Resource Investor Article on Nickelhttps://www.resourceinvestor.com/pebble.asp?relid=11377
Is the Road to Riches Paved in Nickel?
By Ben Abelson
15 Jul 2005 at 10:41 AM EDT
NEW YORK (ResourceInvestor.com) -- World-class miners like BHP Billiton [NYSE:BHP] and Inco [NYSE:N; TSX:N] have been riding the nickel wave higher, with the often overlooked base metal marking record highs close to $8/lb. But while these companies derive only a portion of their profits from nickel operations, there are several pure-play (or close to it) juniors for true nickel bulls that provide unique investment opportunities.
Market Overview
Nickel is one of the lesser-used commodities in the world - just five years ago, only about 1 million tonnes of nickel were consumed annually, compared with 10 million tonnes of copper and 800 million tonnes of steel. Nickel is mostly used as a component of steel - with 65% of nickel production destined for stainless steel, and an additional 20% used in other steel and nonferrous alloys. The metal has also gained prominence in nickel metal hydride (NiMH) batteries, such as those used in gas-electric hybrid cars and other electronic gadgets.
Surging Indian and Asian demand for steel, however, has helped push recent annual nickel consumption higher by as much as 40%. In just over four years, this demand has driven nickel prices as high as $7.90/lb. from a 2001 low of $2/lb. Supplies, in turn, have remained tight with the development of any large-scale projects at least a few years away.
While nickel has trended lower in the last few months (a pound could recently be had for $6.53), the overall upward trend has afforded opportunities for junior miners hoping to enter the game.
Canico Resources
Canico Resources [TSX:CNI], one of the better-known junior nickel plays on the market, is in the middle of an ambitious plan to develop its high-grade Onca-Puma project by 2007. A scoping study from 2003 noted that the project, one of the world's largest undeveloped nickel mines, could produce as much as 50 million pounds of nickel per year for up to 100 years at costs below $2/lb. Without a formal feasibility study in-hand (due within weeks), it's difficult to ascertain the final costs of development, which have been estimated in the $500 million to $950 million range.
However, Canico is one nickel play that has been more than discovered by the market. From an early 2003 low of C$2, the stock has jumped nearly 800% to trade as high as C$17.55 earlier this year. While this insight might not make the stock look cheap in its current C$13 range, the company will likely continue to attract die-hard nickel bulls interested in getting a piece of a world-class project.
Oriel Resources
For those who prefer to get in before the crowd, Oriel Resources [TSX:ORL] is one of the more compelling nickel plays out there, as recently reported by Resource Investor. The company is in the process of developing nickel and chromium projects in Kazakhstan. With its 90%-owned Shevchenko project, Oriel holds the bag on what may become one of the lowest cost operations in the world. The project, which is currently undergoing a feasibility study, could produce 31,000 tonnes per year over at least 15 years, with development costs in the relatively inexpensive $350 million range.
Oriel's shares currently change hands at C$0.73 - less than half its February 2005 initial Canadian listing price of C$1.75. Recently, the company's stock price has likely been held down by near-term declines in nickel prices and general concern over the location of its projects.
Jaguar Nickel
Jaguar Nickel [TSX:JNI], currently exploring in Guatemala, is another junior that has suffered of late. The company's shares traded as high as C$2 Canadian in early 2004 on the back of surging nickel prices. Today, these shares can be had for a pittance at C$0.22, near a multi-year low.
While not much has changed in Jaguar's prospects during that time, investor sentiment to the exploration sector has obviously suffered. Although company's shares could be worth a speculative investment given their current depressed state, Jaguar's exploration-stage assets make it much more of an unknown.
European Nickel
European Nickel [AIM:ENK], is another junior nickel play recently featured in Resource Investor. The company is working to develop its relatively small Caldag project in Turkey, which only has an indicated and inferred resource base of 38 tonnes grading 1.14% nickel. While the project's size may have made it economically unfeasible in the past, European Nickel is currently testing an innovative heap leaching process that could make the numbers work. Considering that company has the backing of mining titan BHP Billiton, it might just succeed.
While European Nickel's shares have gyrated frantically in the past year, they recently traded at 35p, right around its 2004 AIM listing price.
Future Supply Growth
Besides the ever-present concerns of a slowing Chinese economy, several large new mines coming online with the next few years could cause a significant rebalancing of the current supply situation.
In 2007, BHP Billiton plans to bring its Ravensthorpe project online, while Inco will open the doors to its Goro project on the French island of New Caledonia. In addition, Companhia Vale do Rio Doce [NYSE:RIO] has plans to begin production on its Vermelho project in Northern Brazil just one year later.
Together, these three projects will generate about 150,000 tonnes of nickel per annum - about a 10% increase to the market. Unless supply tightens further within the next few years, the startup of these projects could have detrimental effects to price of nickel.
Considering the project trifecta set to hit in the coming years, any long-term investors in today's junior nickel plays must be confident of continued growth in emerging market demand.
For those interested in reading more about the history of nickel production, consumption and pricing, a fascinating report is available from the U.S. Geological Survey.
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