‘NICKEL SUCKS BROADLY’
MINERS SEEK ANSWER TO PRESSING QUESTION: WHY HAS SHEEN FADED ON CRITICAL MINERAL?
Why does the nickel market suck? It’s the topic of a talk that Joe Mazumdar, editor of mining newsletter Exploration Insights, plans to give on March 3 at the annual Prospectors & Developers Association of Canada convention. “Nickel sucks broadly,” he said. This year, as tens of thousands of mining industry professionals make their annual pilgrimage to Toronto for the PDAC convention, there’s no escaping the perception that the sheen has faded on many of the critical minerals needed for an energy transition.
In 2023, the price of lithium fell 82.3 per cent, nickel dropped 29.1 per cent, cobalt swooned 38.5 per cent and manganese fell 22.3 per cent, according to Benchmark Intelligence, a pricing firm.
The price declines have persisted in 2024, even though analysts continue to forecast that the demand for critical minerals will markedly rise in the next decade as electric-vehicle sales ramp up, electrification gathers speed and the global energy transition away from fossil fuels proceeds.
But analysts say there’s a simple reason that prices are declining even though demand is rising: Matching demand with supply, ton for ton, is not so easy.
The combination of high inflation and sluggish global economic growth last year meant that demand for many commodities — not just critical minerals — came in lower than expected, according to Kevin Murphy, director, metals and mining research at S&P Global Commodity Insights. As a result, there are surpluses and prices are cooling.
“There is a bit of an economic hangover,” Murphy said in an email.
He expects many commodities to be in “surplus” in 2024, with “downward pressure on prices” for a few years. That means the price of many critical minerals are plummeting even though various governments have passed legislation — such as the Inflation Reduction Act (IRA) in the United States and billions of dollars’ worth of tax credits and subsidies in Canada — that steer billions of dollars into the sector.
Despite the promise of such incentives, many critical mineral exploration and mining companies are reporting that low commodity prices have made it difficult to raise money on capital markets to build their projects or to achieve profitability.
On the demand side for nickel, Mazumdar said, investors are uncertain about a few things, including whether electric vehicles will use a battery chemistry that heavily relies on nickel, and even the pace of electrification itself.
On the supply side, large questions also loom, such as whether the U.S. will sign a free-trade agreement with Indonesia, which produces 48.6 per cent of the world’s total. If it does, that will allow automakers to use Indonesian nickel and still be eligible for funding incentives under the IRA, and it will greatly affect the demand for nickel from countries such as Canada that already have free-trade agreements with the U.S.
The Mining Journal earlier this month reported that the growing amount of nickel from Indonesia has already created a flood of supply, which has forced the industry into an existential moment given that half of all nickel mines are unable to turn a profit at current prices.
“That’s one uncertainty and why I’m saying nickel sucks,” Mazumdar said, adding that it makes it difficult for Canadian nickel exploration companies to raise money for their projects.
He compared the current situation to the board game Snakes and Ladders. After the passage of the IRA in August 2022, market fervour for critical minerals companies reached a frenzy. But as time wore on, reality set in and complications in implementing policies surfaced, leaving many companies back where they started: having difficulty convincing investors that their projects make sense.
ALL THESE STORIES WE’VE HAD IN THE LAST FEW WEEKS ABOUT EVS ARE HYPE, BLAH BLAH BLAH. IF YOU’D SUBSTITUTE EVS FOR CHINA, YOU’D SEE THE SAME STORY BACK IN 2005. — MARK SELBY, CHIEF EXECUTIVE OF CANADA NICKEL CO. INC.
“It’s not one step back,” Mazumdar said. “It’s like a chute; you start at the beginning again.”
The challenge of raising money could even be called a theme of this year’s PDAC convention. Some of the other sessions include: Where will the money come from?; Bringing “reluctant” capital back to the junior mining sector; and Mine cost inflation amid an energy transition gold rush.
“Oh, it’s brutal,” said Mark Selby, chief executive of Canada Nickel Co. Inc., which aims to develop a nickel mine in Crawford, Ont.
He said it’s frustrating because behind the scenes, executives from automotive and battery companies expect the demand for battery metals such as nickel will be “bonkers.” Those companies are putting their capital behind such projections, he added.
For example, Nouveau Monde Graphite Inc. in February signed a deal in which General Motors Co. agreed to a Us$150-million equity investment in exchange for offtake agreements to feed its planned precursor battery materials plant in the port city of Bécancour, Que. That followed an earlier deal that the graphite miner made with Panasonic Energy Co. Ltd.
And Canada Nickel inked a deal in January with Samsung SDI Co. Ltd., a South Korean battery company, which agreed to invest US$18.5 million in Selby’s company, with separate agreements for Samsung to purchase up to 10 per cent of its proposed mine for US$100.5 million, plus rights to take nickel from the mine.
Despite the investment, Canada Nickel’s share price has declined 60 per cent since December 2021 to $1.46.
Selby said retail investors in particular are underestimating the long-term demand for nickel, and placing too much emphasis on shortterm trends, such as the flagging sales of electric vehicles or current commodity prices.
He said it reminds him of investor skepticism about China’s economic growth potential in the early 2000s and the role nickel would play. Analysts back then predicted demand for nickel would increase by orders of magnitude as the country built out its infrastructure. But supply and demand fell out of balance, the price of nickel dropped, and many nickel exploration companies had trouble raising money.
“All these stories we’ve had in the last few weeks about EVS are hype, blah blah blah,” he said. “If you’d substitute EVS for China, you’d see the same story back in 2005.”
Eventually, demand caught up with supply and nickel prices ramped up, Selby added, predicting it would happen again in this cycle, perhaps by the end of 2024.
Jeff Killeen, director of policy and programs for PDAC, which also lobbies for the mineral exploration sector, said there is “frustration” among his members.
In 2023, the overall financing raised by mineral exploration companies listed on the TSX Venture Exchange dropped 20 per cent year over year to $3.3 billion. As a result, 2023 ended on a much different note than it started.
At last year’s PDAC convention, the IRA was roughly six months old. Panellists back then noted it could unlock as much as US$1.7 trillion in public and private spending on the energy transition, which infused the critical minerals exploration sector with optimism.
“That longer-term optimism is still well-anchored,” Killeen said. “That being said, we did look at the market over the past year, and we did notice it wasn’t a great year.”
On the other hand, swooning commodity prices provide opportunities for some.
Marc Lafleche, chief executive of Ecora Resources PLC, a mining streaming company (formerly Anglo Pacific Group PLC), said the long-term demand forecast for critical minerals hasn’t changed, even if commodity prices are falling.
He said it is unfortunate that investors tend to “extrapolate the present into the future,” believing that if prices are high, they will stay high forever and if they’re low, they will stay low forever. But it doesn’t work that way: commodity markets are cyclical.
“For an investor, now is the entry point,” Lafleche said. “Today’s pain is tomorrow’s gain. That’s kind of how I see it.”