Nickel Prices Will Rise Even Without The Electrical Vehicle Revolution | Martin Turenne & Brian Leni

At the 2018 Mines and Money Toronto conference, Martin Turenne (CEO, FPX Nickel) and Brian Leni (Junior Stock Review) shared why they are both very bullish on nickel as a commodity.  This interview is a must-listen for investors wanting to understand the fundamental case for a rising nickel price.  Martin and Brian also discuss the investment value proposition of FPX Nickel (TSX-V: FPX) giving investors an introduction to the company.

0:05 Introduction

0:57 Nickel prices over the last 15 years

2:30 Primary use of nickel

3:44 Nickel prices will rise even without the EV revolution

5:15 Why Brian is bullish on both nickel & FPX Nickel

6:31 Martin discusses FPX Nickel

8:00 Martin’s thoughts on British Columbia as a mining jurisdiction

9:24 Brian’s favorite EV revolution metal is nickel

9:45 Class 1 versus Class 2 nickel markets

12:10 Who will buy FPX’s nickel product?

13:55 What could prevent nickel’s rise in price?

BEGIN TRANSCRIPT:

Bill: Welcome back, ladies and gentlemen. This is Bill Powers, your host with MiningStockEducation.com. I’m here in Toronto at the Mines and Money Americas Conference and I’m joined with returning guests, Brian Leni of Junior Stock Review. Brian, thanks for coming on the program again.

Brian: Thank you for having me.

Bill: And a new guest, a gentleman I spoke with at length yesterday, Martin Turenne, the CEO of FPX Nickel. Martin, thanks for joining me today.

Martin: Thanks, Bill.

Bill: I asked you both to come on to talk about the nickel market, to lay out the bullish case for nickel. So let’s start with you Martin. Could you go over the price of nickel the last 15 years to kind of bring us to where we are today?

Martin: Thanks, Bill. Nickel, I think the first thing to remember about nickel is it tends to exhibit more volatility than the other major base metals, copper, and zinc. And if you look back over the last 15 years, the nickel price has gone between a range of, at its peak in 2006 and ‘07, of $24 a pound down to a bottom in early 2016 of $3.50 a pound. So it’s quite a large disparity between top and bottom and quite a bit of volatility.

When the price peaked in that ’06, ’07 period, that induced a lot of new production to come online and that led to the market being oversupplied for several years between the 2010 to 2015 period. With the price bottoming out in 2016, that also coincided with a turn in the market where the market went from being oversupplied to now being in a state of structural deficit and endless really across the nickel sector view that those deficits will continue for several years. And as such, the prices started to slowly move back up from that bottom of $3.50 a pound in early 2016 to about $5.70 a pound today. And in order to balance the market, I think the view is that the nickel price needs to go significantly higher to incentivize new production to come online.

Bill: What’s the purpose of nickel? What’s it used for?

Martin: The primary use of nickel, 70% of nickel demand is for the production of stainless steel. So that really is the elephant in the nickel industry is stainless steel. And that’s really fundamentally tied to GDP growth and particularly growth in emerging economies that don’t have as much stainless steel as developed economies do. The area of demand growth that’s kind of catching most people’s attention lately is nickel going into electric vehicle batteries. So nickel is a large part of the cathode portion of the electric vehicle battery. And in fact, there’s more nickel in the cathode than there is cobalt manganese and really more nickel in the battery than there is lithium.

Bill: And why is that?

Martin: So, nickel with respect to its place in the cathode is useful because it has high energy density, meaning it helps the battery keep the charge longer. And so it has higher energy density, for example, than cobalt. It also has a lower spot price than cobalt. And so what you started to see is thrifting of cobalt in favor of nickel. So substitution effects are taking place within the battery space and those effects are favoring nickel at the expense of cobalt.

Bill: And what you shared with me yesterday, which I thought was memorable, is that nickel’s price is gonna rise just on a fundamental basis, even if we didn’t have the electrical vehicle revolution.

Martin: Yeah, that’s right. So the nickel market has been in deficit since the beginning of 2016, and those deficits have expanded since then. In 2018, the deficit will likely be larger than in the previous years. Really the main driver for that is continued very strong stainless steel demand and consumption growth, which has been in the range of 5% to 6% per annum for the last 15 years. And really there’s no sign of that letting up. EV demand is very small with respect to the overall nickel market, it’s only 3% to 4% of the overall demand picture for nickel. So it hasn’t really influenced the fundamentals to a great extent yet, but depending on the rate of uptake of EVs over the next several years, it will and I would argue that’s kind of the cherry on top of an already very bullish case for nickel, strictly coming from the stainless side and also looking at things from a supply standpoint.

Several years of low nickel prices we had have led to quite a severe constraint in supply growth. Frankly, the price has not been high enough to incentivize much new mine production to come online. And so you have sort of a perfect storm brewing of supply constraints and very bullish demand both from stainless, the traditional use, and from a brand new source of demand from EVs.

