Like so many commodities, nickel, and nickel mining stocks, can experience dramatic price swings in relatively short periods of time. For investors, these swings can be breathtaking, creating or crushing large amounts of wealth in relatively short periods. The following article does not specifically examine nickel fundamentals but instead attempts to set out investment parameters to help investors who want exposure to battery metals to decide which nickel stocks to invest in today.

Creating and sticking to an investing framework is important when nickel prices start to rise. When nickel prices experience rapid increases, promoters dust-off old nickel projects that were in the cupboard and “showcase” them as promising new sources of nickel supply. Adjectives such as “low CAPEX”, “fast-track permitting,” “world-class asset” are often used to tout a re-packaged nickel project. Investors need to beware – most of them have little if any actual value or the prospect of ever becoming a mine. When nickel prices go from “boom-to-bust” the projects go back into the cupboard to await the next nickel price boom. We have seen this numerous times whether it be the construction and subsequent closure of operations such as Ravensthorpe or Santa Rita or projects such as Fortune Minerals and Polymet.

My approach to any given commodity (like nickel) is to own a diversified basket of names across the development cycle, exchanges, geography, and in the case of nickel, project mineral type, CAPEX, etc.. Let’s break down the framework further:

Exchange: ASX, TSX, LSE, JSE

Project Stage: concept, pre-discovery, discovery, feasibility, development, start-up, production

Project Jurisdiction: North America, Africa, Australia, South East Asia

Project Type (what technology will be used to develop it): sulphide v laterite

Intended Product (who will buy it?): chemical industry (batteries) v nickel pig iron (steel)

Management: Has management been successful in exploring/developing/building/operating?

Capital Structure: Is there debt? A convertible note? What are the terms of the joint venture? Are there any streams and royalties? Is there an off-take agreement in place?

Share Register (also liquidity): Who owns the stock?

ESG: Environmental and social licenses are becoming increasingly important.

A book could be written about the above factors that comprise my framework, but for the sake of this article, I will only touch briefly on each factor to give you a sense of things to consider.

Exchange: The exchange on which a company is listed is surprisingly important. Different exchanges are better for different commodities. An exchange that has a number of similar listings often will have a larger group of equity analysts following a story and therefore better “comps”, as well as a more educated retail investor base, both of which lend itself to more easily achieving a re-rating of the stock. In the case of nickel, the Australian Stock Exchange (ASX) is a well-known listing venue for nickel companies with its retail investors having a deep of knowledge of the nickel market when compared to global retail investors.

Project Stage: It goes without saying the biggest reward for an investor is a large discovery, it also happens to be the riskiest investment. Early-stage exploration is risky and often is less about investing and more about luck. Mature producers get less leverage from a nickel price move but may pay a dividend. Project stage is a critical part of portfolio construction and it is important to identify how much risk you want to take on. Personally, I prefer names across the spectrum of project stages.

Project Jurisdiction: Stocks trade on multiples based on the jurisdiction of the underlying project as this impacts risk. Investors should consider if the market has “made” or “lost” money in a given jurisdiction if it’s off the beaten path. Often some large discoveries and projects are in new places so you don’t need to avoid a new jurisdiction, but it is important to consider the likelihood of success from both a market perspective (ability to finance) and a country perspective (is the government going to change the rules which could materially impact the asset and owner).

Project Type: Nickel deposits occur in two main forms, sulphides and laterites. Sulphide deposits formed the backbone of the nickel industry up until the 1990’s as it was plentiful and relatively uncomplicated to recover nickel from sulphides deposits. However, in the mid-1990’s focus turned to laterite deposits as they represent 70% of global resources of nickel. Laterites are technically more challenging to process to recover nickel, requiring approximately three times the energy intensity per pound of nickel recovered. Various technical approaches have been utilized over the past 60 years to recover nickel from laterites ranging from pyrometallurgy (FeNi and NPI) to hydrometallurgy (HPAL and Caron). It is safe to state that projects to recover nickel from laterites have resulted in more value destruction than any other mining project over the last 50 years. Every High-Pressure Acid Leach (HPAL) project that I am aware of has had massive capital expenditure over-runs. Projects like Goro, Ravensthorpe, and Ambatovy have wiped-out the balance sheets of their owners. By some accounts, cost over-runs at Goro and Ambatovy are greater than $3B as both projects were initially $2B projects and both have exceeded the $5B price tag. In the case of Ambatovy, whose project economics were based on a nickel price of approximately $5/lb the resulting cost overrun requires a nickel price of $10/lb over the life of the mine for the investment to just break even. When thinking about potential portfolio companies, thought should be given to the type of ore body and process that management intends to use. HPAL projects and other similar technologies are very unlikely to get funded in the current nickel price environment as investor confidence has been destroyed based on the industry track record of the last 20 years.

