Sun Shines For Nickel Producers, Large Upside Potential

This story features PANORAMIC RESOURCES LIMITED, and other companies. For more info SHARE ANALYSIS: PAN

-Major upgrade to price forecasts
-Oz nickel stocks key beneficiaries
 

By Eva Brocklehurst

Nickel miners have long felt the ill winds of depressed prices but the outlook has brightened this year and analysts believe a period in the sun might be nigh. The last six months has reflected a turnaround in sentiment, largely because of the Indonesian ban on the export of nickel ore in order to encourage companies to undertake refining operations locally.

Nickel has recently been the star performer in the London Metal Exchange's stable. Credit Suisse admits this was against its more conservative expectations, acknowledging a gap has opened up between current prices and where the analysts expected they'd be in the second half of 2014. The broker has made major revisions to 2014-15 forecasts. It's not only the Indonesian ban that's affected the price. Nickel has also been bolstered by worries that broader sanctions on Russia might block nickel exports from that country, although that's now seen as increasingly unlikely. Still, perceptions count and Credit Suisse thinks nickel prices will creep higher this year. The analysts retain a cautious view, expecting a softening in stainless steel production, while a build up in production in Indonesia should begin to narrow the deficit beyond 2015. The broker expects nickel to average US$15,850/t this year (previously US$13,875/t) and US$17,385/t next year (US$14,250/t).

Macquarie is very upbeat and thinks nickel prices could head back to historical highs if the Indonesian ban holds out. At present the broker forecasts US$16,000/t for 2014 and US$17,500/t for 2015. Beyond this, Macquarie believes the ban has potential to push the market back into a deficit not seen since 2007, when prices peaked near US$54,000/t. High inventory levels are expected to be drawn down over the next 18 months, leaving an extremely tight market from late 2015. The broker's longer term base case forecasts are US$20,000/t in 2016 and US$22,000/t in 2017.

Factoring in a continued recovery in nickel prices back towards US$40,000/t by 2017, the bull case scenario, would translate to an effective doubling of Macquarie's price targets for Western Areas ((WSA)), Panoramic Resources ((PAN)), Sirius Resources ((SIR)) and Mincor Resources ((MCR)). All four of the pure nickel plays have the ability to add upside with exploration success. Panoramic and Mincor have short mine lives and extensions could add materially to valuation, in the broker's view. Macquarie has Outperform ratings on all ASX-listed nickel miners. The broker concedes there's more to the better sentiment on these stocks than just the nickel price and retains a preference for Western Areas. Panoramic is liked for leverage to the nickel price while Sirius is considered a likely takeover target as, with production to start in 2017, it does not benefit from the strength in current nickel prices.

Morgan Stanley has raised nickel price forecasts to US$15,600/t for 2014 and US$17,527/t for 2015. The broker was also surprised by Indonesia's full implementation of its export ban and notes this, coupled with the fear of sanctions against Russia, which has 15-20% of global supply, resulted in the metal being the best performer so far in 2014. Morgan Stanley has cut estimates of Indonesian mine output by 80% for 2014. This would reduce that country's share of global output to 6% from 30%. China's nickel pig iron production is not expected to be affected until 2015, given the stockpile in that country. Morgan Stanley expects a nickel deficit from 2015 to 2019.

What other house shares these views? UBS has increased 2014 nickel price estimates by 14% and 2015 by 10%. This has lifted free cash flow estimates for both Mincor and Panoramic substantially for the next two years. Subsequently UBS has raised their target prices by 11% and 50% respectively and upgraded Panoramic to a Buy rating from Neutral. The favourite up until now has been Western Areas but UBS takes the opportunity to downgrade to Neutral from Buy, as the stock has rallied so strongly this year and is ahead of the broker's target. On a valuation basis UBS thinks Sirius stands out, such is the quality of the company's deposit the broker is confident it will be developed.

There's another issue that's provoking interest in the nickel sector. BHP Billiton ((BHP)) has recently signalled it may streamline its business and media has suggested the company will divest the Nickel West asset. In UBS' view any potential acquirer would need to secure 7-10 years of high iron/magnesium smelter feed, which makes both Sirius and Western Areas appealing from a merger perspective. In terms of short term exploration leverage, Panoramic has the goods for the broker. The Savannah North discovery could provide significant upside to the current 3-year mine life, albeit the concept is at an early stage.

Deutsche Bank is bullish on nickel prices too, expecting the market to be in a modest deficit this year and a significant deficit next year, should the Indonesian ban hold up. Sirius is the broker's top pick in the nickel sector, with catalysts including the definitive feasibility study. Deutsche Bank has raised nickel price forecasts by 2% for 2014 and by 11% for 2015. The analysts expect the nickel price to average US$6.94/lb in 2014 and US$7.71/lb in 2015. Goldman Sachs has nickel price forecasts at US$6.76/lb in 2014 and US$6.86/lb for 2015.
 

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