Nickel: The Outperformer And Top Pick For 2015

by: Rockstone


Nickel was the best performing metal in 2014.

Nickel is the top commodity pick of several investment banks, including Morgan Stanley.

The Voisey's Bay area may host the next big nickel discovery since it is abnormally under-explored.

From today's perspective, Voisey's Bay wasn't really a great nickel discovery, but still one of the world's biggest.

• 22 years ago, Robert Friedland's Diamond Fields Resources Inc. stumbled onto nickel while looking for diamonds in Canada's remote north.

• Only three years later, in 1996, Friedland sold his lucky strike, the Voisey's Bay Nickel Deposit, for $4.3 billion USD to Inco.

• Prior to being purchased by CVRD (now Vale (NYSE:VALE)) in 2006, Inco was the world's second largest producer of nickel.

• In 2005, the Voisey's Bay open-pit and concentrator started production. Vale is currently completing an engineering study for an underground mine to be constructed between 2016-2019, extending mine life to 2035.

Now, one could think that some more nickel deposits were discovered around Voisey's Bay, as being the case with all other major nickel mining districts in the world (Sudbury, Norilsk, Thompson, Raglan). However, this is not the case. The multi-billion dollar question is why.

Bottom line:

• 20 years ago, explorers needed a good portion of luck to make a discovery as exploration technologies were, at most, only able to scan a few meters below surface; i.e. only deposits with surface expression or association were detected.

• Soon after Voisey's Bay's discovery, it became clear that the deposit is gigantic and that an entire mining district may evolve as these types of deposits typically occur in clusters. Hence, an aggressive staking rush began in the region, putting the most prospective areas into checkerboard-style ownerships widely dispersed and wildly fought after - which made effective regional, large-scale exploration unfeasible.

• Today, next-generation exploration technologies, such as VTEM, can see an order of magnitude deeper, up to 750 meters.

"Voisey's Bay is a world-class nickel deposit, but it is not the largest or richest example of its type; based on its contained nickel metal, it is probably the seventh largest in the world. However, it is probably the only place in today's world where high-grade nickel sulphide ores are known to sit close to deep-water access. Large, high-grade nickel deposits are rare, because they are difficult exploration targets. The large exploration expenditures in Labrador in the post-Voisey's Bay years have still only scratched the surface of a remote and poorly explored region." (A. Kerr in "Voisey's Bay and the Nickel Potential of Labrador: A Summary for the Nonspecialist")

Nickel monument in Sudbury, Ontario (source):

The Voisey's Bay Mine and port facilities in nearby Anaktalak Bay (source):

The Long Harbour Processing Plant (LHPP) began operations in 2014 (nickel concentrate from Voisey's Bay is shipped to LHPP to be processed into finished nickel and associated copper and cobalt products; source):

Off-loading Sudbury nickel matte at Nikkelverk, Norway (Source):

Nickel was the best performing metal in 2014 finishing off the year with a +20% gain, whereas its price rose strongly (+50%) within the first five months. Nickel is Morgan Stanley's top commodity pick for 2015, with a price target of 19,842 USD/lb in 2015 (+58 from its current price of 12,590 USD/lb):

"Persistent price support/driver is Indonesia's laterite export ban - price tension to return during stainless steel-led seasonal uptick in trade flows in 1Q15." (Morgan Stanley; Global Metals Playbook 2015)

Glencore (OTCPK:GLNCY) in its Investor Day presentation (12/2014):

"Nickel Market Transitioning to Deficit; Balanced 2015 and Deficits Thereafter:"

• Nickel demand growth conservatively projected at c.4.5% p.a.

• Substantial deficits forecast over the outlook period.

• LME nickel price rallied to $21,200/t in May, up 52% from the start of the year. Prices subsequently settled in an $18,000-$20,000/t range, then declined rapidly from September, along with commodities in general. The market recently recovered most September/October losses.

• The increase in price was primarily driven by the Indonesian ban on nickel ore exports and the anticipation of reduced nickel output.

• Yet, continuous increases in LME inventory, Chinese metal exports, higher Philippine ore exports, macro-economic downgrades and liquidity issues in China have all impacted sentiment and nickel prices.

