The fall in share prices as a result of the ongoing COVID-19 pandemic gives investors a chance to enter the nickel market at a reasonable price.
Below, we take a closer look at nickel and explore an ASX 200 mining share that, in my opinion, could represent a good buying opportunity for investors looking to enter the nickel market.
The metal of the future
The geology required for nickel exists only in a very few countries on earth. One of these, Indonesia, banned all export of nickel ore in January, which took 220,000 tonnes out of the nickel market. In addition, a sharp draw down on London Metals Exchange (LME) inventories has added to the reduction in supply.
The main use for nickel is stainless steel applications. These range from architecture and construction through to process plants. In addition, nickel is used in alloying and plating, with 5% of global supply used for battery manufacture.
Nickel is positioned as one of the more important metals of the near future. For instance, the structural shift globally to electric vehicles and storage systems will see increased demand for nickel, with a transformative result.
Batteries and gold
IGO Ltd (ASX: IGO) is a well managed mining company with a strong exposure to the nickel market. IGO refers to itself as a company with “an evolving strategy to align the business to the structural shift to energy storage”. It has sustained a compound annual growth rate (CAGR) of 21.8% for cash flow and a CAGR of 24% over the past 10 years.
IGO has a 30% stake in the Tropicana Gold mine with Anglogold Ashanti Limited (ASX: AGG), This has secured IGO a strong royalty stream in the current bull market in gold. In addition, the company operates the Nova operation near Esperance in Western Australia. This mine produces nickel, as well as cobalt and copper – 2 other metals used in battery manufacture.
At the time of writing, the IGO share price is down 32.25% since the start of the year and its price-to-earnings ratio (P/E) is 14, which is way below its 10-year average P/E of 53.
IGO’s past share price performance underlines the market’s belief in the future of battery metals. In addition, it has started to see heavy trading in the past week.
IGO is presently selling at a discount to historical prices. Additionally, the shift to renewable energy will benefit the company and it is producing into increasing demand.
In Western Australia, we have always had strong nickel operations, however, BHP Group Ltd (ASX: BHP) purchased Western Mining Corporation, and Glencore purchased Minara. This leaves IGO Ltd as one of the last reasonably sized players with a strong focus on nickel.
These 3 stocks could be the next big movers in 2020
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Motley Fool contributor Daryl Mather has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.