There are few areas in the world where nickel occurs in economic quantities. Western Australia is one and Indonesia is another. With the recent ban on export of minerals from Indonesia there will be an impact on the price of nickel.
Australia's largest producer of nickel is BHP Billiton (ASX: BHP), which produces about 120,000 tonnes of nickel metal per annum. However, as nickel is only a relatively minor part what BHP produces, the share price of BHP is proportionally less affected by a changing nickel price than the share price of a pure play producer. The largest Australian listed purely nickel miner is Western Areas (ASX: WSA), producing approximately 30,000 tonnes per annum.
Western Areas has the highest ore grades in Australia with approximately 10 years' life from its two operating mines, Flying Fox and Spotted Quoll, at Forrestania, 400 miles east of Perth. With ore grades averaging 4.7%, Western Areas is a low-cost producer at $2.54 per pound.
Undoubtedly, overall ore reserves will continue to grow, extending the life of mines owned and operated by Western Areas, as extensive exploration continues. For example, Western Areas has recently discovered a third source of nickel in Australia. The Lounge Lizard deposit, adjacent to the Flying Fox mine, has even higher ore grades, averaging 5.8% nickel. Also, overseas, there been early signs of significant success in Finland, when Western Areas is in a joint venture with Finnaust Mining.
The price of nickel, traded daily on the London Metals Exchange, can move substantially. Over the last five years it has ranged from approximately US$4 per pound to US$13 per pound. Currently the price is US$6.50 per pound.
As the Indonesian government no longer allows nickel ore to be sold overseas, I expect the price of nickel to be considerably higher in the medium and long term, assuming world demand does not fall.
Foolish takeaway
Expect to see earnings grow and, consequently, the share price escalate for Western Areas in the long term. If one is patient, and waits for a possible overall 10% market correction early in 2014, then it would be a good time to acquire Western Areas shares. In that scenario, I would expect a purchase of Western Areas at $2.00 each to be an outstanding investment for long term capital growth.
