Nickel Future Supply Challenges: The Structural Shortfall in Supply Begins. Mark Selby, President & CEO Royal Nickel Corporation April 29, 2015

Transcription

1 Nickel Future Supply Challenges: The Structural Shortfall in Supply Begins Mark Selby, President & CEO Royal Nickel Corporation April 29, 2015

2 Disclaimer Cautionary Statements Concerning Forward Looking Statements This presentation contains "forward looking information" including without limitation statements relating to the future price and supply and demand and the positive implications the Indonesian ore export ban will have on the outlook for nickel; and statements relating to construction and production at the Dumont Nickel Project. Forward looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual outcome, events, results, performance or achievements of RNC to be materially different from any future outcome, events, results, performance or achievements expressed or implied by the forward looking statements. Factors that could affect the outcome include, among others: future actions taken by the Indonesian government as well as mining companies operating in Indonesia; general business, economic, political and social uncertainties; availability of alternative nickel sources or substitutes; and financing to complete construction and achieve production at Dumont. For a more detailed discussion of such risks and other factors that could cause actual results to differ materially from those expressed or implied by such forward looking statements, refer to RNC's filings with Canadian securities regulators available on SEDAR at Although RNC has attempted to identify important factors that could cause actual outcome, events or results to differ materially from those described in forward looking statements, there may be other factors that cause outcome, events or results to differ from those anticipated, estimated or intended. Forward looking statements contained herein are made as of the date of this presentation and RNC disclaims any obligation to update any forward looking statements, whether as a result of new information, future events or results or otherwise, except as required by applicable securities laws. All currency references in U.S. dollars, unless otherwise stated. TSX: RNX 1

3 Summary Nickel entering a multi year period of structural nickel supply shortages Nickel demand continues to be robust growing at an average of 6.3% since 2010 Nickel demand grew by more than 5% in Strong demand expected to continue in 2015 Large increase in LME stocks more than compensated by massive destocking in China Existing sources of nickel supply will struggle to provide required overall supply Supply to decline in and net supply growth of just over 2% by 2020 Big 15 nickel operations are shrinking with little prospect of potential expansions Tidal Wave of projects started in continue to struggle Project cupboard largely empty and pace of discoveries a fraction of what s required now need ~2 Voisey s Bay and 3 4 Nova Bollinger EACH year Nickel market will depend on Indonesia, Philippines and lower grade sulphides Indonesia commitment to ban remains resolute China took 6 years to get to current NPI levels how many $ billions and how long in Indonesia given lack of infrastructure? Indonesia to become world s largest nickel producer but will be mid 2020s at least to get there Philippines possible ban? How much saprolite exports can be supported? Lower grade sulphides with significant infrastructure and low cost power a competitive alternative? With recent price trough, market peak months away based on past cycles Past cycles indicate that nickel prices could get to $30 $50,000 per tonne by early 2016 and structural supply shortages to maintain prices at above average price levels through end of decade 2

4 Nickel Demand Evolution of Chinese Nickel Demand As an economy industrializes, demand moves from more basic materials like carbon steel into stainless steels and ultimately into specialty alloys that require a lot of nickel and will drive non stainless nickel consumption in China Carbon Steel Stainless Steel Nickel 2010 Kg/capita consumption 2010 Kg/capita consumption 2010 Kg/capita consumption China 2013 China China 2013 China China 2013 China 2010 Source: World Steel Association, INSG, World Stainless Steel Statistics, Woodmac, Macquarie Research, RNC Analysis 3

5 Chinese Nickel Demand At Least ½ Million Tonnes More to Go Despite huge growth in demand, Chinese per capita consumption is still only just over half that of industrial economies such as Germany and Japan 1.2 Nickel Consumption per Capita 2010 (kg/capita) At Japanese and German per capita consumption levels, Chinese nickel demand alone would increase by nearly ½ million tonnes annually from 2013 to Source: Wood Mackenzie, RNC Analysis 4

