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Cards fall in nickel’s favour

THE divestment by WMC of its nickel plays together with strong, albeit volatile, nickel metal prices and historically low inventory levels has injected renewed enthusiasm into the Western Australian nickel industry.

Shareholders are now able to look beyond the Anaconda Nickel operations to junior explorer and nickel miners such as Dalrymple Resources NL, Independence Gold NL, Jubilee Mines NL, Mincor Resources NL, Sally Malay Mining and Western Areas NL.

In a report on the sector released last October, Hartleys senior resource analyst Kevin Tomlinson predicted that inventory restocking would be the essential nickel price driver during 2003 as the world economy recovered.

“There is little spare inventory or capacity for increases in nickel pro-duction to meet the needs of anticipated industrial production growth rates and we believe this could have a strong influence on a strengthening nickel price,” Mr Tomlinson says in the Junior Nickel Book.

“At present, nickel inventory levels are at historical lows and there are few new large nickel projects that are planned for production before 2005.

“There is a strong possibility that higher nickel prices could eventuate over the next few years with the potential for a significant spike in prices due to a combination of demand and supply-side issues.”

World nickel inventories held in warehouses to be traded by the London Metals Exchange have fallen over the past six months from around 28,000 tonnes to around 20,000t. It’s a far cry from the 150,000t held by the exchange in 1995 during the technology boom.

Inventory levels are insignificant also when compared with the annual world demand for the base metal. A recent Australian Bureau of Agriculture and Resource Economics Report put annual world consumption at 1,110 kilotonnes in 2001 and forecasts an increase to 1,235 kilotonnes during the current calendar year.

Nickel consumers – stainless steel manufacturers – have responded with strong buy orders, spiking prices by 15 per cent in the past month to reach a new high of $US8,000/t.

DJ Carmichael senior analyst Peter Strachan said consumers were jumping in early to ensure they maintained a steady supply of the metal.

“Clearly as stockpiles fall away there is less of a buffer. Consumers would be more inclined to stockpile,” he said.

While prices have pushed through the $8,000 barrier, Mr Strachan believes this could go higher over the next year.

“It [the nickel price] has certainly got a lot of momentum. I would think the nickel prices could go on from here to around $US9,000 a tonne although I think there would be some resistance as it goes up another $US500 a tonne to $US8,500,” Mr Strachan said.

“The outlook for stainless steel is very good, particularly in China.

“As the Chinese economy grows and matures the amount of stainless steel grows by an even greater rate.”

All this bodes well for WA investors with a stake in a nickel project.

Mr Tomlinson says Mincor Resources and Independence Gold offer good upside potential as they exploit mining tenements taken from WMC. Mincor is developing the Miitel, Redross and Wannaway Nickel Mines near Kambalda while Independence, which listed in January last year, exploits the Long Nickel Complex near Kambalda, which it took from WMC for $15 million in September last year.

Mr Strachan said Jubilee Mines, which was moving to underground production with the development of Cosmos Deeps, was a good producer to back. Sally Malay, which is yet to put a shovel in the ground at its Kimberley project, was another with a lot of blue-sky potential, he said.

The Jubilee share price is al-ready tracking the price of nickel. Its share price has risen in the past month by more than 20 cents to around $1.64.

Paterson Ord Minnett analyst Andrew Driscoll, singling out Jubilee in the broker’s weekly brief, said the company had excellent leverage to the nickel price given its unhedged status.

“Sensitivity analysis demonstrates that a 10 per cent nickel price movement impacts earnings about 22 per cent,” Mr Driscoll writes.  “We believe this leverage is reflect-ed in the share price, with the stock trading at a 15 per cent premium to Paterson’s valuation of $1.40.

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