Notwithstanding this, an already producing HPAL project that has already taken its lumps is a completely different situation for a new investor, such as Ramu, Sherritt’s Moa Bay or Sumitomo Metal Mining’s Coral Bay. Once again, the project stage will be an important element when considering project type. An early-stage laterite ore body, is likely just an option and unlikely to be built. In contrast, an early-stage sulphide ore body may well be very attractive in the next nickel cycle.

Intended Product: While this article is not about nickel fundamentals, the bull case for nickel is largely tied to electric vehicles and electrification more broadly. It is worth considering the product that the company intends to produce. Nickel units are not completely fungible at any price, and so projects focusing on future battery demand are likely to be more attractive takeover targets and financing targets. Nickel has traditionally been driven by stainless steel demand. However as the world turns its attention to decarbonizing the atmosphere, electrification is expected to challenge stainless steel as the main demand driver for nickel. The big difference is that electrification applications (such as lithium-ion batteries) require a pure form of nickel (metallic or chemical) whereas stainless steel production can tolerate some impurities and actually required iron, which is considered a “poison” in the production of batteries. In this case a producer that makes high purity nickel is more likely to be better suited to weather the various commodity cycles expected compared to a nickel producer that only makes a product for stainless steel (such as NPI).

As major OEMs such as Tesla, Panasonic, VW focus on the supply chain required to support their production of EV’s nickel producers that are well suited to meet these specific needs will be well-positioned to capitalize on potential partnerships. In 2017 VW held an unprecedented event in Germany inviting essentially every major cobalt player known to participate in efforts to establish a strategic partnership. The announced partnership between Norilsk and BASF to establish an integrated battery chemicals operation in Harjavalta, Finland is just the beginning of what I believe the industry will see occur over the next decade as supply integration moves down towards the mining operation in order to secure the much needed raw materials required for EVs.

Management: Social media and industry rags are full of commentary on this subject. The most basic question to ask is can management accomplish their stated objective based on where their company is on the development spectrum. A management team should be diverse and contain relevant industry experience to where they plan to operate. Prior to the 1980’s the majority of resource companies had technically trained CEO’s who “came up” through the ranks. This started to change with the advent of the MBA culture where non-technical skills became more prized by investors. There are major companies that have management teams in place that have demonstrated a track record of making flawed decisions at the expense of the shareholder. In contrast, there are some companies that have exceptionally skilled people at their helm that have trouble raising the necessary funding to get a project off the ground. Having a diverse management team that encompasses both technical and non-technical leadership skills is something that I look for.

Capital Structure: Debt is a killer of nickel projects for two primary reasons. First, because the nickel price can be cyclical and volatile so using a model with an aggressively high nickel price can lead to disaster in a price downturn. Second, nickel HPAL projects have been historically challenging to bring online and to ramp up to stated capacity within the budget and time frame promised. A company can be crushed under its debt during the ramp-up period if it takes longer than the pre-production model showed as was the case for Anaconda Nickel, Cawse and Bulong in the 1990’s and Goro and Ambatovy in today’s market. Projects that are not only well funded, but have the support to weather a cyclical downturn (sometimes prolonged) in the nickel price have a much better chance of being economically successful compared to projects that are only funded through to construction and commissioning but have “nothing in reserve”.

Share Register: It is always worth understanding the share register of a portfolio company. This has a number of implications. A share register that is entirely retail may have a challenging time raising large amounts of money when it comes time for development. Alternatively, a share register with a large strategic investor may imply the company is a potential takeover target, and so on. Each situation is different, but it is worth looking at filings to see who the large shareholders are in a company. Another aspect of the share register is its implications on liquidity. Increasingly funds are required to own larger and more liquid names, which causes smaller cap (under $1Bn in market cap) to struggle with liquidity. In addition, consider management ownership of the company. A management team with a large ownership stake in the company is far more aligned with that of its smaller minority shareholders.