Bill: Brian, you are bullish on both nickel and FPX Nickel as a company. Can you share your thoughts?

Brian: Sure. Well, for FPX it starts with Martin. You know, people are the most important thing and having gotten to know Martin over the last…just over a year, I think he’s a trustworthy and smart guy and that’s where I like to put my money. Next, to that, there’s kind of four overviews or four points. It starts with FPX is the end product, whatever it may be, a pellet or a concentrate, will be able to bypass a smelter and go right to the end user, which I think is a big selling point for me. You know, there’s a clear path to improvement in the old PA. It starts with the exchange rate. There’s a big differential between the exchange rate when it was done, I believe in 2013 to where we sit today.

In the last drilled program, there was a high-grade portion that was discovered, and this is speculation on my part, but it looks like that could be a starter pit, which is integral for a good NPV as you front load the return on cash. And finally, the metallurgical work that we’re doing right now could show huge returns in the end with the goals that they’ve set out. So that’s the kind of the overview for investment.

Bill: And Martin, can you share more about FPX and your project?

Martin: Yes. So we have a very large development stage, PEA stage, nickel deposit in Central BC. It’s called Decar. It’s really a district-scale land package around 245 square kilometers. Within that, there’s a single well-defined deposit called Baptiste. It’s a 2.5 billion ton ore body, moderate grade open pittable mineralization at surface amenable to bulk tonnage open pit mining. A PEA was done on the project by our former joint venture partner Cliffs Natural Resources in 2013. They estimated the operating costs would be in the range of 3 USD a pound, which would be close to the bottom quartile of the cost curve for the nickel business. And, you know, I’d stress to say that that was the closest view and the view of their consultants. It wasn’t really the result of any study that we as a junior put out.

Cliffs ran into hard times and faced a bankruptcy risk and so, in a bit of a fire sale, we were able to buy their interest in the product back, so we hold the project on 100% basis now. It’s one of the largest undeveloped nickel deposits in the world. It’s gonna have mine life probably well in excess of 30 years and given it’s favorable position on the cost curve and the fact that it’s located in a tier 1 jurisdiction in BC, we think it’s one of the projects that could come online and in the coming years to sort of help meet that supply shortfall in the nickel market.

Bill: In our conversation yesterday I asked you about British Columbia as a jurisdiction and I brought up some perceived baggage with that jurisdiction. Can you share your thoughts on BC?

Martin: Yeah, I think, I think BC definitely has a bit of a PR problem right now with respect to mining and resource development. And I think, you know, there’s been a lot of conversation and negative press frankly about BC as a jurisdiction for permitting and building pipelines for the oil and gas industry. And I think that’s very real. However, on the mining side, we’ve seen a very continued strong support from the government and from regulators to permit mines to allow them to go through. In the last several years we’ve seen, you know, Brucejack, the Pretium project go through. The Comesa underground project has been permitted at Red Mountain from IDM Mining just received its permits. The next project we looked at as a bit of a benchmark for ourselves is Blackwater, which is a large copper, gold open pittable deposit in our same region, within Central BC, owned by New Gold. And our understanding is that project is nearing the final stages of permitting and on receipt of permits, I think that would show quite clearly that BC is open for mining and specifically for large open pit bulk tonnage mining operations with large tailings facilities.

Bill: Brian, you follow the EV revolution and the metals that are needed to fuel that. Is nickel your favorite commodity that is fueling the EV revolution?

Brian: It is. I think out of all the metals, you know, nickel, copper, cobalt, nickel…I think there’s the most disruption created by the EV market to nickel, and that’s what intrigues me the most. The other side is much of the narrative in the nickel space, particularly from juniors with nickel sulfide deposits, is it surrounds the importance of nickel sulfides as they feed the class 1 nickel market. And this is true, but it’s more complex than that. And maybe this is a great question for Martin, is the class 1 nickel market, if you can maybe shed some light onto what can actually feed the class 1 nickel market?

Martin: Sure. So, the nickel market is broadly comprised of two product types, class 1 nickel and class 2 nickel. Class 1 nickel is a pure nickel product basically containing 99% plus nickel in order to qualify as a class 1 product. So basically a pure nickel metal. You know, class 1 nickel is the ideal form to feed into the production of nickel sulfate. Nickel sulfate is actually the battery chemical that goes into the batteries. However, you can also produce nickel sulfate using sources of nickel that don’t necessarily come from sulfide sources. So, the typical path for a sulfide ore is to go first through the process of extraction and pyrometallurgical recovery and smelting. That product then needs to go through a refining step. Once it’s been refined, it can be considered class 1 nickel. It then further has to go to a sulfate plant to be turned into sulfate.