NPI Output Supported by High Grade Ore Stocks:

• Significant stockpiles of Indonesian high grade ore (>1.8% Ni) were built in China prior to the export ban (27Mt HG/MG ore).

• These stockpiles, blended with Philippine ore, have supported continued high levels of Chinese nickel pig iron (NPI) production in 2014 (c.480Kt Ni) albeit with production decreasing Q on Q.

• Estimated at over 20Mt at the start of the year, stockpiles of high grade ore in China are currently below 10Mt and trending toward critical levels.

• Philippine shipments will decrease in the coming months due to the monsoon season. Shipments will not pick back up materially until April when Surigao area exports resume.

• HG stocks will be at critical levels by April 2015 and seasonality will become a major factor going forward.

Philippine Ore Supplies Determine Chinese NPI Outlook:

• With the Indonesian ban on ore exports sustained (also confirmed by recent Constitutional Court ruling), Chinese inventory of Indonesian high grade ore will ultimately deplete and NPI production will depend on ore exports from the Philippines.

• 2014 Philippine exports to China are forecast at c.52Mt wet ore and constitute LG >50%, MG >30% with the balance HG. Lower average grade ores increase NPI production costs, all things being equal.

• No game changers elsewhere: New Caledonia may supply 1-2Mtpa additional ore to market while Guatemala may supply up to 30kt Ni contained in higher grade ore to European FeNi plants.

•Based on our projection of volume and composition of Philippine ore supply, China's NPI production is forecast to fall from 480kt Ni in 2014 to 400kt Ni in 2015 and 350-400kt Ni over the outlook period.

Supply Outlook - Limited Growth Amid Ore Ban:

• Global nickel supply in 2014 is forecast to be relatively unchanged on 2013 as decreased output from existing producers and Chinese NPI is offset by increased production from new projects.

• Longer term, Chinese NPI production is forecast at 350-400kt vs. 510kt in 2013. However, increased supply from new projects (all going well) should offset projected losses and overall supply growth is forecast at c.1% p.a. to 2019.

• China's NPI dependence on lower grade ore from the Philippines will increase production costs.

• Ramp up performances highlight the need for a cautious outlook, with the majority of new projects delayed due to technical, environmental, permitting and social challenges.

• We assume limited growth in actual Indonesian NPI output. While capacity will be built in a higher price environment, the extent and pace of commissioning is likely to be challenged for a variety of reasons.

• We forecast less than 100kt Ni in Indonesian NPI by 2019.

Demand Outlook - Solid Growth in Key Markets:

• "While the days of double-digit growth in China are over, the greater size of the economy means lower growth still translates into strong absolute demand… It's slower, not lower." (Julian Kettle, Wood Mackenzie)

• Primary nickel demand in stainless steel is projected to increase c.5% in 2014, reflecting growth in China, North America, Japan and India. Longer term, we forecast global nickel demand in stainless to increase at a rate >4.5% p.a., predominantly driven by China (Global CAGR 2008-2013: 9.6% p.a.).

• Activity in non-stainless applications also is robust with nickel usage projected to increase >8% in 2014. Going forward, non-stainless demand growth is forecast >4% p.a., with strong contributions from China, US and India.

• Overall, we project solid nickel demand growth of c.4.5% p.a. between 2014 and 2019 (CAGR 2008-2013: 7.1% p.a.).

• Put simply, we conservatively expect demand will increase by 75-100Kt Ni per year.

Expanding Deficits to Emerge:

• Assuming the Indonesian ban on ore exports is sustained, market deficits will emerge.

• Increased supply from new projects (all going well) supports global production growth of c.1% p.a. to 2019.

• With nickel demand growth projected at a conservative c.4.5% p.a., the market is expected to transition to deficit, with substantial deficits forecast from 2018.

• Long run nickel pricing will largely be determined by the cost of bringing on marginal (low grade) limonite ore processing capacity.

• We do not see any new low cost technologies that will alter the outlook."

