Canadian Mining Review

Top 10 Nickel Stories of 2011

2011 was an interesting year for the Devil's metal

By Patrick Whiteway

Twenty-eleven was an eventful year for nickel, the steely grey metal that is so essential to high end stainless steels and finds a myriad of modern applications from rechargeable batteries to jet engines. The world of nickel had everything a mine engineer could ask for in 2011: Prices gyrated, supply and demand increased over 2010 and the organization that represents companies that mine and refine this 'envrio-metal,' the Nickel Institute, suffered a humiliating defeat in the courts of Europe.

2011 began with the price of nickel hovering above US$11 a pound and ended the year significantly lower at US$8.49. Demand from stainless steel producers in China, which use 25% of all nickel mined on the planet, continued to grow, although at a much slower pace than was anticipated at the beginning of the year by the most bearish of analysts. Meanwhile, nickel producers continued to build supply, thus dragging prices downward.

From where this mine engineer sits, the top nickel stories of 2011 were as follows:

1. Human health and environment classificaitons where upheld in Europe. In July, the European Court of Justice rendered a final decision on a case brought before it by the Nickel Institute. The decision neutered the industry's argument that Europe's reclassification of a wide range of nickel compounds is unlawful. The only winners in this very costly debacle were the over-priced lawers in London and Toronto. The millions wasted could have been used to increase our understanding of how nickel compounds impact human and environmental health;

2. Nickel laterite operations failed to meet expectations. Nickel laterite operations such as Sherritt International's Ambatovy project in Madagascar and Vale's Goro project in New Caledonia, for example, struggled to meet production and capital expenditure targets;

3. 'Social licence to operate' issues slowed new mine building in the developed world. Nickel developments in Canada encountered social challenges with Cliffs Natrual Resources and Noront, two companies in the so-called 'Ring of Fire' nickel-chromium development in northern Ontario, running into "social licence to operate" snags;

4. Supply and demand headed toward imbalance. Nickel prices fell over the 12-month period due to an increase in supply and a slower than anticipated increase in demand brought on by a slumping global economy;

5. Carbon taxes began their inevitable rise to prominence. Australia approved a carbon tax in October and authoritarian China, which is home to the environmental disaster that is nickel pig iron production, signaled it would bring in a carbon tax within the next five years;

6. The new kid on the block made waves. The world's largest metals trader, Glencore Inc., went public in June and signaled its interest in nickel by increasing its grip in Minera, operator of the Murrin Murrin mine, a profitable nickel laterite operation in Western Australia;

7. Cash-rich majors modernized existing operations. Norilsk announced major capital expenditures in Russia and Xstrata and Vale both announced major capital investment plans at their existing nickel operations in Canada: Xstrata announcing it will spend $200 million at Reglan mine in northern Quebec and Vale to spend an equal amount on the Clarabelle concentrator in Sudbury.

 

Questions for Royal Nickel

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?

Survey results of 2010 and 2011 nickel price predictions as compiled by Reuters

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.

REFERENCES:

1. European Nickel Risk Assessment http://www.mst.dk/English/Chemicals/Substances_and_materials/Nickel/

2. Case "Nickel Institute v Commission" before the Court of Justice of the European Union  http://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  http://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  http://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.

Virtuous Products, Produced in Virtuous Circles

‘Radical transparency’ is changing how buyers choose the things that they buy. In the next five to ten years, this trend could have a negative impact on the demand for nickel. Market share could be lost in the white goods sector of the economy and nickel producers could begin to use to their advantage the poor ecological, health and social performance of their competitors. Canadian nickel producers are well positioned to take advantage of these trends.

By Patrick Whiteway

Imagine this. An elderly colleague of mine, who happens to be a metallurgist, checks into a Toronto hospital for an operation that could extend his life. Months prior to checking in, he had complained to his doctor about irregularities in his heartbeat, a shortness of breath and the occasional pain in his chest. His doctor referred him to a heart specialist who, after all the necessary tests for stress and cholesterol levels recommended that he have a stent installed in his main artery.

(Boston Scientific)

Stents are ingenious tube-shaped devices made of metal wire mesh that are designed to prop open and prevent your arteries from collapsing, thus ensuring the free flow of blood. Millions of these have been inserted into people’s arteries since they were invented some 20 years ago. These days, stents are made of either nickel-titanium shape memory alloy, nickel-containing stainless steel or a cobalt-based alloy.

Being a metallurgist, our patient knows a thing or two about nickel and the rate at which nickel alloys corrode, especially in the highly saline environment that is the human body. He is also aware of the potential risks to his long-term health of nickel ions, released from a corroding stent, circulating throughout his body. So, naturally, our metallurgist asks the surgeon if he could have the stent that is made of a cobalt-based alloy.

As it turns out, due to a quirk of the Canadian medical system and the year that this event actually took place, the hospital in question used only one variety. So, in reality, there was no choice to be made.

