) - A very real structural shortage of nickel is coming in the second half of this decade. Nickel prices already spiked in 2006 and 2007, when the world ran into a similar structural shortage in supply. Now there's plenty of reason to believe that we could be in for another one of those periods in the second half of the 2010s.
Beyond 2015, it's believed that growing global demand will require over 500kt of new supply to meet the world’s needs. However, the "project cupboard" to meet this demand is almost bare. With not enough projects on deck, the world's nickel markets will be challenged to overcome several years of under investment in new supply.
Among the few projects that look to be coming into stride when this supply differential truly hits is located in Quebec's prolific Abitibi mining district. The Dumont nickel project, owned by Royal Nickel Corporation [TSX: RNX
], is one of the world's largest undeveloped nickel sulphide projects and could be around just in time as supply shortages start hitting their peak.
Royal Nickel and its Dumont project look to be one of the frontrunners to address the upcoming nickel shortage. Stacked with experienced senior management largely from Inco (former Canadian nickel producer taken over by VALE in 2006), Royal Nickel is capable of handling a project of this magnitude. When looking at the world’s nickel "project cupboard," Dumont is front and center.THE DUMONT NICKEL PROJECT
Destined to operate within one of the world's friendliest mining districts (the Abitibi region of Quebec), Dumont has the earmarks of a major project with lasting power. Boasting a reserve of over a billion tonnes, with another billion tonnes resource, Dumont is the third largest nickel reserve in the world.
Among nickel producers, the project is expected be in the low second quartile in terms of cash costs, making it appealing to a potential major partner down the road.
All the infrastructure is in place, with everything from low cost power (at around $0.045 per kW/h) to highway, railway and water on the property or at least nearby. As well, with the company's planned phased expansion of the project within five years of start-up, there's a good shot that Dumont will be the largest base metal operation in Canada at that time.
On the road through development, Royal Nickel has already been able to raise money through difficult times. Backed by the potential of Dumont as a long-term strategic asset, the team raised $50 million in 2010, and a further $30 million over the last 18 months. By the middle of next year, they should have one of a very few large scale, fully permitted feasibility study stage base metals project ready to go.THE CHINA/INDONESIA FACTOR
One of the strongest indicators for a nickel supply problem is being driven by China. Like every metal on the market, China is a dominant consumer. However, unlike commodities such as rare earths, lithium or graphite, nickel is one of the metals that China is the least self-sufficient. At present, the country is producing just 15% of its demand requirements.
To curb their supply shortage, the Chinese have looked to Indonesia for its supply, by taking nickel containing ore, what is essentially soggy dirt, and converting it into nickel pig iron. Compared to traditional supplies, it appears to be a lower capital expenditure alternative, but on the whole it's a relatively high operating cost way of making nickel. Going forward, nickel pig iron will no longer be able to bail out the nickel market the way it did between 2005 and 2007.
Worse yet for Chinese nickel consumers is that Indonesia passed a law in 2009 to ban the export of ores entirely by January 12, 2014. The intention from the Indonesians is to have materials processed further from within the country. Economically speaking, Indonesian politicians are smart to push this forward, as the country is only currently capturing about 14% of the end value of their nickel product.
Thankfully for the upcoming Dumont project, Quebec is a desirable location to build a new mine and has a rigorous, but fairly straightforward and predictable permitting process. The Province's resource investment arm, Ressources Québec, actually participated in Royal Nickel's 2010 IPO and made a $12 million investment in the Dumont project through a royalty financing and could potentially provide access to a billion dollar fund designed to help advance the Province's best mining projects. On top of that, Quebec still offers a favourable flow-through financing incentive, which essentially gives a company back $0.30 on every exploration dollar spent into the ground.
Going forward, Quebec is presenting itself to be a much easier jurisdiction to operate in, with a mining history to back it up. These incentives, coupled with established infrastructure make the Dumont project one of the more economical places to look for nickel production in the future, when Indonesia closes a lot of its doors.THE BOTTOM LINE
Royal Nickel has set itself up nicely. Likely by the end of the decade, the Dumont project could be the largest base metal operations in Canada after the planned two-phase operation is fully constructed. But with a 33-year reserve life, and billions of tonnes in the ground to extract, this is an asset that will be around for many, many decades. Given the state of nickel supplies in the world, the timing couldn’t be better.
With a huge resource in the ground, investors can look forward to the potential for expansions beyond the contemplated life of the mine. Thankfully, the operation is situated in Quebec. With its ample low-cost hydroelectric power, and pertinent infrastructure in place, the province is a great jurisdiction for a large scale, long life mine to operate within.
In terms of timing, the Dumont has had to fight through tough market resistance when it came time for financing. However, the team was able to raise $50 million in 2010 under tough market conditions and then has raised a further $30 million over the last year and a half. Their efforts have thus effectively pushed along a project that the world is going to need if it wants to keep the upcoming nickel supply gap manageable.
Royal Nickel is one of the few companies to have recently advanced a new base metal project through feasibility study. By the middle of next year they should have a fully permitted feasibility study project ready to go for when a major comes knocking. Getting as close to a turnkey operation as possible could bode well for the team’s return on investment.
So, timing wise, when the majors regain a strong interest in looking at new projects, Royal Nickel should probably be at the front of that queue.
Look for possible interest coming out of Asia as Indonesia reshuffles its nickel ore export policies. As well, keep an eye on the price of nickel as there are enough incidences of price shocks that we can point to from the recent past to indicate a significant bump in profitability for any nickel project in place when the shortage begins to take hold after 2015.
G. Joel Chury
for the Bottom Line Report
Royal Nickel Corporation
220 Bay Street, Suite 1200
Canada M5J 2W4
Phone: (416) 363-0649
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