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 Tue Apr 14, 2015
Excerpt from Express 2015-02: February-March Review - First Point
    Publisher: Kaiser Research Online
    Author: Copyright 2015 John A. Kaiser


A recent example of government policy aimed at boosting domestic beneficiation is Indonesia's decision to ban the export of raw ore and concentrates. During 2005-2008 the Chinese came up with a process innovation whereby they were able to use nickel-pig-iron as feedstock for a grade of stainless steel that was adequate for domestic needs. Prior to that the feedstock consisted of refined nickel that came from laterite and sulphide mines and was traded through the LME. China happened to have legacy blast furnace capacity whose capital cost had long ago been written off. A lower grade nickel laterite ore from the Philippines and Indonesia that was not profitable to process with HPAL could be strip mined, shipped to China, and dumped into blast furnaces which churned out nickel-pig-iron. NPI would normally require further refining if it were not for the Chinese metallurgical innovation that allows it to be used as a direct feedstock. As the nickel supply evolution chart shows, the NPI downstream innovation enabled the Philippines and Indonesia to become the top suppliers and brought the price of nickel back to earth.

In 2013 Indonesia proposed a new policy that stopped exports of raw nickel laterite ore and set the stage for the construction of NPI furnaces within Indonesia. Although officially nobody expected Indonesia would actually implement its domestic beneficiation policy because it would suffer an intervening revenue slump, the Chinese did hedge against this skepticism by importing far more nickel laterite ore than they needed in 2013, with the result that warehouse stocks have since risen to record highs even as Indonesia went through with its policy change. An advantage the Chinese have over their western competitors is that they are not beholden to shareholders focused on the next quarter's financial results; they are entitled to engage in strategic measures that translate into near term cash flow hits but secure longer term benefits.

The current view is that it will take quite a few years for Indonesia to develop its own laterite ore processing capacity, much longer than to deplete the Chinese stockpiles, with the result that the warehouse stocks of refined nickel will drop fast enough to spur stronger nickel prices over the next year or so. Key to this speculation is the assumption that the Philippines have reached a supply expansion limit, and might even follow Indonesia's policy shift to domestic beneficiation. There are also concerns that the laterite ore miners may encounter pushback from environmentalists. The stabilization of the nickel-pig-iron boom should benefit nickel prices, especially if Indonesia's smelters comply with western environmental standards which the Chinese furnaces do not. However, with warehouse refined nickel stocks at a record high, the nickel price has started to crumble and is now below $6/lb. Once the Chinese NPI anomaly has been diminished, nickel prices will reflect the higher processing costs associated with laterite and sulphide ores, which does not translate into greater profitability unless the nickel grade is very rich.

Betting on lower grade sulphide nickel deposits as Indonesia's domestic beneficiation policy becomes reality is thus not smart from a security of supply perspective. So one might wonder why the security of supply nickel pick in the SVH 2015 portfolio is First Point Minerals Corp, owner of the lowest grade nickel deposit for which an economic study has ever been prepared. The key lies with the style of nickel mineralization at Decar, awaruite, which is a natural stainless steel occurring in a chemically benign ultramafic rock. Although the targeted nickel grade at Decar is only 0.1%-0.12%, this is the grade recoverable through simple gravity and magnetic separation processes. SVH Tracker Mar 9, 2015 explains why First Point is cheap, and what needs to happen to put the junior back in play. All it requires is for the 60% owner, Cliffs Natural Resources Inc, to pay some attention to the Decar project and do a win-win deal rather than be obsessed with the hedge fund mantra of "heads I win tails you lose".

*JK owns shares of First Point Minerals


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