Martin Turenne | Nickel Rose 40% in 3 Months…Here’s Why

Martin Turenne is the CEO of FPX Nickel Corp. (TSX-V: FPX).  In this interview, he explains why nickel prices have rose 40% in just 3 months from under $5.50/lb to now almost $7.40/lb.  Martin also provides a concise summary of the past 15 years of the nickel market.  He also shares an overview of FPX Nickel’s Baptiste deposit and their recent advancements of this project.

0:05 Introduction

1:08 Why nickel is up 40% in 3 months

5:18 Nickel prices over the past 15 years

7:49 Is the nickel market hard to analyze?

8:47 What the nickel bear market did to nickel equities

10:27 Future nickel demand apart from EV demand

12:10 FPX Nickel is a leveraged play on nickel

TRANSCRIPT:

Bill: Nickel is up about 40% in the last three months. It rose from under $5.50 a pound US, now to about $7.40 a pound or so. So that’s about a 40% rise where gold only rose 20%. I am speaking today to Martin Turenne. He is the president, CEO and director of FPX Nickel. If you go back in this podcast last October, I interviewed Martin along with Brian Leni of Junior Stock Review and we talked about the nickel market in that podcast. You can flip back and listen to that if you want more of Martin’s insights, but I asked him to come on today to explain to us what’s going on. So Martin, welcome back to the show and please explain to us, why is nickel up about 40% in the last three months?

Martin:  Yeah, Bill, thanks for having me. So I guess since we last spoke, you know through the latter part of last year and really through the first three, four months of this year, nickel remain tied to its base metal peers, copper and zinc in price performance. It was slightly outperforming copper and zinc, but was generally in line with those metals. Really since the beginning of July, we’ve seen this huge increase in the nickel price, as you mentioned. The main driver of that has been increased speculation in the market that Indonesia, which is actually the largest producer by country of nickel mine supply, may be ready to impose an export ban.

Which would restrict the ability of miners there to export nickel ore out of country to downstream processors, typically in China. So if the Indonesians were to follow through on that export ban, then the nickel market would be short of nickel units. The structural deficit that we’ve seen in the nickel market over the last few years would be heavily exacerbated, which would potentially have positive implications for the nickel price.

Bill: What is the political pressure here or what’s going on politically? Is the US potentially applying pressure on Indonesia to hurt China amidst the trade war? Or what’s your analysis of the political situation and how it impacts this?

Martin:  I don’t think that there’s any influence from the trade war on what Indonesia is doing. Indonesia has had a very strong current domestically of resource nationalism and a push within the country to maximize the value of resources that are housed within the country. With respect to mining, that would mean trying to encourage investors and companies to build smelters and other processing capacity within the country. So several years ago in 2014 the Indonesians imposed an export ban on the export of nickel or of unprocessed nickel ore specifically to induce companies and investors to invest the capital to build those smelters within Indonesia. That export ban was relatively successful in encouraging external investors, primarily Chinese investors and companies to start to build smelter capacity in Indonesia. I think the Indonesian government considers the re-imposition of that export ban as as another lever that it has at its disposal to further encourage capital investment within within the country’s borders.

Bill: So if we could step back and just look at the nickel market from a 30,000 foot view, there’s many savvy listeners that are listening to us right now on this podcast, but there’s also people that are very unfamiliar with the nickel market. Nickel’s been bounced in between $5 and $6 US for most of this year before it shot up to about $7.40, as I mentioned at the introduction. But, you could you take us back about 15 years, Martin, and help us to understand where the price of nickel is now relative to where it’s been in the last 15 years.

Martin:  Sure. So if you go about just sort of the middle part of the last decade, you had the Chinese super cycle really kicking into gear. Among the major metals, nickel probably had the most dramatic increase to the upside. Right in the middle of that Chinese super cycle, the nickel price went up to about $24 a pound. You know, as miners do what they do and as a commodity price goes up, particularly when it goes up that dramatically, it tends to induce a lot of new production to come online. That’s what we saw in the period between 2010 and 2012.

That led to the nickel market being in huge over supply for about five years, between 2010 and 2015. That macro economic theory would dictate that the nickel price would go down in those circumstances and that’s indeed what happened. So the nickel price went from a high of $24 a pound to a low of about $3.50 in late 2015 and early 2016. Since the beginning of 2016 that dynamic has shifted 180 degrees. The nickel market has been in structural deficits since the beginning of 2016 and so demand is exceeding supply by considerable margin since that point every year and we continue to see that here in 2019.

So there was, in that prior period between 2010 and 2015, a large buildup of inventories on the LME and other warehouses. Those inventories have been steadily being drawn down here since the beginning of 2016 as the market has been in deficit. So at some point in the not too distant future, the nickel market will become, I think in most people’s view, truly tight. That’s where we could see potential for further escalation in the nickel price.

Bill: Some have said the nickel market is a little harder to analyze than let’s say the gold market because more than half of the inventory is not reported on the exchanges. Do you agree with that?

Martin:  Yes, I think that’s absolutely the case and it’s true for copper and zinc as well. As these markets move, of course you have reported inventories, those would be typically the LME and the Shanghai reported figures. But, then there will always be nickel units that are being stored in private warehouses that are not reported and those volumes can be considerable. So I think it’s safe to say that depending on inventory volumes that are reported for these major base metals, oftentimes there can be just as much, if not more, of these base metal stored in private warehouses. So it does lend a certain opaque nature to the ability to model and to come up with a thesis on these metals.

Bill: With that bear market ending in 2015, talk about what that did to the nickel equities.

