Investing is about anticipating what is ahead. The trend is for increasing demand for nuclear power and for batteries. We think that this will only acclerate and for investors the key is to position your portfolio to profit.
It is quickly turning from a buyers’ market for uranium into a sellers’, which is exciting for uranium stocks awe have picked because they are well positioned to take advantage of this.
The uranium oxide spot price broke out from US$32.40 a pound* in July to US$33.75 at the end of August, while the futures is trading over US$38. There are big ramifications for investors.
Well Positioned ASX Listed Companies
The first point to note is the strong industry position of the three Uranium stocks that Under the Radar Report has recommended.
The driver of the uranium price is rising demand from big governments on the one hand, on the other there are supply concerns, as mines deplete and Covid causes delays.
Let’s look at demand first. Big governments including the US and China support nuclear power in their clean energy programs. The US is reportedly seeking to use funds from its infrastructure bill to stave off nuclear reactor closures, with the US nuclear industry currently producing about 19% of US power.
On the supply side, one example of disruption is reports from Europe's Euratom Supply Agency of reduced uranium production due to Covid. This is happening world-wide and uranium stocks are close to 5-10 year lows, representing only around 2-3 years of supply. As you would appreciate, in this utilities market, supply security is imperative.
Incumbency is the key: Why some ASX companies have a big advantage.
Although uranium oxide prices are rising, they remain lower than the full costs of mining and processing if you were to build a new greenfields production facility from scratch. This puts previous producers in a very good position, because they have the advantage of incumbency and existing infrastructure.
Moreover, the uranium oxide price needs to double for significant supply disruption. This highlights why these miners are in such a good position with sunk costs and existing contract agreements. These will be the first miners to harvest big profits from the nuclear led renaissance.
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The base metal is in high demand from increasing battery and stainless steel production, but there are big technological changes adding to the complexity when predicting where the nickel price will go.
We remain positive on the sector, but it's important to understand that the battery demand is still at the early stages of the cycle.
Nickel Market Explained
Annual supply and demand is currently 2.6 million tonnes and includes both mine production and recycling. Half is classified as Class 1 nickel, containing a minimum of 99.8% nickel), Class 2 being the lower grade remainder.
Class 1 is essential for lithium ion batteries and comes from relatively rare nickel sulphide deposits.
Class 2 is suitable for stainless steel and includes ferronickel and NPI (nickel pig iron). It comes from large and plentiful nickel laterite deposits.
The nickel price is based on Class 1 and is US$8.73 a pound, having gone from US$7.50 six month ago and US$6.50 this time last year.
The big driver is stainless steel production, for which 70% of nickel is used. Batteries will become increasingly important, but stainless steel growth has been the driver due to high demand from China. This is increasing production from laterites and keeping a lid on nickel prices.
The Elephant in the Nickel Mine
Current demand for nickel in batteries is still small, with 2021 demand at around 250k tonnes. However, its growth trajectory is similar to lithium i.e. it’s ramping up very quickly.
Growth rates in nickel demand for batteries are forecast at 16% a year over the next decade. This translates to annual demand climbing from 0.25m tonnes to as much as 1.4m tonnes, with the surge occurring from the mid-2020s.
This is good news for nickel sulphide producers, or is it? Up until recently, it was assumed high quality nickel for batteries could only come from scarce sulphide deposits, driving nickel prices higher.
Then in early 2021 China's Tsingshan company, operating in Indonesia, created a shock wave in nickel markets. It announced it had developed a technology to produce a nickel matte, a form of nickel sulphide, from its Indonesian laterite ore. Tsingshan said that this could be refined to battery grade to supply the electric vehicle (EV) market.
Furthermore, an Indonesian joint venture PT HPAL has a high pressure acid leach project on Obi Island, which is processing limonite laterite ore to produce a mixed nickel-cobalt hydroxide. This can be sold to battery makers or processed to nickel and cobalt sulphate, which is in high demand by global battery makers for EVs.
Carbon Emissions Could be a Sticking Point
Are these nickel matte and HPAL projects a threat to nickel sulphide projects? Possibly, but what is their carbon footprint? Outside China, the European and US auto makers are aiming to be carbon neutral. Indonesian nickel production, in contrast, is energy intensive with its growth facilitated by low cost coal power generation and low cost coking coal used in NPI smelting. The laterite to matte process is also early stage and may not be fully proven.
BHP Agreement with Tesla
As an indication of trends underway, BHP Group (ASX:BHP) signed a nickel supply agreement with Tesla in July 2021. They are collaborating to make the battery chain more sustainable. BHP produces some of the lowest carbon intensity nickel in the world.
In a recent presentation, ASX listed nickel producer Western Areas (ASX:WSA) said there was a strong market environment for sustainable, nickel sulphide concentrates. It said Korea and Japan (Panasonic and LG Energy) were moving faster to consolidate future offtake contracts.
What does this mean for ASX investors?
At current prices nickel producers like our current stock picks should make good profit margins. We believe that the nickel price momentum will continue due to increasing overall demand. With one of our favourites making its first shipment in December, these are exciting times.
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