The Nickel stock that could prove electrifying
There has been plenty going on in financial markets lately, and not least of which has been the precious metals markets with gold prices hitting new highs in Australian dollar terms, and rallying almost 20% in the last few months to above US$1500. Other precious metals have also been similarly strong.
However, another metal that has been going gangbusters is nickel, with prices recently surging to five-year highs, and coming to within striking distance of US$19000 a tonne for the first time since 2014.
Against this backdrop there is a nickel stock we think you should consider owning…..
Nickel has broken above a major downward trend in recent weeks after a ten-year bear market.
What’s been happening, and why the surge?
Supply has been delivered a major shock, with Indonesia, which accounts for almost a quarter of global output, saying it will ban exports from December. This is set to create a major supply deficit next year, against the backdrop of strong demand due to the rising demand for electric vehicles.
Falling nickel stocks in LME-registered warehouses at 109,950 tonnes, down 20% so far this year, have fuelled supply concerns. This can be seen in the premium for the LME’s cash nickel over the three-month contract, which has risen above US$100 a tonne – its highest in more than a decade. The global nickel market is estimated at 14 million tonnes, and has been in deficit for some years now, and expectations were for a more balanced market next year. So prices could go a lot, lot higher.
It is estimated that the average EV could contain up to 70 kilograms of nickel per vehicle (the following image shows the commodity content of new model EVs by battery type). Nickel is also used in the steel industry, and this traditional market could also assert pressure on the nickel price over the next few years.Source: Reuters
On the other side there are these clear supply constraints, which will see nickel move toward a supply deficit in 2020, with recent draws on the London Metal Exchange inventories a telltale sign. The move by the Indonesian Government to ban exports two years ahead of the original timetable is significant – Indonesia produced 560 million tonnes of nickel ore in 2018 and accounts for around a quarter of global supply.
One correlation that not often discussed, is the one that exists between nickel and platinum. As can be seen on the chart below, both nickel (purple line) and platinum (orange line) have moved together in recent years – right up to the point where “both staged major multiyear decade long breakouts” within a week of each other!
How to play the bull market in nickel???
So, if you are a believer that the demand for electric vehicles will only increase, one way to play it is by having exposure to a high-class nickel miner, and one that is going to make money, the same of which might not be said of Tesla!
We have identified a strong play on the sector. The company is a high quality, pure play, nickel miner, with a strong operational track record, which was further evidenced by recent FY19 results. Brokers are also sitting up and taking notice and raising their price targets.
The company in 2019 produced nearly 18,000 tonnes of nickel at a cash price of A$2.98 per pound. With nickel currently trading at over US$5 per pound (circa A$7.50 per pound), operating margins will be significant. Any weakness in the A$ will add to the positive mix.
Robust margins are set to persist (and grow) for some time to come, based on our long-term view on the nickel market and developments in the auto industry.
This company is guiding for 2020 nickel output in the range of 21,000 to 22,000 tonnes and the unit cash cost of production to be in the range of A$2.90 to $3.30 per pound. The company has also recently delivered a very positive update on the exploration front.
What to know the name of this stock, and a way to benefit from the surging demand for electric vehicles and nickel?