Nickel Prices: $5,000 or $50,000 Where is the Market Headed?

Transcription

1 Nickel Prices: $5,000 or $50,000 Where is the Market Headed? Metal Bulletin 31 st International Ferro-alloys Conference Mark Selby, President & CEO Royal Nickel Corporation November 10, 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 Nickel Prices $5,000 or $50,000? Nickel prices have peaked above $50,000 per tonne but also troughed at prices below $5,000 per tonne where will we go over the next cycle? 55,000 50,000 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 LME Cash Nickel Price (US$/t) $50,000 $5,000 2

4 Summary Nickel market has disappointed many analysts this year (including us) Why? Stainless production and nickel demand weak for 5 quarters since peak in Q (when nickel prices prematurely spiked) What would market look like today if nickel demand +10% (+180kt higher!!) Philippine ore production was able to offset a portion of the loss of Indonesian exports A portion of production was shipment of previously stripped ore or previously mined stockpiles Chinese have massively destocked ore (and other nickel materials) inventories held by ports/traders/consumers in order to maintain current levels of NPI production Once a stockpile is used, it can t be used again Many physical signs that market improving NPI production once again declining Net ferronickel and nickel imports have skyrocketed (up 160% and 500 % respectively) European scrap discounts have improved dramatically back into historical ranges Exchange Inventories appear to have peaked Nickel prices over next cycle will be driven by 3 key factors will determine whether prices closer to $5,000 or $50,000 Strength of restocking rally and rebound in demand (remember that each new cycle typically starts with a strong restocking rally) Double-digit demand growth is the NORM at start of cycle, NOT the EXCEPTION Ability of Philippines to increase ore production in response to higher prices (relative to Indonesia) NGO/Church activity, poor iron ore markets, and scale/quality resources will reduce Philippines ability to respond Growth of NPI capacity in Indonesia We continue to believe that Indonesia will become the largest nickel producer and 2 nd largest stainless steel producer but will take until mid-2020s to reach these levels 3

5 Nickel Market What Happened? Weaker than Expected Demand Stainless production and nickel demand weaker for 5 quarters since peak in Q (when nickel prices prematurely spiked) 15% Year-over-year Nickel Consumption and Stainless Steel Production Growth Ni Consumption Stainless Steel Production 10% 5% 0% -5% Source: CRU, RNC analysis 4

6 Nickel Ore (Millions of tonnes) Nickel Market What Happened? Philippines Nickel Ore In 2014, Philippines provided additional ore to China partially offsetting loss of ore from Indonesia and delaying market response. YTD 2015 performance supports thesis that some of 2014 supply came from stockpiles & Philippines facing cost pressures Chinese Nickel Ore Imports from Philippines Source: GTIS ( ) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Philippines Nickel Ore Exports to China (Mt) FY YTD-Sep FY YTD-Sep YTD-Sep

7 Nickel Market What Happened? NPI Production Maintained by Massive Destocking NPI production levels only sustained through massive destocking of implied consumer ore stocks in China stockpiles can only be used once. Ore stockpiles continue to be drawn down in 2015 even during peak Philippine shipping season which has significant implications for subsequent NPI production levels. 20 Change in Chinese Nickel Ore Port Stocks and Implied Consumer Stock Change 1 (Mt) 10 Port Stocks Consumer Stocks YTD Sept 2015 Equal to Kt of contained nickel Source: Ferroalloynet, GTIS, Macquarie, RNC Analysis 1. Implied Consumer Stock Change is difference between ore consumption, net imports, and change in port stocks 6

8 Summary Nickel market has disappointed many analysts this year (including us) Why? Stainless production and nickel demand weak for 5 quarters since peak in Q (when nickel prices prematurely spiked) What would market look like today if nickel demand +10% (+180kt higher!!) Philippine ore production was able to offset a portion of the loss of Indonesian exports A portion of production was shipment of previously stripped ore or previously mined stockpiles Chinese have massively destocked ore (and other nickel materials) inventories held by ports/traders/consumers in order to maintain current levels of NPI production Once a stockpile is used, it can t be used again Many physical signs that market improving NPI production once again declining Net ferronickel and nickel imports have skyrocketed (up 160% and 500 % respectively) European scrap discounts have improved dramatically back into historical ranges Exchange Inventories appear to have peaked Nickel prices over next cycle will be driven by 3 key factors will determine whether prices closer to $5,000 or $50,000 Strength of restocking rally and rebound in demand (remember that each new cycle typically starts with a strong restocking rally) Double-digit demand growth is the NORM at start of cycle, NOT the EXCEPTION Ability of Philippines to increase ore production in response to higher prices (relative to Indonesia) NGO/Church activity, poor iron ore markets, and scale/quality resources will reduce Philippines ability to respond Growth of NPI capacity in Indonesia We continue to believe that Indonesia will become the largest nickel producer and 2 nd largest stainless steel producer but will take until mid-2020s to reach these levels 7

