Three former executives of Inco Ltd., now on the board of Royal Nickel Corporation, have a duty to provide potential investors with a thorough analysis of the risks of investing in a high-cost nickel producer
By Patrick Whiteway
Royal Nickel Corp. is seeking $100 million in public financing at a time when clouds of uncertainty hover over the nickel market - clouds that will break only for the low-cost producers of the Devil's metal.
A preliminary analysis of the prospects for profitability at Royal Nickel's Dumont nickel property in northern Quebec, concludes that the proposed $1.2-billion project will work out only if the price of nickel stays at US$8.00 a pound or above for the foreseeable future (for a 21-year operating life).
Like all speculation in commodities, the future price of nickel is something that is impossible to foretell. But that doesn't stop so-called "experts" from making predictions.
A recent survey compiled by Reuters of 2010 nickel price predictions bodes well for the Dumont project. It reveals that 24 of 48 market analysts surveyed worldwide foresee the price of nickel averaging US$8.25 per pound or above this year.
Overall, their predictions range from a low of US$6.69 per pound to a high of US$9.98. All, no doubt, cite double digit economic growth rates in China as a driver. Not one of the analysts predicted that nickel will dip below the average 2009 price of US$6.67.
I wonder what the prediction record is for these forecasting "experts". How many of them predicted that the average price in 2009 would be $6.67 for example?
I have not read any of those reports, but I doubt that they include an in-depth discussion of what could cause the price of nickel to fall.
A lower nickel price should not be an unexpected event. A lower price is within the tunnel of possibilities. The following chart shows historical LME nickel prices from 1982 to 2009. Rarely, has the price been above $6 a pound.
Historical nickel prices and mine production costs (1982-2009) as compiled by Brook Hunt
So, a nickel price lower than $8 is very possible, especially considering the recent reclassification of nickel and nickel compounds by the European Union (and globally via the United Nations' Globally Harmonized System of Classification and Labelling of Chemicals) which followed a 14-year risk assessment process in Europe.
This regulatory development ,which came to light in 2009, could have a significant impact on long-term nickel demand. Demand could fall, for example, if a stigma were to be attached to nickel as a result of the classifications and if three lawsuits currently before the Court of Justice of the European Union drag on (and if they fail to overturn the classifications).
That's a lot of ifs, but as much as two-thirds of nickel demand could be negatively affected. Therefore the profitability of new, high-cost mines such as the Dumont project (not to mention the much larger and costly nickel laterite mines that are coming into production in the next few years) could be impacted.
As former executives of Inco Ltd. during a time when the European nickel risk assessment was being conducted by the Danish Environmental Protection Agency, Scott Hand, Peter Jones and Peter Goudie, are (or should be) well aware of the EU reclassification issue. As such, they have a special duty to fully brief investors on three costly lawsuits presently winding their way through the Court of Justice of the European Union and to explain how the outcome of these lawsuits could affect the health classifications of nickel.
The outcomes of these lawsuits are not expected until 2011 or 2012, which gives architects and the designers of white goods and other consumer products plenty of time to reconsider the use of nickel-containing materials in the consumer products and buildings they design. They may very well decide NOT to use materials that contain compounds that are considered by the EU to be carcinogens, mutagens and reproductive toxicants (CMRs). They may decide to substitute nickel-containing austenitic stainless steel with nickel-free ferritic stainless steel.
If the analysis of the 48 agust investment firms quoted in the Reuter survey mentioned above had factored in the reclassification of nickel, then their forecasts for nickel prices might have been significantly lower. That's because supply will significantly outstrip demand should demand decline due to a perception on the part of consumers that nickel-containing materials are to be avoided.
On the supply side of the nickel market, the Metals Economics Group of Halifax, N.S. recently published the following chart:
Potential nickel production from discoveries relative to global nickel production 1998-2009
It shows the relative positions of low-cost sulphide producers and generally higher-cost laterite producers.
If nickel demand were to fall significantly, the annual production of nickel from low-cost nickel sulphide operations worldwide is sufficient to meet demand. High-cost operations would go bust. And there are plenty of high-cost producers around and more being contemplated. (See a report prepared recently for the International Nickel Study Group (INSG) on nickel heap leaching test sites worldwide.)
In light of the above, here are some questions investors should ask Royal Nickel as it seeks $100 million to develop the Dumont nickel property:
- Why hasn't the Dumont deposit been developed in the past? It's not a new discovery.
- Should you succeed in bringing Dumont into production, what are your plans for the operation should nickel prices dip below US$8.00?
- What possible future developments do you anticipate could impact costs at Dumont in the near future? Hydro power costs in Quebec; potential future carbon emissions taxes; or transportation costs relative to the price of oil; for example?
The world doesn't need more, low-grade, high-cost nickel producers. What is needed are more large tonnage, high-grade, low-cost nickel mines of the kind found at Voisey's Bay, Thompson and Sudbury. There are companies looking for these types of deposits in Canada and I hope to make them the subject of a future post on this website.
1. European Nickel Risk Assessment https://www.mst.dk/English/Chemicals/Substances_and_materials/Nickel/
2. Case "Nickel Institute v Commission" before the Court of Justice of the European Union https://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:C:2010:161:0053:0054:EN:PDF
3. Case "Nickel Institute" before the Court of Justice of the European Union https://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:C:2010:063:0038:0039:EN:PDF
4. Case "Norilsk Nickel Harjavalta Oy and Umicore v Commission Environment and Consumers" before the Court of Justice of the European Union https://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:C:2010:063:0038:0039:EN:PDF
If you would like to comment on the above posting, please click on "Comments" below.