TD Securities expects the start of a nickel supply deficit in 2015 with 12,000 tonnes. In 2016, the deficit is anticipated to increase 9-fold to 104,000 tonnes nickel. TD Securities as per their latest research report "2015/2016 Metals & Minerals Outlook" (01/2015):

"Nickel - Supply Deficit Expected - Global Nickel Market Deficits Emerge in H2/15:

As NPI (Nickel Pig Iron) production starts to contract in China during 2015, the nickel market is expected to move into deficit during the second half of the year. Deficits are expected to increase into 2016. Global nickel demand is forecast to expand year-over-year by ~3% in each of 2015 and 2016, while refined production should contract ~1% in each year. Growing deficits should lead to a reversal of the rapid expansion of visible nickel inventories that put downward pressure on the nickel price in 2014.

We maintain our long-term price of US$10.00/lb (starting in 2017): We expect that under-investment in new global nickel production capacity (outside of NPI production) that has been the result of a protracted period of low prices will result in much tighter nickel markets over the medium to longer term."

Morgan Stanley, in its Global Metals Playbook 2015, comments as follows on the positive outlook for the nickel price:

"Indonesia's trade shock has yet to play out:

Frustrating year revisited: We were all nickel bulls, early 2014: its price was to jump on Indonesia's ban of Ni-bearing laterite exports as China had no other ore options (the Philippines too small; other sources already engaged). Soon though it became clear that there was adequate ore in the supply chain (pre-emptive stocking by China, as with bauxite). The mid-year Qingdao port probe prompted a release of previously unknown metal (i.e. record-high LME inventories), yet China's industrial activity weakened anyway. Nickel's price retreated on these drivers to below MCP, recovering a little by year's end on speculation around monsoonal supply risk in the Philippines.

Shortfall's real: We still believe that Indonesia's trade ban is a price driver for the metal: it just needs more time to play out. China's laterite inventories are being run down, and the development of Indonesia's downstream processing capacity is proving far slower than the general market probably expects.

1Q15 seasonal kick: In addition to a troubled supply growth story, we also expect a seasonal lift in 1Q15's trade to support the metal's price in 2015, making nickel one of our top picks. Stainless steel output expands with the rest of the industry in this quarter, typically led by China, but with US support this year.

Indonesia shortfall quantified: When Indonesia announced its plan to push for the development of domestic downstream ore processing capacity in 2009, nickel-in-laterite exports (and some metal) represented 15% of global supply (200-300ktpa). During 2009-14, China boosted imports ahead of the trade ban, distorting China's apparent consumption data. With the ban in place, what's actually been done downstream? China's stainless steel giant, Tsingshan (via JV Sulawesi Mining Investment) has developed capacity for up to 300ktpa NPI, ramping from 2015. Cahaya Modern Metal Industry began late 2013, Indoferro's 8ktpa from 2012 - all delivering 15-40ktpa in 2015-18. Significant, but still not sufficient to replace Indonesia's pre-ban and 300ktpa rate.

First-use update: Global stainless steel dominates nickel demand (70% of primary metal demand), itself dominated by China (50% global demand; 50% of global melt capacity too). We expect melt production to rise 5% YoY in 2015 (China's up 12% YoY)."

Nickel Trivia

• Discoverer: Axel Frederic Cronsted in 1751

• Symbol: Ni

• Atomic Number: 28

• Melting Point: 1,455°C

• Boiling Point: 2,913°C

• Mohs Hardness: 3.8

• Specific Density: 8.9 g/cm3

• Color: whitish-grayish

• Occurrence frequency in Earth Crust: 84 ppm

• More than 3,000 alloy variations exist with nickel. Yet nickel is the most common trigger for human contact allergy (in Germany around 5 million people are allergic against nickel, a reason why fewer metals are alloyed with nickel. In the US, every fourth kid below five years suffers from a contact allergy).

• The 1 and 2 Euro coins also contain nickel. The ring of the 1 Euro coin is made from nickel-brass, whereas the middle part contains copper-nickel, then nickel and then again copper-nickel. The ring of the 2 Euro coin is made of copper-nickel and the middle part contains nickel-brass, then nickel and again nickel-brass).

• The 5 cent coin in the US is called "Nickel" as it contains nickel (besides copper).

