Nickel is the new gold, but the 15 minutes in the spotlight for ASX-listed nickel producers may have come to an end.
The Western Areas Ltd (ASX: WSA) share price crashed 3.5% to $3.03 and the Independence Group NL (ASX: IGO) share price declined 0.7% to $6.22 in after lunch trade after copping a downgrade by JP Morgan.
In contrast, the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index rallied 0.7% with most other mining stocks trading higher.
But the sell-off in Western Areas and Independence Group still leaves the nickel miners with gains of around 35% over the past six months when the top 200 stock benchmark is less than 6% in the black.
Even mining heavyweight BHP Group Ltd (ASX: BHP) is left in the dust as its share price fell 10% over the period.
Record drop in nickel inventories
The outperformance of the two stocks come on the back of the jump in the nickel price after Indonesia (a major producer) brought forward a ban on nickel ore exports by two years to January 2020.
The nickel price could stay higher for longer as the Philippines is unable to increase exports to cover the shortfall.
What's also helping sentiment is the record draw down of nickel inventories at warehouses controlled by the London Metal Exchange (LME). Reuters reported that an extra 8,898 tonnes of the metal left the exchange's warehouse system on Tuesday. Inventories have slumped by almost a third in the last two weeks!
Profit upgrades but what's in the share price?
This in turn means big upgrades to the earnings of Western Areas and Independence Group, but have the stocks run ahead of fundamentals?
"With nickel prices up 65% [year-to-date] and stockpiles continuing to be drawn down, we have updated our nickel price forecasts. We have increased our FY20 nickel price 35%, which lifts our IGO and WSA earnings 30% and 270% respectively," said JP Morgan.
"Strong spot prices come at a good time for offtake negotiations for the miners with concentrate markets already tight. We anticipate a positive outcome for the miners and now model ~75% payability from FY21."
However, the good news is already in the stocks after the run up in the WSA share price and IGO share price.
As a result, JP Morgan has downgraded Western Areas to "neutral" with a price target of $3.20 a share and cut its rating on Independence Group to "underweight" with a target price of $5.70 a share.
