A Perfect Storm Is Brewing For Nickel - Michael Beck
Years of underinvestment, long lead times for mine development and a coming surge of electric vehicle demand are all bullish factors for nickel, said Michael Beck, managing director at Regent Advisors.
Beck spoke to Kitco News at Palisade Global's Hard Asset Conference in Georgia on Jekyll Island held mid-May.
Nickel is a key component of lithium-ion batteries, and Beck said Tesla's next generation of lithium-ion batteries uses more of the element.
"The ramp-up of demand is just beginning," said Beck.
"Electric vehicles are going to impose a new demand source on nickel that never really existed before. It takes seven to 10 years to bring on new nickel projects. So you have the makings I thinkâ??at least this is our thesisâ??of a perfect storm."
Interview is edited for clarity.
Kitco: What impact is the electrical vehicle revolution going to have on nickel?
Michael Beck: Nickel is probably the single most important metal component in battery fabrication. It's where all of the energy is stored and increasing the battery chemistries are being refined to allow the inclusion of as much nickel as possible. The more nickel, the higher the energy density of the battery. And nickel is particularly interesting from a supply-demand outlook because of the collapse of nickel prices in 2007. The commodity has remained relatively depressed. The current nickel price is US$12,000 a tonne versus the high in 2007, which was $15,000 a tonne. And in this intervening almost 12 years there was no material investment in new nickel capacity. The last 12 years has been a draw down of excess inventory, and that's coming to an end. The ramp-up of demand is just beginning.
Electric vehicles are going to impose a new demand source on nickel that never really existed before, particularly for class one nickel. It takes seven to 10 years to bring on new nickel projects. So you have the makings I think, at least this is our thesis, of a perfect storm. You have a baked in structural deficit for the next 12 years. You have seven to ten years lead time to bring in new capacity, and all of a sudden you have inventories in the next 18 months going down to almost zero. You also have this new demand source that never existed for nickel. So that gets us rather interested as prospective investors. And in the universe of metals it's our favorite. We think in the next two to three years you're going to see a major up-tick of nickel price, and that's as shortages emerge and that's what's going to be required to get new investment in the sector.
Kitco: Why is nickel important for electric vehicles?
Michael Beck: Well it's interesting. Elon Musk said a couple of years ago that really lithium-ion batteries was a misnomer. It should be really called nickel-iron, and that's because that's the energy density of a battery. The energy is stored by the nickel units. And if you look at an average Model 3, it consumes something on the order of 30 kilograms of nickel. And increasingly the cathode makers, which are really the principal components for battery fabrication, are tinkering with chemistries that use more nickel. The higher the energy density, the longer range you have on the vehicle. It is the most important element in in a battery. Without nickel you don't have the energy storage.
Kitco: If you have a nickel thesis, how does this play out in the junior space?
Michael Beck: It's a little bit of a challenge because the world's largest nickel producer, at least in the Western world, is Vale. But Vale is really an iron ore producer. Nickel represents probably less than 15 percent of the company's portfolio. So if you buy Vale, you're not really getting nickel. You're getting an iron ore share. Vale has its own challenges. It has a rather impaired balance sheet, which is why it trades where it does. Another interesting nickel producer that we own is Independence Group NL out of Australia. They have a market cap of about a $1.5B, and the company is growing its nickel production. But you're right, there aren't a lot of opportunities to invest in existing nickel producers, because they're few and far between.
Maybe the most interesting in the larger cap of established players is Norilsk. They're the number two nickel producer, and they're based in Russia. That's probably the single best large-cap way to get exposure to nickel. It has a good dividend yield. It's a major producer of the metal, and when nickel goes up, their share price goes up accordingly. At the smaller cap end of the spectrum, there are a bunch of smallish nickel explorers and emerging developers.
One that we like particularly is a company called Giga Metals. It's listed on the TSX. Even though it has a market capitalization of less than $10 million, it happens to own the world's second-largest undeveloped nickel sulfide deposit. Nickel sulfide is the preferred form of nickel for the production of class one nickel, which is what is required for a battery fabrication. We think the company is completely mis-priced asset, and we look at it as an un-dated call option on nickel. So if our thesis on nickel is correct and nickel goes from $12,000 a tonne to $20,000 a tonne and then perhaps beyond to $50,000 a tonne where it peaked in 2007, then this stock will be disproportionately re-rated and you have a chance, if your thesis is right, to make 10 to 20 times your money. If you're wrong, maybe the market cap goes from where it is today, from $8 million to $4 million. So we like to see those kinds of bets. There is another company that's sort of similar, and it's an asset is not nearly as large but it's called Grid Metals, and it has a relatively advanced smaller nickel sulfide deposit in Manitoba and it has a market cap of $3 to $4 million dollars.
But again any of these companies, whether they're at the microcap end of the spectrum or whether they're big established producers like Norilsk or somebody in between, will benefit when the nickel price rises. We've got a fair degree of conviction about our thesis: the adoption rates for EV will accelerate. Nickel shortages will emerge, and all these companies with nickel exposure will benefit.