• Name: Originally "Niggel," since miners in Germany's Saxony mistakenly thought that the reddish nickel ore mineral, nickeline, from the Annaberg District was copper ore. However, "by hook or by crook" and "bedeviled by ghosts" it was impossible to extract copper from it, hence the miners desperately calling it "niggel" (colloquial for "devil and other ghosts") and "kupferniggel."

• Native nickel does not form on earth, except inside the earth's core or where a meteorite fell on earth (which was the case in the Sudbury District). The highest nickel grades (7-15% Ni) are hosted by iron meteorites.

• Nickel is resistant to corrosion, has high strength over a wide temperature range, has a quite pleasing appearance, whereas its suitability as an alloying agent make it useful in a wide variety of applications.

• Stainless steel is the predominant use of nickel as being the material of choice for consumer safety and hygiene (e.g. household equipment, domestic appliances, equipment for the food industry, pharmaceutical production tools, surgical equipment). Stainless steel also is extensively used in building and construction, transportation and heavy industries such as chemicals and petrochemicals.

Principal uses for primary nickel (approximate %):

1) Stainless steel (65%)

2) Nickel-based alloys (12%)

3) Electroplating (10%)

4) Casting and alloy steels (8%)

5) Rechargeable batteries (3%)

6) Coins (1%)

According to the publication "2012 Nickel Commodity Review" by Natural Resources Canada (NRCan):

• Canada mined roughly 16 million t of ore containing an estimated 218,564 t of nickel in 2012.

• 2 companies (Sherritt International Corp. and Vale SA) produced a total of 152,500 t of refined nickel from 3 refineries.

• Canada ranked fourth among world nickel producers after China (519,200 t), Russia (256,000 t), and Japan (169,000 t).

• Canada exported 80,756 t of nickel in matte to Norway and 39,347 t of smelted nickel oxide to the UK.

Basically, there exist just two commercially significant nickel deposit types: Silicate-type and sulphide-type (latter has >50% of the world's reserves and around 75% of global mine supply). Economic grades for primary nickel deposits are typically >1% nickel. However, highly depending on the size and chemical composition of the deposit (thus metallurgy plays a more important role than grade).

1.) Sedimentary Nickel Deposits:

Nickel laterite (lateritic weathering of serpentine rocks, so-called nickel-hydrosilicate deposits, where nickel is associated primarily with olivine; roughly 35% of world supply from nickel laterites). Examples: Poland, Saxony (Germany), Orsk-Chalilowo (Ural, Russia), Cuba, Philippines, Australia, and New Caledonia (discovered by geologist Garnier in 1863, the mineral garnierite was named after him and a third of the island is made up of serpentinized peridotites from which hundreds of open-pits are mining some 35,000 tonnes of nickel annually).

2.) Sulphidic Nickel-Copper Deposits (Magmatic Genesis):

Together with cobalt and PGM ("Platinum Group Metals"), whereas the ore occurs as inclusions (0.3-0.5% nickel) and/or massive (1-2% nickel), oftentimes copper occurs with similar grades. Ore minerals: Pyrrhotite, chalkopyrite, pentlandite, cobaltite and PGM minerals.

Type A: Hydrothermal Nickel Deposits

Vein deposits of bismuth-cobalt-nickel-silver-uranium formation (silver near surface and cobalt-nickel at depth) - Examples (historic): Germany (Annaberg, Schneeberg, Marienberg, Erzgebirge, Saxony, Bohemia), Canada (Cobalt City, Ontario).

Type B: Liquidmagmatic Nickel Deposits

Nickel enrichment mainly in basic rocks; e.g. norite and peridotite with pentlandite intergrowing with pyrhhotite. Examples: Sudbury (Ontario, Canada - the world's largest nickel district with significant amounts of copper and platinum, reserves of around 1 billion tonnes nickel producing roughly 120,000 tonnes nickel and 10 tonnes PGM annually), Norilsk (Siberia, Russia - production of around 180,000 tonnes nickel per year representing roughly 20% of world mining supply), Stillwater (Montana, USA), Kambala Greenstone Belt (West-Australia), Bushveld Merensky Reef (South-Africa), Chalilowo (Ural, Russia), Kola (Russia).