So the path from the sort of mine site from a nickel sulfide ore body to production of nickel sulfate is very long and involves typically a lot of intermediaries, smelters, refiners, and sulfate producers. Similarly, the path from nickel laterite to sulfate is a long process, but it is very much achievable. It’s being achieved by large groups like Vale in Indonesia for example, who produce nickel matte from laterites, which ultimately becomes a product called MHP which can become a nickel battery chemical. So both laterites and sulfides are capable of feeding the nickel sulfate, the chemical market, and I think there’s been a bit of confusion in the market to say that only sulfides are appropriate and that’s not in fact true.

Bill: When FPX’s deposit comes into production, who will be your primary buyer of the nickel?

Martin: So we will produce a product that’s more akin to a class 2 product in that, our nickel mineralization is rather unique. The nickel mineral is called awaruite. Awaruite is a pure alloy of nickel and iron. So the nickel in our deposit comes out of the ground bearing iron alloyed with it in mineral form. And as such, the product that we produce will contain both a lot of nickel and a lot of iron, and some chromium as well. And nickel, iron, and chromium are the three main ingredients in the production of stainless steel. So, in producing nickel, iron, chromium pellet or a concentrate, those products will be feasible as a direct source of feed to the stainless steel industry. The product will be akin to ferronickel, which is produced by the likes of Vale and Anglo American and South32, or high-grade Chinese nickel pig iron, which has become a huge source of direct feed to the stainless business.

The key benefit for the product coming from Decar, from our project, is that when it leaves the mine gate, after having been processed into either concentrate or pellet, it does not need to be sold to a smelter. It can go directly to an end user. And as such we can capture a lot more value of the LME nickel price by not having to pay a smelter the treatment or refining charges that a typical nickel sulfide miner would have to pay.

Bill: So as investors look at nickel as a commodity, there’s a strong case for a rise in price, what would be a potential monkey wrench or something that could hold back the rise of nickel, the price?

Martin: First, I guess it would be sort of global economic growth. Certainly, there’s been much discussion of that in the marketplace lately, given the trade war that’s brewing between China and the United States. And if we see that, you know, have more sort of contagious effects through the global economy, reduction in demand can certainly hamper the bull case for all metals really, for all the commodities that are used in industrial applications. I would say though that even in a kind of a flat sort of demand profile view, that the lack of new supply coming online really means that we’d likely still be in a deficit market for the nickel business.

The other thing that I think people need to understand about the nickel market in order to form a view of their own is to delve into Indonesian nickel production. Indonesia will be the leading supplier of nickel units for the next decade and more. And so understanding what the cost curve of Indonesian nickel production looks like, what the capital intensity of those projects is, and understanding the sort of the developments that are happening in Indonesia between the production of nickel pig iron for stainless steel, and also potentially the production of MHP for feed to the battery industry.

I would encourage people to do research. Certainly, there are many analysts out there who are capable of providing some insights. Brian certainly is one of them. And so that’s an important element on the supply side that I think people need to be aware of. My personal view is that while the Indonesian supply growth will be substantial in the coming years, that no matter how much Indonesia ramps up, the nickel market will still be structurally short. We need to build mines in other countries around the world. And that’s where we think our project sort of fits in quite nicely.

Bill: Brian, what more can you share about either FPX or the nickel market?

Brian: You know what? I just remain bullish on it and FPX is the vehicle that I’ve chosen to move forward. Like in our conversation before, there’s too few good people in this business and I think Martin is one of them and I’m happy to put my money with people like that. And yeah, I think 2019 is going to be a good year for nickel.

Bill: Martin, in light of our conversation, anything else you’d like to share with listeners?

Martin: Yeah. You know, the nickel market has been quite robust in terms of the price appreciation over the last couple of years. One of the key things that I think that’s been limiting price growth has been there was a huge build-up of stocks in LME and Shanghai warehouses in the years of oversupply between 2010 and 2015. Those stocks have been…being drawn down at quite a rapid rate. The stocks are still actually in a historical sense, still traditionally high, even today in the fourth quarter of 2018. The drawdown continues to be quite rapid and as we see the those inventory levels reach a more critical level, nickel is a market that is prone to price spikes both to the upside and to the downside and it’s my view that, you know, that in the coming years, the risk weighs more towards a likely sort of upside price spike. And so I would certainly encourage investors to look at various nickel opportunities out there and certainly happy to have them consider FPX as one of those opportunities to look up.

Bill: And how can listeners follow you and your company online?

Martin: So we’re at fpxnickel.com and we also have a twitter account, @FPX_Nickel. And we’re quite active on Twitter putting out market information about the nickel business generally. And we’ll also obviously highlight our own news, but we spend quite a bit of time trying to put out nickel market intelligence that we gather from various analysts around the world and trying to help people understand more about the market generally.

Bill: Brian, a lot of listeners already know you, but share your contact details, please.

Brian: Sure. So you guys, I write at juniorstockreview.com. It’s free to subscribe and you can find out what I’m investing in.

Bill: Brian and Martin, thank you for joining me today.

Brian: Thank you.

Martin: Thanks, Bill.