6 Nickel Demand Rest of World (ROW) Demand ROW demand rebounded in 2014 for the first time since 2010 Other South Korea Taiwan Japan 1,067 1,060 Global Nickel Demand ex China F (Kt) Europe U.S. // // Source: Wood Mackenzie, CRU, RNC Analysis 5

7 WHERE WILL NEW NICKEL SUPPLY COME FROM? Existing sources of nickel supply will struggle to provide required supply; overall supply to decline in and net supply growth of only just over 2% by 2020 Big 15 nickel operations, more than 60% of supply in 2005, have actually shrank by 3% and are likely to continue to decline going forward with little expansion potential Tidal Wave of projects started in continue to struggle and will contribute only another 100ktpa of supply by the end of the decade Project cupboard now largely empty and pace of discovery is only a fraction of what s required to meet demand ~ 2 Voisey s Bay or 4 Nova Bollinger EACH year (but only finding a few per DECADE) Nickel market will depend on Indonesia, Philippines, and lower grade sulphide projects Indonesia to become largest nickel producer and one of world s largest stainless producers but how long and how many billions? Took China 7 years to get to current levels, why expect Indonesia is going to do faster with far less infrastructure in place should it take 10 years? 15 years? Will Philippines also implement ore export restrictions? What level of saprolite exports can physically be supported? What level of mining activity will communities allow to occur? 6

8 Core Nickel Mines Depleting The big 15 nickel operations have experienced declining production, while NPI production in China, fed largely by Indonesian ore, met growth in demand through World Nickel Production 2014 Tidal Wave (new projects commissioned in ) 12% 32% Other 22% Other The Big 15 The Big 15 41% NPI 3% 65% NPI 25% Source: Wood Mackenzie, RNC Analysis 7

9 Output from the Big 15 Nickel Operation Has Declined Despite Strong Demand Growth Output from the big 15 nickel operations declined overall by 11% and declined in 11 out of 15 operations from 2006 to 2014 most operations saw further declines in Nickel Production from Top 15 Operations (kt) Source: Wood Mackenzie, RNC Analysis 8

10 China NOT Self Sufficient in Nickel Chinese domestic production not likely to add significant volumes of nickel Chinese Self Sufficiency Mine Supply as a % of Demand (2012) 54% 57% 67% 85% <5% 12% 18% 29% Platinum Palladium Nickel Copper Iron Ore (62% Fe eq) Lead Aluminium (Bauxite) Tin Zinc Source: USGS, Wood Mackenzie Ltd., Macquarie Research, RNC Analysis 9

11 Nickel Supply Tidal Wave Projects New supply growth from the tidal wave of new projects is still ~50% of capacity and RNC expects that it can reach 60%+ by 2020 Higher risk Lower risk Potential Supply Nickel Supply In Construction Source: Wood Mackenzie Ltd., RNC Analysis 2014F based on Q data TSX: RNX Nickel Supply Tidal Wave Ramping Up or In Construction (Kt) Annual WoodMac RNC Forecast Actual WoodMac Project Capacity F F VNC (Goro) Ambatovy Koniambo Specifics Onca Puma Removed Talvivaara Barro Alto Ravensthorpe Ramu Taganito Santa Rita Eagle Niquelandia Kevitsa Total

12 Tidal Wave Cleaned out the Cupboard The bulk of the current wave of projects have been known for many decades: either discovered/developed too late during the period or inferior to other projects that were developed Most of the Tidal Wave sat in the cupboard for many decades (even back to the beginning of the last century) Project Koniambo Goro Ramu Ambatovy Barro Alto Onca Puma Talvivaara Discovery Early 1900s Early 1900s Early 1960s Early 1960s Early 1960s Mid 1970s Early 1980s 11

13 New Nickel Supply Fundamental Issue: An Empty Project Cupboard The fundamental issue facing the nickel industry by is an empty project cupboard outside Indonesia At the beginning of the last decade prior to the significant run up in nickel prices, the project cupboard was very full with many projects known for decades Today s picture is very, very different, setting the stage for an exciting nickel cycle Laterite (ferronickel) Laterite (HPAL) Sulphide Project Cupboard 2001 (20+kt) TOTAL: 500+ kt Barro Alto Koniambo Onca Puma Tagaung Taung Ambatovy Goro Ramu Ravensthorpe Weda Bay Talvivaara* Kabanga Voisey s Bay Project Cupboard 2013 (20+kt) TOTAL: 150+kt Weda Bay DUMONT Enterprise Kabanga Nova Bollinger *bioheapleaching process Laterite (leach) Sulphide 12

