Price Outlook For Nickel Keeps Experts Divided

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– Mixed Views on nickel price outlook
– Still some value in Australian nickel plays
 

By Chris Shaw

Nickel prices have fallen around 5% since late in February, but this has not dampened Citi's positive view on the fundamental outlook for the metal. This reflects a combination of generally strong demand and further falls in LME inventories of the metal.

Citi estimates the earthquake in Japan took out more than 45ktpy in nickel capacity, though there is unlikely to be any direct impact on stainless steel output as a result of the disaster. While global nickel output has been rising steadily over the past year or so, Citi points out this has been matched by strong demand.

This reflects re-stocking by stainless steel producers, as well as strong demand from the steel alloy and super-alloy sectors. Citi notes this has driven LME stocks from more than 125,000 tonnes in the middle of last month to less than 121,225 tonnes now.

Uncertainties for nickel in 2011 according to Citi are largely centred on the ramp-up of a number of HPAL or laterite projects, though there remains significant scope for delays in these ramp-ups. This means potential for these projects failing to meet nameplate capacity, while higher capital and operating costs are also likely.

Assuming such an outcome, Citi expects any losses will need to be made up by nickel pig iron. The issue for the pig iron producers is they are also experiencing significant cost pressures. As evidence of this, Citi suggests such producers require substantially higher nickel prices before they would be enticed to increase production.

Looking forward, Deutsche Bank expects nickel prices will moderate, leading to a forecast for 2011 of US$12.48 per pound, up from current prices of around US$11.60 per pound. In 2012 Deutsche expects an average nickel price of US$13.61 per pound. A return to a long-term average price of US$7.71 per pound is expected by 2015.

Given such a price outlook, Deutsche sees value in selected Australian nickel plays. Preferred plays are Western Areas ((WSA)) and Independence Group ((IGO)), while Deutsche also rates Panoramic Resources ((PAN)) as a Buy. Hold ratings have been ascribed to Mirabela Nickel ((MBN)), Minara Resources ((MRE)) and Mincor Resources ((MCR)).

For Western Areas, Deutsche is attracted to the production growth profile, estimating output should double from around 10ktpa in 2010 to more than 25ktpa this year. With the group's nickel resources expected to continue to increase, this gives two advantages according to Deutsche of a medium production life and low cost assets.

Independence Group offers a base of low cost production, while Deutsche notes exploration success continues to offer mine life extensions and scope for increased production. This production also means Independence is well placed to fund future growth projects.

With respect to Panoramic, while the group is a large scale producer Deutsche notes it also has high production costs. Production life of at least eight years is solid, while Deutsche points out a strong balance sheet also leaves the company well placed.

In contrast to Deutsche Bank, Goldman Sachs has a somewhat different view on nickel, seeing the market as already in a notional surplus that should increase through the course of 2011. This suggests some downside risk to the price of the metal.

Given this view, Goldman Sachs also has a different outlook for the prospects of some Australian nickel plays. The broker rates both Western Areas and Minara as Holds, but sees Independence Group as a Sell at current levels.

Western Areas is the preferred exposure of Goldman Sachs given it offers the best growth options, while Minara is seen offering a relatively flat earnings profile for the next two years. Independence Group has a gold premium built in at current levels and Goldman Sachs expects this will be reduced following the proposed takeover of Jabiru Metals ((JML)). 

To provide some comparison to broader market views, the FNArena database shows Sentiment Indicator readings of 1.0 for Panoramic, 0.7 for Mirabela, 0.6 for Independence Group, 0.2 for Western Areas and 0.0 for Mincor.

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