9 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 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep forecast Nickel Market Improving NPI Production Once Again Declining NPI production has declined from peak 2014 levels 600 Chinese Nickel Pig Iron Production (Annualized Monthly Production, Kt) kt decline; ~9% of global supply 111 kt decline; ~6% of global supply 297 kt decline; ~15% of global supply Source: Antaike, RNC analysis 8

10 000s of tonnes Nickel Market Improving Chinese Nickel and Ferronickel Imports Surging YTD September 2015, Chinese refined nickel imports up 500% and ferronickel imports up 164% year-over-year as high grade Indonesian laterite nickel ore stockpiles are largely depleted Chinese Refined Nickel and Ferronickel Net Imports (2010 YTD Sept 2015) FeNi imports have surged as high grade portside ore stocks have reached critical lows Ferronickel Refined Nickel 0-10 Source: GTIS, Macquarie 9

11 Nickel Market Improving Nickel Largely at a Premium in China Nickel prices have been largely trading at a premium in China since the beginning of 2015 for the first time in many years Source: Antaike 10

12 Nickel Market Improving European Scrap Discounts Have Surged in 2015 Stainless steel scrap discounts have sharply rebounded back into traditional ranges Europe Stainless Steel Scrap (as % LME Cash Price) Scrap discounts at highest levels in more than 2 years Source: CRU 11

13 Nickel (kt) Nickel Market Improving LME + SHFE Inventories Are Declining Headline Inventories appear to have peaked and open inventories have declined as cancelled warrants have increased to record levels LME + SHFE Nickel Inventories (Jan 1, 2015 Nov 9, 2015, Kt) kt Peak 481 kt 452 kt 29 kt SHFE Inventory kt 186 kt 329 kt LME Cancelled Inventory: more than doubled in kt LME Open Inventory Jan-15 2-Feb-15 2-Mar-15 2-Apr-15 2-May-15 2-Jun-15 2-Jul-15 2-Aug-15 2-Sep-15 2-Oct-15 2-Nov-15 Note: SHFE nickel inventory was 28,951 t, of which cancelled inventory was 1,985 t, as of November 6, Source: metalprices.com 12

14 Summary Nickel market has disappointed many analysts this year (including us) Why? Stainless production and nickel demand weak for 5 quarters since peak in Q (when nickel prices prematurely spiked) What would market look like today if nickel demand +10% (+180kt higher!!) Philippine ore production was able to offset a portion of the loss of Indonesian exports A portion of production was shipment of previously stripped ore or previously mined stockpiles Chinese have massively destocked ore (and other nickel materials) inventories held by ports/traders/consumers in order to maintain current levels of NPI production Once a stockpile is used, it can t be used again Many physical signs that market improving NPI production once again declining Net ferronickel and nickel imports have skyrocketed (up 160% and 500 % respectively) European scrap discounts have improved dramatically back into historical ranges Exchange Inventories appear to have peaked Nickel prices over next cycle will be driven by 3 key factors will determine whether prices closer to $5,000 or $50,000 Strength of restocking rally and rebound in demand (remember that each new cycle typically starts with a strong restocking rally) Double-digit demand growth is the NORM at start of cycle, NOT the EXCEPTION Ability of Philippines to increase ore production in response to higher prices (relative to Indonesia) NGO/Church activity, poor iron ore markets, and scale/quality resources will reduce Philippines ability to respond Growth of NPI capacity in Indonesia We continue to believe that Indonesia will become the largest nickel producer and 2 nd largest stainless steel producer but will take until mid-2020s to reach these levels 13

15 Stainless Steel Production Despite steady long term growth, stainless steel production has historically always been highly volatile driven by strong restocking and destocking cycles World Stainless Steel Production ( f, Mt) 20% 10% 0% -10% -20% -30% World Stainless Steel Production (Year-over-Year % Change, f) 30% Long term average CAGR 5.0% Source: Macquarie Research 14

16 Nickel Consumption leading in turn to significant volatility in nickel consumption World Nickel Consumption ( f, Mt) 25% 20% 15% 10% 5% 0% -5% -10% -15% -20% -25% World Nickel Consumption (Year-over-Year % Change, f) Long term average CAGR 3.4% Source: Macquarie Research 15