But there are two interesting things about this story. The first is that my colleague didn’t want nickel ions released into his body and the other is that our patient knew the technical details and the risks to his health of a particular product and fully expected to have a choice. This heightened level of expectation is a direct result of today’s socially connected world; patients should be entitled to make a choice based on what they feel is best for them and their health.

A choice was not possible in this particular example, but in the not-too-distant future choices like this will become an essential part of our everyday lives. In 2009, Daniel Goleman, wrote a best-selling book entitled Ecological Intelligence. In it, he explains how the process by which we make purchasing decisions will have a significant impact on markets in the future. How this 'radical transparency' might affect the market for nickel in the next five to ten years is the subject of this post.

Read more >>

What Did Explorers Learn From the Downturn?

Observations from the PDAC 2010 conference: Still not taking the long-term view

By Patrick Whiteway

Prospectors from across Canada and around the world have gathered in Toronto every spring since 1932. This year was no exception. Encouraged by higher metals prices, a record number of people (the majority of whom were investors) attended four days of festivities at the Toronto Convention Centre. And there can be no doubt that this was a hugely different convention from the one in 2009 when the mood was at an all time low.

Twelve months ago, all metals companies had been cut off at the knees by the global financial crisis. In fact, some junior exploration companies fell into their graves (or into the arms of bigger companies with more cash). Walking the isles of the Investor’s Exchange in 2009 was like strolling past rows of tombstones in a cemetery. No, the 2010 edition of the PDAC convention demonstrated that the people who explore the world for valuable minerals can bounce back from even the darkest hour.

 

In 2009, investor interest was extremely low

In 2010, every metals analyst was optimistic about the future direction of prices.

Every company presentation extolled the positive aspects of their properties. Everyone could make money for investors it seemed; liquidity has returned to the market; but for how long?

The doubling of prices for many metals in the past year has been tied, not surprisingly, to China, according to Andrew Keen of HSBC Securities Inc. China’s US$586 billion stimulus package, allocated over the past year and a half, was focused mainly on building public infrastructure, a lot of which had been planned years ago. Therefore contracts could be awarded immediately.

“We’re about halfway through the downturn,” Keen said at the commodities and market outlook session. “Things should return to ‘normal’ [with supply and demand in balance] in 2011. China’s economic growth needs to stay at 8% per year for metals demand to return to a ‘balance,’ ” he said.

Just below this promotional surface, however, lurk some inconvenient facts which could cloud this sunny outlook. Take the nickel market for example.

FACT: On the supply side, Vale S.A. and Sherritt International have invested billions in two high pressure acid leach nickel projects (Goro in New Caledonia and Ambatovy in Madagascar respectively). To make the projected profits their investors have been promised (10% ROR), nickel prices have to be above US$8.50 a pound for a sustained period of time. This does not sit well with the fact that on the demand side regulations could create a stigma for nickel compounds, seriously affecting demand in more than one important end-use sector. This is true even in China and the countries to which it exports stainless steel products.

FACT: The European Union in 2009 reclassified over a hundred nickel compounds as carcinogens, mutagens and reproductive toxicants (or CMRs) and, via the United Nations’ Globally Harmonized System, these classifications have spread around the globe. The use of nickel in almost two-thirds of its applications could be negatively impacted. Yet not a single metals analyst even mentions it. Could it be that demand for nickel will fall by 67% over the next couple of years taking prices with it? In that case, only the lowest-cost producers (largely the sulphide nickel producers) would survive and laterite operations would become uneconomic very quickly.

Some things at the PDAC change very slowly

Climate change is another game-changing issue that did not get the public air time it deserves at this PDAC. This is particularly important because investors are listening intensely, trying to decide where to put their savings. Yes, the United Nations’ Climate Change Conference in Copenhagen was a dismal failure and the so-called ‘climategate’ revelations have turned the tide of public opinion, but professional opinion remains firmly planted on the side of “take action now or pay more dearly later.” So, it’s fair to say that some form of carbon emissions tax or cap-and-trade system is likely to emerge within the next 12 to 18 months. Was this issue openly discussed at PDAC 2010? I don’t think so.

FACT: Environmental and corporate social responsibility issues were discussed behind closed doors in a very clubby ICMM-sponsored seminar on the Saturday before the convention even got underway.

Yes, the PDAC is all about providing a venue for companies to sit down with investors and to promote their efforts to find the metals that society will need in the years ahead. The lithium (rechargeable batteries for cars) and rare earth guys did a spectacular job of promoting their companies and properties at this convention. But where were the companies who are competing for investor interest based on low carbon emissions relative to their competitors? Nowhere, that I could see.

Asked how a carbon tax might affect their nickel operations in Western Australia, Robin Dunbar, director of Western Areas (the second largest nickel producer in Australia) said “Frankly, I don’t know. But royalties to the state is an important issue related to carbon taxes.”

That about sums it up. No one at this convention was looking beyond the short term gains that can be made. No one can see the long-term risks of investing in some of these companies. Isn’t that the lesson that the financial crisis taught us: that an inability to adequately evaluate the long-term risks of an investment can lead to disaster?

