13 August 2021
Due to the macro volatility and uncertainty associated with the delta variant outbreak in China (which has spread across the country), we are observing the base metal sector carefully for any weakness (and investment opportunities). The latest outbreak could cost roughly 2% of annualised Chinese GDP over the next 4-6 weeks, as officials look to bring this under control. We expect issues with logistics to tighten some raw material markets over the next couple of weeks, though negative sentiment may weigh on refined metals. This theme will dovetail into the seasonal destocking of metal inventories we generally see into Q4.
Nickel has been on a positive price trajectory over the past couple of months due to a combination of strong demand from both the stainless steel and battery sectors has continued to reduce available inventory in China. Total reported refined nickel inventories are now ~30kt, equivalent to under three weeks of Chinese consumption, and around half the level seen this time last year. Despite microchip shortages, EV battery demand has also remained elevated, helping to lift nickel price to the mid-$19k/t level. It had looked like a supply recovery would ease some market tightness into 2H21, but fresh disruptions and ongoing demand strength now look set to keep prices higher for longer.
While nickel prices at current strong levels will of course fluctuate, we think nickel ‘premiums’ will become a key future dynamic. Firstly the impact to metal prices must grow given some commentators forecast carbon offset prices of ~$5/t to rise by >5x by 2030 as consumers force good corporate behaviour on manufacturers.
Sector wide emissions from ferronickel and nickel pig iron, predominantly fed by laterites, dwarf those from HPAL (High pressure acid leach) and nickel sulphides. Given HPAL capex requirements and technical risks rarely result in equity upside for these type of investments. This leaves nickel sulphide projects. All our nickel investments are in nickel sulphide projects. Centaurus Metals is one such investment that has given over 41% investment return for the fund. An independent CO2 footprint study by UK consultants Skarn Associates shows that the Jaguar Project will sit in the top 3% of producing nickel assets once in production with just 4.7t/t NiEq against an average 33t/t NiEq industry average.
This still stands in the top 15% of assets globally even factoring in the build. The low emissions are a consequence of open pit mining, and 80% grid renewable power, with potential to improve this with likely 100% renewable power usage. This approach was recently validated by BHP signing a nickel supply agreement with Tesla Inc. The deal will focus on supply of ‘green metal’ and a collaboration on the battery supply chain, technology and innovation.
US nonfarm payrolls rose by 943,000 in July, up from 938,000 additions in June, far exceeding the market consensus estimate of 870,000. Nonfarm payrolls are now up by 16.7 million since April 2020 but remain down 5.7 million (3.7%) from its pre-pandemic level in February 2020. The better than expected results will likely provide further ammunition to those Fed officials calling for a tapering of QE in the first half of 2022. Gold price came under pressure following the news, falling to a low of $1,684/oz at the time of writing (from $1,800/oz prior to the release), although it has since recovered some lost ground. We used this market weakness to add another investment, an intermediate Canadian gold producer and copper-gold developer in Mexico, Torex Gold. The principal asset is a gold mine producing 450,000oz /yr at all in cost <$1000/oz. The market has largely ignored the value (>$1bn) of the its second project Media Luna, a 350koz/yr producer for 10 yrs at <$750oz.