Martin:  Yes. So the nickel equities were really severely beaten up, really through the down period of the nickel price. What you saw is actually a lot of companies that were formerly nickel companies rebranded and became focused on other metals or in other sectors. So there’s been a dramatic decline quite simply just in the number of nickel equities out there, particularly in the junior space. Since the nickel prices started to go up, particularly this year, we’ve seen a healthy response in the price of the nickel focused intermediary companies.

Really there aren’t any major companies that offer a pure play exposure on nickel. You really have to go and look at more of the intermediate level companies. Those companies have performed quite well year to date, in 2019 they are producing nickel. So any increase in the nickel price is certainly affecting their bottom line on a realtime basis. But, I would say that the condition or the circumstances for junior companies or pre-production companies is somewhat different. I guess in that way it’s somewhat similar to what we’re seeing in the gold market right now where the gold price is doing well. The gold majors are certainly gaining quite nicely, but that performance hasn’t really trickled down into the juniors yet. I think it’s very much the same case for the nickel market.

Bill: When mining companies make the case for their investment thesis, it’s inextricably tied to the underlying commodity and the future demand for that commodity. Can you make the case for rising nickel price apart from the electrical vehicle revolution? Because that often comes through in many nickel companies presentation, the EV demand that’s expected, you know, the dramatic rise from where we’re at today.

Martin:  Yeah. The EV demand component for nickel, it’s a great part of the narrative. Certainly we see that as well, a lot of nickel companies really pushing that aspect of the story. It is a narrative that I think carries a lot of sway with particularly sort of generalist investors. Really the workhorse for nickel demand though remains stainless steel. Stainless represents about 70% of nickel consumption. Whereas the batteries today are only about 3 to 4%. Now the batteries will certainly take up more nickel demand over time. I guess the simple point I would make is that even if there were no electric vehicle battery demand, the nickel market would likely still be in deficit. There would still be a both bulk case for the nickel price based simply on continued strong and robust demand for stainless steel combined with a real constraint in supply growth for nickel. Particularly in light of several years of very low nickel prices. So the EV battery demand is going to be substantial, but in terms of the both thesis, I think it’s the cherry on top.

Bill: Your company FPX Nickel is one of the more leveraged placed nickel. I’m looking here on your presentation where it shows your share price performance relative to the price of nickel. Your key project is the Baptiste Deposit on your Decar Nickel district. You released some information on that, not too long ago, about 10 days ago. Please provide an overview of what’s going on at this project and what’s the significance of your most recent press release?

Martin:  Sure, so Baptiste is a very large scale deposit. There’s over 5 billion pounds of nickel in the indicated category and a few hundred million more pounds of nickel in the inferred category. So it’s a very large deposit, sits in the middle of central BC, very close to a railway, very close to some other large mining operations. The project sits with an established resource and PEA. That PEA was done in 2013 in collaboration with a former joint venture partner of ours. We hold the project now on a hundred percent basis and our work over the last couple of years has been focused on optimization of every aspect of the project. From expanding the resource, particularly higher grade area of the resource via the drill bit market analysis to understand where and for what price we’ll sell our nickel product. Most recently a real focus on optimization of metallurgy.

In short, we’ve achieved much higher rates of recovery of the nickel compared to what was assumed in the 2013 PEA. About 4 to 5% higher recoveries, which is very significant towards the production of a significantly higher grade nickel product. So the nickel concentrate we’re producing now consistently grades around 65% nickel versus 13% in the previous study. That, we believe, is going to translate into a much higher value product given the higher purity of nickel in that product and also lead to dramatic reduction in the estimated transport costs to take that product to market.

The next steps for us are sort of two fold. One is we are looking at the leach ability of this nickel concentrate to see if we have a product that is potentially a feedstock into ultimately the production of nickel sulfate. Which is the chemical that goes into electric vehicle batteries. It would be nice to demonstrate, I think, that on a resource this large that the project has the ability and flexibility from a strategic standpoint to produce nickel either for stainless or for the growing EV market. The other piece of work is with respect to we’re now producing an iron ore byproduct and so we want to understand what the potential market for that byproduct would be and fold that into the economics at some point. Which has not yet been contemplated for the project and certainly was not included in the previous economic study.

Bill: So you’re doing the metallurgical work in these studies moving towards your pre-feasibility study. That would be the next logical step?

Martin:  The next logical step is likely to be an updated PEA, simply to show the market that this is a project that is very robust and frankly far more robust than the 2013 PEA suggested. 2013 PEA suggested this project needs a nickel price in excess of $9 a pound to be feasible and hit the kind of minimum hurdle rates that would be required for a project of this size. We’re quite confident that a new PEA would show that the project hits those hurdle rates at a much lower nickel price based on the work that we’ve already done today.

Bill: Do you have an NPV calculated at the current price of nickel?

Martin:  We do not. You know, for internal purposes we keep kind of a study kind of live, but it’s not something we’re able to put into the public domain as of yet.

Bill: Okay and Martin, moving forward, what does the treasury look like for the company?

Martin:  Yeah, so our cash and working capital is in the area of just under a million dollars Canadian. We will probably end 2019 with around $700,000 in the bank or so. We have maintained a very, very modest burn rate over the last couple of years. I’ve done desktop work and metallurgical work that’s added a lot of value for low cost. So based on our current cash position, we estimate that we’ve got enough funds to last us through likely to the fourth quarter of 2020.

Bill: All right, well you’ve been listening to Martin Turenne, the CEO and president and director of FPX Nickel Corp. You can find more information about Martin’s company at www.FPXnickel.com and the company trades on the TSX-V under the ticker FPX. Martin, I appreciate your insights. Thanks for taking the time and coming on the show.

Martin:  Thanks bill. Much appreciated.