Exploration for Magmatic/Sulphidic Nickel Deposits:

As the sulphide mineralization is mainly comprised of pyrrhotite, pentlandite and chalkopyrite, such deposits are highly conductive, thus electromagnetic (EM) studies work effectively. The deposits often have an association with ultramafic rocks, which produce strong magnetic anomalies and which can be detected with regional magnetic studies. The other massive sulphides show strong density contrasts, thus gravitation techniques can be employed to identify those.

The Nickel Potential of Labrador

Below is an excerpt of a governmental research paper entitled, "Voisey's Bay and the Nickel Potential of Labrador: A Summary for the Nonspecialists" by A. Kerr from the Newfoundland Department of Mines & Energy in 2003:

"The fact that over $250 million was spent in exploration of Labrador following the Voisey's Bay discovery has led some to conclude that Labrador has been thoroughly investigates, but this is not the case. Although this seems like a vast amount, it must be remembered that the Voisey's Bay project itself accounts for about half of this total, and most of this money was spent within a few kilometres of Discovery Hill.

Exploration budgets elsewhere in Labrador typically allocated about half the total spending to air support services, notably helicopters. Thus, the amount of money actually spent on the ground in exploration work is smaller than it first appears. Finally, many junior companies (some of which had existed for only a few months previously) were attempting ambitious programs with essentially no experience in either nickel exploration or the hostile, remote environment of Labrador. Many such programs were well-managed and systematic, but the results of others cannot be considered conclusive or exhaustive. In some areas, assessment reports were never submitted to government, and the exploration results cannot even be evaluated. The post-Voisey's Bay exploration boom did not locate a second deposit of comparable value, but it did result in the discovery of numerous new examples of magmatic sulphide mineralization, many of which merit further attention.

A well-known exploration proverb states that "the best place to find a new mine is next to door to an old mine." Although the Voisey's Bay deposit is not yet a mine, this area remains highly favourable for future exploration. However, five years of intense exploration around the main deposits must constrain our expectations. As outlined above, large sulphide deposits less than 400 m below the surface should respond well to EM surveys, and this area has now been well covered by several such techniques. These results appear to rule out the presence of another near-surface ore-body akin to the Ovoid, and suggest that any future discoveries around Voisey's Bay will be deeper, blind deposits, more akin to the Eastern Deeps. A deep-penetrating AMT survey have also been conducted over much of the immediate Voisey's Bay area, but the results of these remain undisclosed. Recent results from deep drilling in an area known as Ryan's Pond suggest that a geological environment akin to the Eastern Deeps may exist here, with interesting grades (the sulphide metal contents here are up to 6% Ni). However, only dispersed sulphide mineralization has been found to date, and the great depth (>1400 m below surface) limits the practicality of detailed exploration from the surface. Regions such as this will be more easily explored following the establishment of underground mining.

The Voisey's Bay deposit is associated with a geological feature known as the Voisey's Bay Intrusion, which is a body of igneous rock, i.e., a rock crystallized from a magma that rose in the Earth's crust over a billion years ago. The Voisey's Bay Intrusion is dominated by rocks termed gabbro and troctolite, which themselves have higher nickel contents than most other common rock types. Moving farther afield, all areas known or suspected to be underlain by similar grabbroic or troctolitic rocks are prime exploration targets. At Voisey's Bay, these locally occur beneath a thin screen of younger granite, and do not form surface outcrops. The same situation may exist immediately south of Voisey's Bay, where existing mapping shows mostly granite and anorthosite. Inco has acquired the mineral rights to a large part of this area, and perhaps intends eventually to test this hypothesis through geophysics and drilling."

Common Geologic Traits of Major Nickel Camps

Below is from P.C. Lightwood's research (2007) entitled "Advances in Ni-Cu-PGE Sulphide Deposit Models and Implications for Exploration Technologies":

"There are numerous studies that illustrate the common characteristics of clusters of nickel sulphide ore bodies that comprise deposits or groups of deposits within so-called 'nickel camps' or 'significant clusters.' The world's eight most important camps: Norilsk (Russia), Sudbury (Ontario), Voisey's Bay (Labrador), Pechenga (Russia), Thompson (Manitoba), Raglan (Quebec), Kambalda and the Yilgarn Komatiites (Western Australia), Jinchuan (China), along with smaller deposits in China).