14 Significant Nickel Discoveries by Decade A Fraction of the Required Pace Pace of discovery is only a fraction of what s required to meet demand now the equivalent of ~ 2 Voisey s Bay or 4 Nova Bollinger discoveries EACH YEAR 1990s 2000s 2010s Voisey s Bay Eagle Nova Bollinger Enterprise Nickel Rim South Musgrave Araguia Sakatti Industry has only managed to deliver a few discoveries per DECADE 13

15 600 NPI Production Beginning to Decline and Declines Expected to Continue NPI production has already declined more than 30% from peak 2014 levels equivalent to a reduction of 10% in global nickel supply Chinese Nickel Pig Iron Production (Annualized Monthly Production, Kt) kt decline; ~12% of global supply 67 kt decline; ~3% of global supply 297 kt decline; ~15% of global supply Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Source: Antaike, RNC analysis 2015 forecast 14

16 What Will Be Capital Cost Intensity of NPI Projects? Will it be the $50 85,000 tpa seen in other recent FeNi projects, or will it approach the performance of NPI plants in China? Please note that Dumont and other open pit sulphide mine/mill operations are less capital intensive than other Western World projects. 000s per tonne initial capacity Sulphide Laterite Capital Intensity For Selected Nickel Projects Sulphide Open Pit Laterite Ferronickel Laterite HPAL Source: RNC technical report dated July 25, 2013, publicly available disclosure, Wood Mackenzie Ltd. (figures shown to two significant digits) 15

17 Chinese Mining Projects Outside China Similar/Worse Performance to Western Producers? China s recent track record outside China suggests it could be no better than other Western projects. Selected Examples Recently Completed Chinese Mining Projects Outside China Project Location Construction Base Metals Base Metals Bulk Materials North America South America Initial Capex Estimate Revised Capex Expected Start Actual Start 2007 ~$500 M $1 B (2013) Australia 2006 $1.5 billion (2007) $2.5 B (2006); $4 B (2009) $2.2B (2007) and $3.5 B in (2013) $9.9 B (2013) Sources Woodmac; Company news release date November 5, 2013; Globe and Mail, Oct 16, 2009 Bnamericas.com, January 18, 2013; Worldal.com, June 13, 2007; Company Company; Wall Street Journal August 26, 2013; DOW JONES SEPTEMBER 16, 2014; Bloomberg, April 16,

18 Indonesia is the Critical Factor for the Nickel Market With the ore ban resolutely in place, Indonesia is positioned to become the world s largest nickel producer and one of the largest stainless producers How quickly can 350kt of projects be built to replace NPI production from Indonesian ore in China? If China took 6 years to create 450ktpa of nickel production, how long would it take for that capacity to be replaced in Indonesia given the lack of infrastructure, skilled labour, and power? Will it happen by early 2020s? Mid 2020s? Late 2020s? How willing are financial institutions to provide the billions of financing required to replace 350kt of Chinese NPI production from Indonesian ore? Financing requirements would be $17 28 billion (at recent global examples of $50 $85,000 per tonne) Will they require projects to be successfully commissioned before financing the next ones? 17

19 Nickel Portside Indonesian Ore Stocks and Prices Indonesian ore stocks have declined 14.5 Mt from the peak (170 kt nickel) in February 2014 and 2.0 Mt from the start of Nickel Ore Prices Chinese Portside Nickel Ore Stocks Total (Mt) US$/wmt FOB Laterite 1.5% Ni Ore (Philippines 25 30% Fe) Laterite 1.8% Ni Ore (12 18% Fe) 25 Philippines ore Indonesia ore Feb 2014 Peak 18.9 Mt 24 Apr 2015: 4.3 Mt Source: Ferroalloynet.com Limited 18

