Even though there seems to be no end in sight to the supply shortages and the resulting price support for many base metals, the long-term outlook for nickel may be less bright because the market faces a potential “onslaught” of new production within the next few years, according to mining analyst Greg Barnes of TD Newcrest in Toronto.

However, the nickel market is expected to remain tight in the short term, which means producers of the metal and their shareholders will benefit greatly before the market goes into surplus.

Nickel, which recently hit an intra-day record high of US$9 a pound, was one of the first metals to respond to tight fundamentals, doubling to US$6.28 a pound in 2004 from an average of US$3.07 a pound in 2002 as demand for stainless steel from China and a corresponding lack of worldwide nickel supply contributed to a bull market. (Nickel is the main ingredient in most stainless steel.)

Last year, producers of stainless steel curtailed production, reducing demand for nickel by 50,000 tonnes in the second half of the year. As a result, the nickel market moved into surplus and prices became more volatile.

More recently, prices have been soaring again on the threat of supply disruptions and anticipation that: three million tonnes of new stainless-steel production capacity will be installed in China this year; nickel demand will jump 30%; and supply growth will be limited. The only significant new mine to enter production since the mid-1990s is Inco Ltd.’s Voisey’s Bay operation in Labrador, which began shipping concentrates late last year.

“In terms of market balance, we maintain it will only take a slightly stronger-than-expected demand bounce, or a few supply disruptions, for this market to slip into deficit this year,” notes a report by London, England-based Standard Bank released in March. “Overall, we feel the risks are increasingly less bearish, and we have nudged up our price forecast marginally to reflect this.”

TD’s Barnes agrees, but only in the short term. By 2008, the market will start to worry about a glut of new production — just as it did a decade ago, when prices dropped below US$2 a pound in anticipation of new supply, he told miners gathered at the Prospectors and Developers of Canada Conference in Toronto in March. Unlike copper and zinc markets, which have few projects in the development pipeline to meet demand, there are several nickel projects under or close to being under construction.

“In 2008, the nickel price will probably start discounting potential new production, as it did in 1998 in the face of production coming from the Australian PAL [pressure acid leach] projects,” says Barnes.

Still, just as the PAL projects ended up falling far short of expectations, there is the possibility that some of the new mines coming onstream could be delayed by higher costs, labour shortages and technological bugs. But Barnes assumes about 75% of the proposed projects will be successful.

The next generation of nickel mines will start next year. BHP Billiton Ltd.’s Ravensthorpe project in western Australia will be the first to enter production in the second half of 2007, adding 45,000 tonnes of nickel to the market annually. Close on its heels will be Inco’s Goro mine in the Pacific island country of New Caledonia, adding another 60,000 tonnes on an annual basis. In 2008, Brazil-based Companhia Vale do Rio Doce (CVRD) will contribute 55,000 tonnes a year from its Onça Puma project and another 46,000 tonnes from its Vermelho project, both in the South American country.

If all those projects are successful, a total of 206,000 tonnes a year, or about 16% of the current annual capacity of 1.3 million tonnes, would be added to supply.

Barnes says there are an additional 13 projects in the development pipeline that have been proposed but not yet confirmed; the largest five of those could supply another 132,000 tonnes of nickel. Smaller projects could add yet another 145,000 tonnes of annual nickel production, moving the market into significant surplus in 2009 through 2012.

But the big new nickel projects need at least a US$4-a-pound nickel price to make them viable on a long-term basis, according to Barnes. One way to prevent a glut, and the consequent collapse in prices, is to stagger the projects so they do not all come into production at the same time.

@page_break@But even as these new projects are being readied for production, problems can arise that could delay or disrupt them. In April, for instance, nickel traded at intra-day record highs when Inco was forced to shut down construction at its Goro mine after activists destroyed equipment and blocked roads to the site. The incident made commodity traders nervous that an already tight market could become even tighter.

“Potential labour issues in Sudbury [Ont.] this year and next will probably keep the market on edge,” Barnes adds. Some of the richest nickel mines in the world are located in Sudbury.

As a result, the nickel market is expected to remain tight in the short term. And apart from the major Toronto Stock Exchange-listed producers with Toronto corporate offices such as Inco, Falconbridge Ltd. and Sherrit International Corp., there are a few Canadian producers and potential producers that could share in the current windfall. All of the following companies, with the exception of Sudbury-based Seymour Exploration Corp., are based in Toronto.

>Lionore Mining International Ltd. has nickel operations in Australia, South Africa and Botswana, as well as a gold mine in western Australia. Total nickel production from its mines was 64 million pounds, at a cash cost of US$3.31 in 2005. After writing off its gold assets to concentrate on nickel, the company had a net loss of US$76.4 million (35¢ a share) last year, compared with net earnings of US$78.2 million (40¢ a share) in 2004.

>Fnx Mining Co. Inc. revolutionized junior/senior mining partnerships in 2001, when it won the bid for five of Inco’s former copper/

nickel/PGE (platinum group elements)-producing properties in the Sudbury Basin. In exchange for the properties, Inco received an equity stake in FNX, seats on its board, $30 million in exploration expenditures and back-in rights should FNX find a deposit big enough to interest the nickel giant. In 2005, FNX produced eight million pounds of nickel, 6.2 million pounds of copper and 98,410 pounds of cobalt from the former Inco properties at a cash cost of US$3.17 a pound of nickel. The company had net earnings of $4.6 million (8¢ a share) compared with $6 million (12¢ a share) in 2004.

>First Nickel Inc. is a smaller version of FNX. First Nickel bought the Lockerby mine at the southwest rim of the Sudbury Basin from Falconbridge last year for $8.6 million using a combination of cash ($1.5 million), assumption of environmental liabilities ($5.9 million) and about 2.2 million shares.

First Nickel also has a number of promising exploration projects in the area. The company resumed production at Lockerby in October. And even though it recorded a loss of more than $4 million for the 14 months that ended Dec. 31, 2005, it expects to be profitable in 2006, the first full year of operations at Lockerby.

>Crowflight Minerals Inc. is using a similar formula, earning 100% interest in the Bucko deposit in the Thompson nickel belt in Manitoba from Falconbridge by arranging financing and putting the deposit into production. A feasibility study suggests that the mine would have a 23.9% rate of return by producing 12.5 million pounds of nickel each year over a five-year mine life, assuming an average nickel price of US$5 a pound. Crowflight’s proposed mine development and closure plan is currently under review by the Manitoba and federal governments in anticipation of production in 2007.

>Canadian Royalties Inc., which also has yet to go into production, is advancing the Raglan South nickel project in northern Quebec toward feasibility, with an initial scoping study expected this month. Resources total 10.6 million tonnes, averaging 1% nickel, 1.2% copper and 0.04% cobalt, plus gold, platinum and palladium credits.

>Seymour Exploration Corp. identified remaining resources of 5.8 million tonnes grading 0.85% nickel and 0.39% copper at the Lynn Lake mine in Manitoba, an old Sherrit mine that closed in 1976 because of low nickel prices. The company is holding a scoping study that is expected to identify approximate costs and establish the resource thresholds required to advance the project to feasibility. IE