on market fundamentals, most analysts continue to believe the outlook for the metal -- and for nickel equities -- is strong.
In a recent report, Canaccord Capital Corp. analyst Greg Barnes said base metal stocks "could still have a 30-50-per-cent upside from current levels if the synchronized global recovery does in fact come to pass and China maintains its huge appetite for all of the metals."
Surging nickel prices have been good news for major producers such as Toronto-based Inco, the world's second-biggest nickel producer behind Russia's Norilsk Nickel and Falconbridge Ltd., which is 59 per cent owned by Noranda Inc. and has nickel operations in Canada, Norway, Chile and the Dominican Republic.
Inco shares, which closed down 73 cents (Canadian) Friday at $40.22 on the Toronto Stock Exchange, are up 20 per cent this year, even though the company has said its cash costs could jump as much as 40 per cent this year as a result of a faltering U.S. dollar and higher energy and other costs. The company also lost millions as a result of a 13-week strike this summer at its flagship Sudbury operations, which account for about 9 per cent of the world's nickel supply, but the strike contributed to the current tight supply situation.
Falconbridge shares, which closed unchanged Friday at $24 on the Toronto Stock Exchange, have increased almost 59 per cent this year.
The rise in nickel prices has also focused attention on companies that have fewer or smaller nickel mines or no mines at all, but that own a promising deposit.
"There's a lot of noise about 'me too' projects," said Barry Allan, an analyst at Research Capital in Toronto. "It's part and parcel of what the commodity is doing."
Several Canadian companies, including Canico Resource Corp., Dynatec Corp. and Jaguar Nickel Inc., are working on nickel projects, with Canico's generally considered to be the most advanced.
Canico, 18 per cent owned by Inco, is developing the Onca-Puma nickel deposit in Brazil. The deposit is what's known as a laterite deposit -- essentially, weathered rock that contains minerals, including nickel, in various concentrations. Such deposits generally occur in humid zones within a relatively narrow band about 22 degrees of latitude either side of the equator.
Geologists say about 70 per cent of the world's nickel is contained in such laterite deposits, but to date, most of the nickel that's actually mined and sold on world markets -- about 60 per cent of current production -- has come from sulphide ore deposits, which are cheaper and easier to mine than laterites.
Laterite deposits are expected to become increasingly important as sulphide resources are depleted. Inco's Goro is a laterite deposit, while Voisey's Bay is a sulphide ore deposit.
Analysts say each laterite deposit comes with its own profile and challenges, and processing techniques can take years to fine-tune.
"It is not a slam dunk that anyone with a nickel property can produce nickel efficiently, effectively and profitably," Mr. Ortslan said.
Three Australian laterite nickel mines have been plagued by production problems and cost overruns since they went into production in the mid-1990s, highlighting the necessity for would-be producers to refine their processing techniques before they rush from laboratory to production.
One of the reasons Canico's Onca-Puma laterite deposit is drawing a lot of attention is because it's believed that the company will be able to mine it with "off-the-shelf" technology already proven at similar deposits in, for example, Colombia and Venezuela.
Canico shares have climbed almost 397 per cent this year and closed up 33 cents or 2.2 per cent at $14.90 on Friday on the Toronto Stock Exchange.
Dynatec is a more recent entrant into the nickel project sweepstakes. The company in August announced it had reached an agreement with subsidiaries of copper giant Phelps Dodge Corp. to consider developing the Ambatovy laterite nickel deposit in Madagascar.
Under the agreement, Dynatec will be the operator at Ambatovy and will have the right to earn a 53-per-cent interest in the project by financing about $20-million (U.S.) of project costs.
Dynatec says the deposit is comparable in size with Goro and Voisey's Bay.
On Friday, Dynatec announced a $50-million (Canadian) bought deal for its Ambatovy project.
Although rising nickel prices bode well for deposits that can be brought into production, Mr. Ortslan said there are at least two potential downsides to the current supply squeeze.
One is the danger of substitution, as manufacturers seek lower-cost alternatives to nickel as it grows more expensive.
Last week, a Taiwanese stainless steel producer said it had begun to produce low-nickel-content stainless steel as a result of climbing prices.
As well, he said, the current push to bring big new deposits on stream means that some of them could wind up coming into production at the same time, potentially creating a supply bulge and driving prices down.
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