20 Philippines Also Critical to Global Nickel Supply The Philippines ability and willingness to increase saprolite supply to China is another critical issue for nickel supply Will Philippines implement ore export restrictions as well? In absence of a ban, will Philippines attract additional investment? What level of mining activity will communities allow to occur? Will communities support significantly higher levels of mining activity? What level of saprolite exports can physically be supported? Recent increase in shipments can come from two possible sources Stockpiles? Given low 1.5% saprolite prices of <$20 in 2013, a likely possibility Additional mining? Given resource base, many deposits can generate 2+ tonnes of limonite per tonne of saprolite. What price will be required to profitably mine saprolite if limonite markets remain weak due to iron ore weakness? How much saprolite production can be sustained at new mine in Tawi Tawi? 19

21 Philippines Providing Little Additional Ore to Market Philippines ore imports into China have increased, but are providing only a fraction of the 50+ million tonnes imported from Indonesia. Portion of increase in exports believed to be previously stockpiled material. Nickel Ore (Millions of tonnes) Chinese Nickel Ore Imports from Philippines ( ) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Source: GTIS Philippines Nickel Ore Exports to China (Mt)

22 Why Sulphides Versus Laterites? Simpler mine/mill operations rather than fully integrated smelting/refining operations Conventional mine/mill operations have a long track record. Breakthrough by BHP Billiton (originally WMC Resources) at Mt. Keith in processing ultramafic ores has now operated successfully for almost 20 years Capital intensity a fraction of largest scale laterite projects For examples, RNC Dumont s upfront capital estimate of $1.2 billion and $36,000 per tonne of nickel output is a fraction of the $5+ billion and capital intensity of ~$90,000 per tonne spent at Goro, Koniambo, Ambatovy Inherently, sulphide minerals require much less energy intensive to liberate nickel than laterites Many deposits in more politically stable jurisdictions (e.g. Canada, Finland, Sweden, Australia) versus (Indonesia, Philippines, PNG, New Caledonia) Higher grade, low impurity concentrates like Dumont can be used in a roasted form as a very high grade feed in any NPI / FeNi / stainless steel operation 21

23 Tsingshan Strategic Alliance Led to World s 1st Integrated Stainless Steel Plant Utilizing Sulphide Concentrate Tsingshan currently constructing the world s first integrated nickel pig iron ( NPI ) plant to utilize nickel sulphide concentrate as part of the stainless steel production process. The plant began operation in fall 2014 Significant potential benefits to producers of suitable nickel sulphide concentrate feed such as RNC s Dumont Project: Lower costs due to simpler processing compared to traditional smelting and refining Higher payability than traditional smelting and refining Greater flexibility for more potential partners and customers Roasted nickel concentrate is effectively a very high grade laterite ore feed creates new source of demand for nickel sulphide concentrate notably at a time when many NPI and ferronickel producers face feed shortages as a result of Indonesia s recently implemented nickel ore export ban. 22

24 RNC Forecast Supply / Demand Balance Nickel prices will once again have to rise to force demand in line with available supply as in ($30,000 $50,000+/t), particularly 2018 when available supply constrains demand growth ,499 Source: Wood Mackenzie Ltd, RNC Analysis Nickel Supply / Demand Forecast (Kt) USE ,485 Demand (underlying) Structural 322 deficit Demand (constrained) NPI Existing Supply 23

25 Summary Nickel entering a multi year period of structural nickel supply shortages Nickel demand continues to be robust growing at an average of 6.3% since 2010 Nickel demand grew by more than 5% in Strong demand expected to continue in 2015 Large increase in LME stocks more than compensated by massive destocking in China Existing sources of nickel supply will struggle to provide required overall supply Supply to decline in and net supply growth of just over 2% by 2020 Big 15 nickel operations are shrinking with little prospect of potential expansions Tidal Wave of projects started in continue to struggle Project cupboard largely empty and pace of discoveries a fraction of what s required now need ~2 Voisey s Bay and 3 4 Nova Bollinger EACH year Nickel market will depend on Indonesia, Philippines and lower grade sulphides Indonesia commitment to ban remains resolute China took 6 years to get to current NPI levels how many $ billions and how long in Indonesia given lack of infrastructure? Indonesia to become world s largest nickel producer but will be mid 2020s at least to get there Philippines possible ban? How much saprolite exports can be supported? Lower grade sulphides with significant infrastructure and low cost power a competitive alternative? With recent price trough, market peak months away based on past cycles Past cycles indicate that nickel prices could get to $30 $50,000 per tonne as early as mid 2016 and structural supply shortages to maintain prices at above average price levels through end of decade 24

