If you missed out on taking advantage of the 50 per cent rise in nickel spot prices since January, there still may be a chance to benefit from a tightening in nickel supply. Resources investors should be keeping an eye on nickel ore producers.
What: Citigroup is forecasting nickel metal prices to climb another 50 per cent by next year – possibly reaching US$30,000 a tonne – on top of the earlier rise. This is brought on by Indonesia's total ban on nickel ore exports.
Demand for nickel and supply squeeze
As it is the world's largest nickel ore producing country, the ban will put a squeeze on world supply. Demand for nickel was already strong in China for stainless steel production. European and US demand has been improving as well.
The ban will leave China with only an estimated six-month supply of nickel ore. Citigroup believes this ban will not be temporary. The country stands to gain from foreign investment, royalties and taxes if ore miners must build smelters domestically to produce the metal.
Now what: Here are three companies that could benefit from a rise in nickel metal prices.
1) BHP Billiton Limited (ASX: BHP)
BHP Billiton wants to concentrate on its "four pillars" strategy of iron ore, petroleum, copper and coal and sell down on other commodities. It announced that it will sell its Nickel West business, which has attracted interest from Glencore Xstrata (LSE: GLEN).
Higher nickel metal prices could help the miner achieve better prices for its nickel mining assets. BHP is looking for ways to cut costs and reduce debt and has said that there could be a capital return to shareholders if debt reduction targets are met.
2) Western Areas Ltd (ASX: WSA)
This nickel ore producer already is up about 90 per cent in share price since January and hit a 52-week high last week. It is estimating that with current prices, it may see a $70 million increase in free cash flow and earnings before interest and tax (EBIT) on an annualised basis. That could be more if Citigroup's forecast for a further nickel price rise is correct.
3) Independence Group (ASX: IGO)
The company is a nickel, zinc and copper miner that recently opened the Tropicana gold mine with AngloGold Ashanti (ASX: AGG) in WA. Nickel ore generates the largest portion of revenue.
Together with higher gold production from what is considered to be one of the top five gold mines in Australia, Independence Group may be looking to stronger business and revenue in the near future. Its stock is up about 31 per cent since mid-January.