ESG: ESG (Environmental, Sustainability and Governance) and associated issues have become a priority with investors and miners alike. Whether we are talking about Rio Tinto’s recent comments about ESG or the fact that Blackrock now has a dedicated ESG group, the way that companies handle environmental and social issues is going to only become more important. This will manifest itself in a company’s share price over time as increasingly ESG focused funds are being raised and requirements around ESG are included in current fund mandates.

What are a few of the names that I would consider adding to a nickel basket today:

Giga Metals (TSXV: GIGA): Giga’s Turnagain project is a low CAPEX world-class nickel sulphide project located in Canada. If you are a battery maker or OEM (original equipment manufacturing), this project ticks all of your ethical sourcing issues and is located in a mining-friendly country. Moreover, management is looking at ways to make the project carbon neutral through zero GHG power (hydroelectric) and carbon sequestration. I love the massive size of this deposit and what it will mean for the option value of this stock when nickel runs. If you look at projects that have sold for huge sums you often see large option style projects at the top of the list such as this – Voisey’s Bay, UraMin, Ross Beaty, and his Lumina Copper trade. When majors are hunting for one of the last nickel sulphides projects in a friendly jurisdiction, this one will likely be on their list. In fact, I have personally purchased several percent of the company and recently joined the board.

Conic Metals (TSXV: NKL): Conic is the only investible, currently producing nickel-cobalt company listed on the TSXV. This fact alone should give NKL tremendous leverage to a nickel move. The company’s interest in the Ramu Nickel-Cobalt Operation also gives it leverage to cobalt price moves. The Ramu Operation is one of the lowest-cost integrated nickel-cobalt operations in the world and is generating significant free cash flow. Ramu’s production is currently sold into the battery industry which should give it leverage if a bifurcation in the nickel market occurs at some point in the future. NKL also has optionality around doubling production at Ramu in several years when the mine is expanded. In addition, management and the board of Conic (myself included) own over 10% of the company, meaning strong alignment with shareholders.

Nickel Mines (ASX: NIC): Nickel Mines holds 60% economic interests in the Hengjaya Nickel and Ranger Nickel projects, both of which operate 2-line Rotary Kiln Electric Furnace plants producing NPI within the Indonesia Morowali Industrial Park. Nickel Mines also holds an 80% economic interest in the Hengjaya Mineralindo Nickel Mine (Hengjaya Mine), a large tonnage, high-grade saprolite deposit located in the Morowali Regency of Central Sulawesi, Indonesia. This project has a great management team that brought the company into production. There is room to expand the project. If nickel runs, this stock should provide investors with good leverage to a move.

Western Areas (ASX: WSA): Western Areas has a portfolio of operating sulphides nickel mines in Australia. Which are very high in grade. The company has struggled with certain mines and its capital structure, however, if you are looking for leverage to a nickel price move in a producer this is an excellent choice.

Independence Group (ASX: IGO): IGO is one of the leading nickel concentrate producing names. It has an experienced management team and a portfolio of producing assets in Australia. Any investment portfolio focusing on nickel should consider this name as part of the mature end of the nickel market.

One obvious omission from this list is Norislk. While I actually like this name quite a bit, it is not truly a nickel name. A material portion of its revenue comes from PGMs and copper and so being long Norilsk is a more complicated bet than some of the other pure plays on the list. Moreover, names like Vale and BHP don’t make the list because they are large diversified producers. The list above is focused on giving leverage specifically to the next move in the nickel price. Other notable omissions include Sherritt whose primary asset is in Cuba and many US investors are not able to own the stock, as well as the fact that the company has a large debt burden.

Ultimately whatever your nickel portfolio looks like, I would urge you to come up with a framework for investing to help you articulate what risks you are willing to take and why. Investment professionals are required to write memos to their peers to defend their investment ideas (both buys and sells). Consider writing a brief note to yourself or a close friend on why you should buy or sell a given stock. This type of discipline can help you make more fact-based decisions. The effort required to write a note will force you to come up with pros and cons around a given name. You may find you end up making different decisions when all of the facts that you deem important are written in a format that suits you. Investing is deeply personal – it’s your money!!!! – so you owe it to yourself to come up with a sophisticated way to speculate.