26 Nickel Price Cycle Analysis 7 troughs have occurred since nickel trading began on LME. Historically, troughs occurred in Q4, but April s collapse breaks the pattern With shift in demand to Asia, is Lunar New Year going to shift troughs to end Q1? Nickel Market Price Cycles Troughs Q Q (4 trading days after Q4) Q (1 trading day before Q4) Q Q Q Q April 2015? Source: MetalPrices.com, RNC analysis 25

27 Nickel Price Cycle Analysis An April 2015 trough is the 3 rd longest peak >trough. Other long declines occurred during periods of structural oversupply. Mar 1980 to Nov 1982 Apr 1985 to Jan 1987 Nickel Market Price Cycle Peak to Trough (months) Elimination of large producer inventories Mar 1988 to Sep 1993 Jan 1995 to Oct Russian collapse Threat of $1/lb PAL + Voisey s Bay Mar 2000 to Oct 2001 Jan 2004 to Nov 2005 May 2007 to Dec 2008 Feb 2011 to Apr NPI + Tidal Wave Projects Source: MetalPrices.com, RNC analysis

28 Nickel Prices Lessons from Last Inventory Peak Nickel Price ($/lb) At prior nickel inventory peak, it took only 3 months and a 6% decline in inventories before nickel prices hit their peak for that cycle (a 150% increase in prices in just 18 months from trough to peak LME Nickel Prices and Inventories Sep Jan (Prior Inventory Record Weeks of Consumption) 2 mths 160,000 (352,000) 150,000 (331,000) LME Inventory (tonnes) ,000 (309,000) 130,000 (287,000) 120,000 (265,000) 110,000 (243,000) 100,000 (222,000) 90,000 (200,000) 80,000 (178,000) Bracketed amount is 2014 equivalent of 1994 inventory levels adjusted for week of consumption Source: Metalprices.com, RNC Analysis 27

29 Nickel Price Cycle Analysis Explosive Price Moves Nickel price moves have always been explosive even without China. Again, why would it be different this cycle? Remember that a % price increase from a $12,500 trough is $30 $50,000!! 700% 600% 500% 400% Nickel Price Increase (Trough to Peak) 300% 595% 200% 371% 301% 100% 157% 184% 221% 84% 0% Trough Q4 1982Q1 1987Q3 1993Q4 1998Q4 2001Q4 2005Q4 2008Q Peak Q2 1985Q1 1988Q1 1995Q1 2000Q1 2004Q2 2007Q1 2011? 300%=$50, %=$30,000 Source: MetalPrices.com, RNC analysis 28

30 Corporate Overview Share Structure: Basic Shares Outstanding 1 : million Options (average exercise price: C$0.62) 12.5 million Deferred/Restricted Share Units 1.8 million Warrants (exercise price: C$0.98) 5.7 million Compensation Warrants (ave. price C$0.60) 0.6 million Contingent Shares 7.0 million Fully Diluted Shares Outstanding: million Directors and Officers Share Ownership: ~9% Largest Shareholder RAB Special Situations (Master) Fund Limited: ~17% Balance Sheet Highlights 2 : Cash and Cash Equivalents: C$2.9 million Current Tax Receivable: C$0.4 million Working Capital: C$1.2 million Market Capitalization: C$33 million 1. Shares outstanding, fully diluted shares outstanding and shareholdings as at February 27, Balance sheet highlights as at December 31, 2014; market capitalization at February 27, 2015 TSX: RNX 29