17 Nickel Prices - $5,000 or $50,000 As a result, stainless production and nickel demand growth are almost NEVER average more often negative or double-digit growth World Stainless Steel Production ( f, YoY % Growth Distribution) World Nickel Consumption ( f, YoY % Growth Distribution) > 10% 6-10% 4-6% 0-4% <0% Source: Macquarie Research, RNC analysis > 10% 5-10% 3-5% 0-3% <0% 16

18 Nickel Ore (Millions of tonnes) Nickel Prices $5,000 or $50,000 Philippines Providing Little Additional Ore to Market YTD September ore imports from Philippines are now down and have not been materially different than in prior years Chinese Nickel Ore Imports from Philippines ( ) Philippines Nickel Ore Exports to China (Mt) Full Year 21.3 YTD Sept Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Source: GTIS

19 Nickel Prices $5,000 or $50,000 Philippines A Critical Nickel Market Factor 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? Stockpiles drawn down in 2014? 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? 18

20 Nickel Prices $5,000 or $50,000 Indonesia A 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 but not until mid-2020s at earliest. How quickly can 350kt of projects be financed and 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? How quickly can new NPI projects be financed in the current price environment? Will they require projects to be successfully commissioned before financing the next ones? Will it happen by early 2020s? Mid 2020s? Late 2020s? 19

21 Nickel Prices - $5,000 or $50,000 Where do Prices Go From Here? 20

22 Nickel Price Cycle Analysis Have We Seen the Bottom? Over the last 30 years, 7 troughs have occurred either in or near Q4. Recent price action suggests that we may take out the low from earlier this year and have another trough in Q4 of this year Nickel Market Price Cycles Troughs Q Q (4 trading days after Q4) Q (1 trading day before Q4) Q Q Q Q Q3 2015? Source: MetalPrices.com, RNC analysis 21

23 Nickel Price Cycle Analysis This cycle has been one of the longer peak-to-trough price movements Nickel Market Price Cycle Peak to Trough (months) Mar 1980 to Nov 1982 Apr 1985 to Jan 1987 Mar 1988 to Sep 1993 Jan 1995 to Oct 1998 Mar 2000 to Oct 2001 Jan 2004 to Nov 2005 May 2007 to Dec 2008 Feb 2011 to Aug 2015? ? 66 Source: MetalPrices.com, RNC analysis

24 Nickel Price Cycle Analysis Consistent Rebounds A second half 2015 trough in nickel prices would imply a late 2016 or late 2017 nickel peak as time from trough to peak is relatively consistent; either months or months (with 1 exception) Nickel Market Price Cycle Trough-> Peak (months) Nov 1982 to April 1985 Jan 1987 to Mar 1988 Sep 1993 to Jan 1995 Oct 1998 to Mar 2000 Oct 2001 to Jan 2004 Nov 2005 to May 2007 Dec 2008 to Feb 2011 Aug 2015 to? ? Source: MetalPrices.com, RNC analysis

25 Nickel Price Cycle Analysis Consistent Rebounds Consumption growth in the 2 rebound years following a trough has always been robust in past cycles (almost always double digit) few analysts are forecasting this level of growth 30% 25% 27% Nickel Consumption Growth 2 Years Following a Price Trough Year 25% 20% 15% 10% 13% 13% 12% 9% 16% 5% 0% Trough Source: MetalPrices.com, Macquarie, RNC analysis 24

26 Nickel Price ($/lb) Nickel Prices Lessons from Last Inventory Peak 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 weeks of consumption Source: Metalprices.com, RNC Analysis 25

27 $/tonne Nickel Prices Cost Curve Support 90 th percentile of cost curve has been historically a strong support for nickel prices. The 90 th percentile would suggest a significant rebound in nickel prices Nickel Prices & 90 th Percentile of Cost Curve 1980 to Date LME price 90th percentile of cash costs Source: Macquarie, WoodMac, RNC analysis 26

28 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 $9,000 trough is $22-$36,000!! 700% 600% 500% 400% 300% 200% 100% 84% 595% Nickel Price Increase (Trough to Peak) 157% 184% 301% 371% 221% 0% Trough Q4 1982Q1 1987Q3 1993Q4 1998Q4 2001Q4 2005Q4 2008Q Peak Q2 1985Q1 1988Q1 1995Q1 2000Q1 2004Q2 2007Q1 2011? 300%=$36, %=$22,500 84%=$16,500 Source: MetalPrices.com, RNC analysis 27