I think mineral explorers should be convincing investors to put their money into mining ventures that will satisfy a real need of society and they should be explaining to them the long-term, sustainable plan that they have to meet that need. Nickel companies today are not doing that at their peril.

To comment on the above posting, please click on "Comments" below.

2009 Year in Review: Nickel

By Patrick Whiteway

In 2009, one major issue seriously hamstrung the once galloping metal nickel.

That issue, the health re-classification in the European Union of more than one hundred nickel compounds has spread like a wild fire around the globe, thanks to the United Nation’s Globally Harmonized System (GHS).

As a result, 117 water soluble compounds of nickel – known as the devil’s metal - are now labeled in many countries as carcinogens, mutagens and reproductive toxicants (or CMRs for short).

Hazard symbol for carcinogenic chemicals 

This has had an immediate negative impact on the metal and the ability of prices to crawl out of the hole they fell into during the 2008 financial crisis. The health re-classification has created significant uncertainties in the minds of the all-important end users of nickel and its compounds.

Human health concerns could affect fully two-thirds of the 1.3 million tonne-per-year demand for nickel with food and water contact applications being affected most.

The world's major nickel producers are convinced that European regulators, led by the Danish Environmental Protection Agency, overstepped their own procedures in making the re-classifications. The industry insists that the best available scientific knowledge is on their side and therefore the re-classifications are unjustifiable.

 
Hazard symbol for toxic chemicals 

Acting on the precautionary principle and the desire to protect the health of European citizens, however, the Danes were undeterred. On September 25 the European Commission moved forward with the 30th and 31st Adaptation to Technical Progress, or ATP (since re-named the 1st ATP). Nickel producers subsequently followed through on their threat to launch legal challenges in order to impede progress of the market-damaging re-classification. This action could not stop the GHS however and the classifications have spread around the world.

Expected to cost the industry millions of Euros, the legal squabbles will not be resolved quickly and could drag on for months into 2010. It may be years before they are settled.

Meanwhile, to add insult to injury, a leading international scientific body, the International Agency for Research on Cancer (IARC) in May reaffirmed its cancer classification for nickel compounds.

As 2009 comes to a close, the once-galloping nickel market is seriously hobbled.

Since prices peaked at about US$24 per pound in 2007, they languished in the $4 to $8 per lb. range for most of 2009, closing today, the last day of the year, at $8.37. This will have a predictable impact on the bottom line of the world’s leading nickel producers which include: Norilsk Nickel of Russia, Vale Inco of Brazil, BHP Billiton of Australia and the U.K. and Xstrata Nickel of Switzerland.

Perhaps because of the stigma attached to CMRs, demand for nickel, especially in Europe which normally accounts for 40% of demand, has not recovered from the downturn caused by the financial crisis of 2008.

Norilsk Nickel, the world’s largest producer of the devil's metal said demand was significantly lower (down about 5%) for household products and various architectural products that contain nickel.

Non nickel-containing substitutes in these applications (mainly ferritic stainless steels) could be irreversible and will hurt demand for nickel in 2010 and beyond.

Top 10 Developments in 2009

In my opinion, the top ten developments in the nickel industry in 2009 were as follows:

1. On September 25, 2009, the European Union brings the 30th and 31st ATP into affect (re-classifying 117 nickel compounds as CMRs) and the nickel-producing industry challenges the classifications in court.

2. In May, the International Agency for Research on Cancer (IARC) re-affirmed its ‘carcinogenic in humans’ classification for nickel compounds.

3. In July, Vale Inco workers go on strike in Sudbury, Ontario and Voisey’s Bay, Labrador, seriously affecting supply. The strike remains unresolved.

4. In China, where state intervention in the economy is massive, nickel and stainless steel production continued to grow.

5. The world's largest mining company, BHP Billiton sells the Ravensthorpe nickel mine near Perth, Australia (which it spend $1.2 billion to develop) to First Quantum Minerals, a junior Canadian company, for just $350 million. The operation could produce between 28,000 and 39,000 tonnes of nickel per year when it is restarted.

6. Cash-rich Chinese companies move into Canada, snapping up junior properties at bargain prices.

7. The United Nation's Copenhagen Climate Change conference failed to create a carbon trading scheme.

8. Cliffs and Noront engage in a bidding war for a major chromite deposit in northern Ontario.

9. China detains two Rio Tinto iron ore executives on suspicion of stealing state secrets.

10. Former Inco executives successfully promote an undeveloped nickel property in northwestern Quebec. China’s largest nickel trading company, Ningbo Sunhu, pays $21.8 million for a 15% interest in Royal Nickel.

_________________________________

References

1. The 1st Adaptation to Technical Progress (ATP) enters into force in the EU:

http://ec.europa.eu/enterprise/sectors/chemicals/documents/classification/index_en.htm 

2. The International Agency for Research on Cancer (IARC) maintains its 'carcinogenic in humans' classification for nickel compounds:

http://www.thelancet.com/journals/lanonc/article/PIIS1470-2045(09)70134-2/fulltext#tbl1

__________________________________

If you have any questions about the above post, or would like to make a comment, please click on "Comments" below.