Sudbury, Ontario, Canada

Sudbury competes with Norilsk (OTCPK:NILSY) as one of the two principal producers of nickel and for ranking as the world's largest nickel deposit. Sudbury is one of the largest mining camps, and some of the mines have been in near continuous operation for over 100 years. The Sudbury Igneous Complex (NASDAQ:SIC) is a 1.85 Ga elliptical rock body that is located on the boundary between the Superior Craton and the Proterozoic Huronian Belt to the South. The SIC is subdivided into a lower sequence of noritic rocks, a central sequence of gabbroic rocks, and an upper sequence of granophyre (Naldrett and Hewins, 1984). The SIC is widely accepted to be the product of a meteorite impact event (Grieve, 1994; Grieve et al., 1991), and the process that gave rise to the ores has now been reconciled with this genetic model (Lightfoot et al., 1997a, b, 2001b; Keays and Lightfoot, 2004; Lightfoot and Farrow, 2002).

At Sudbury, there are a large number of deposits which share features of one of these groups, thus ore deposit models for the Sudbury nickel deposits are influenced by the very specific and unique relationships that developed in response to a combination of meteorite impact, crustal melting, protracted differentiation of superheated sulphide saturated silicate magmas, gravitational accumulation of the sulphides, and remobilization into dilational structures in the footwall (Morrison et al., 1994). Geological exploration models are supported by deposit-scale surface and borehole geophysical surveys that effectively image the strongly conductive sulphide mineralisation in the absence of significant spurious conductivity due to barren sulphides in the country rock (Polzer, 2000; King, this volume; King et al., 2006).

Voisey's Bay, Labrador, Canada

The most significant recently discovered Ni sulphide deposit is at Voisey's Bay, Labrador, Canada. The Voisey's Bay Intrusion consists of a series of 1.34 Ga olivine gabbros, troctolites, ferrogabbros and ferrodiorites that are within the anorthositic Nain Plutonic Suite. The deposit is associated with a pair of small intrusive bodies termed the Eastern Deeps and the Western Intrusion that are linked by a conduit dyke. The intrusions and the associated mineralization are associated with west-east oriented structures (Evans-Lamswood et al., 2000) that cross-cut at right angles the broad boundary between the Proterozoic-aged Churchill paragneiss to the west and the Archean Nain Orthogneiss to the east (e.g., Lightfoot and Naldrett, 1999). Mineralisation is spatially related to recrystallized inclusions of Churchill paragneiss (Li et al., 2000) that are of a very different source when compared to the immediately adjacent paragneiss. The Ovoid Deposit is located at what is interpreted to be a dilation in the conduit dyke (an alternate interpretation is that it is at the entry point of the conduit into a now-eroded magma chamber - Lightfoot and Naldrett, 1999); the Eastern Deeps Deposit is located at the entry point of the conduit into the Eastern Deeps Chamber, and the location of the mineralization is principally controlled by the injection of massive sulphide and sulphideladen magma from depth into the Eastern Deeps chamber (Lightfoot and Naldrett, 1999). Other deposits like the Reid Brook Zone are associated with the same conduit, or with immediate country rock structures (Lightfoot and Naldrett, 1999).

By far the most successful method of direct detection of sulphide uses the resistive and conductive properties of magmatic sulphide ore bodies. Both barren and nickeliferous sulphides are conductive and chargeable, as are carbonaceous shales and graphite, so the application is complicated in belts with such country rocks with geophysical properties that are too similar to the exploration target. Disseminated sulphides typically are unconnected, so although they can be targeted using induced polarization methods, they are rarely conductive. In contrast, massive sulphides are highly conductive, and so a range of electromagnetic survey methods has been developed to target mineralized systems by regional airborne geophysical surveying right through to exploring extensions of ore bodies in existing mines using down-hole electromagnetic methods. The success of these tools is well established (see King, this volume), and it is unlikely that their position will be usurped as key tools in the exploration toolbox."

Here's a simplified geological map of Labrador showing the locations of the Voisey's Bay Deposit and many other examples of magmatic sulphide mineralization discovered during the exploration boom that followed the Voisey's Bay discovery (source):

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