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Maurice Jackson:

Welcome to Proven and Probable, where we focus on metals, mining, and more. I’m your host, Maurice Jackson. Joining us today is Sam Broom. He’s an investment executive at Sprott, the Global Resource Investments. Today, we will discuss nickel and cobalt propositions for your portfolio. Mr. Broom, welcome to the show, sir.

Sam Broom:

Maurice, thanks. It’s a pleasure to be here.

Maurice Jackson:

We brought you on the show today because you’ve truly carved out a niche for yourself in the space with regards to nickel and cobalt. Many speculators don’t hear much about these metals and the value propositions that they may present, so we’re delighted to have you on the show here.

Sam Broom:

Yeah, thanks for having me. I’m looking forward to it.

Maurice Jackson:

So let’s begin our discussion here with nickel. Sam, at the 10,000 foot level, share with us the supply and demand fundamentals for nickel.

Sam Broom:

Sure. Nickel’s actually quite an interesting market. It was a darling back in the sort of early to mid … even to late 2000s, up until about 2007 and eight, where the price rose dramatically. A lot of people and a lot of speculators made a lot of money in the nickel market in the 2000s.

What basically happened was the Chinese came up with a new way of producing largely stainless steel, which was the main use for nickel. Formerly, they were using refined nickel to produce stainless steel, which was … Nickel is a fairly rare metal. There’s not a lot of high-quality deposits out there, but what they did was they figured out a way to turn ferronickel , which was basically an iron-rich nickel dirt, withered rock. You’d be able to use that as a replacement for refined nickel in creating stainless steel.

That truly was almost like a shale oil moment for the nickel market, and drastically changed the cost structure of the industry. It also coincided with I guess the global financial crisis in ’08, and then nickel promptly fell of a cliff. It was trending for about 54,000, 55,000 dollars a ton. It was as low as I think almost 7,000 dollars a ton about a year ago. So that’s we’re talking an 80 percent decline over the last ten years, in terms of the nickel price.

What resulted was all of a sudden you hit this flood of nickel, or iron rich nickel, nickel pig iron, or ferronickel, that flooded into the market from places like Indonesia and the Philippines. It basically destroyed the price of nickel. If you look at a chart of the … a long-term chart of the nickel, the refined nickel stores on the LME, you’ll see exactly what happened. Basically supply went through the roof, and then we saw this huge accumulation of nickel. The nickel market was in a huge seller plus for years and years.

To this very day, we’ve still got … There are still huge amounts of nickel on the LME, compared to historical norms. That’s why a lot of people still steer clear of the market. One key thing to note, though, is for the last few years, nickel has actually, the nickel market or the refined nickel market has been in a deficit. If you look at that very same chart, you’ll notice that stock piles have been starting to draw down, and that’s initially what got my attention. I think, and perhaps we’ll get to it later, but that’s a very key thing for investors and speculators to keep an eye on.

The draw down has actually being in excess of what I was expecting at this point in the cycle, so clients of mine will know that I’ve been talking about nickel for the better part of about six to 12 months as being a commodity I think could be one of the best performing commodities over the next few years. So far, it’s … The tide is turning, and it’s actually exceeding my expectations so far.

Maurice Jackson:

Well, you made two interesting points here. You have a supply deficit and an 80 percent reduction in price here. That really prompts some unique opportunities here for us. Let me ask you this, if I may: do you foresee a catalyst that will constrain supply in the future, or add to the demand?

Sam Broom:

Yeah, so I guess the main driver that I see moving the nickel price is it’s a very crucial ingredient in just about every … type of lithium-ion battery there are out there. Okay, so if you go and have a look at all the various chemistries, most of them are very nickel-rich.

What we’re seeing or just starting to see, I actually think it hasn’t even really hit yet, is increased buying from those getting set in the electric vehicle space where they need to … They don’t actually need refined nickel, nickel metal.  The EV industry uses nickel sulfate, which is basically a nickel salt; but you can make that. You can process refined nickel into nickel sulfate. We’re starting to see a little bit of an impact from that.

Nickel is also a, what I would term a kind of an affluent commodity. Stainless steel is obviously something that a … increasingly wealthy population consumes in greater quantities as they become affluent. Global growth, I actually think global growth in places like China and in the developing world is driving this nickel drawdown at the moment, but I do foresee that in the near future, probably not in the next 12 months, but maybe 18 to 24 to 36 months down the track, the growth of the electric vehicle industry is going to be what drives nickel demand, refined nickel demand.

The key thing to note here is that all of that additional supply that came onto the market back in the late 2000s with the invention of nickel pig iron is completely unsuitable and unusual in the electrical vehicle space. So basically, that can towards servicing demand from stainless steel fabrication and production; but it cannot be used at all to create electric vehicles and lithium-ion batteries to go into the cathode of lithium-ion batteries.

In a nutshell, that EV demand is going to directly impact on what’s called … what we term ‘class one nickel,’ which is what the LME stock piles represent.

Maurice Jackson:

You hit on some very key points here, and that’s a lot of ambiguity that I heard regarding the nickel space is this. There’s excess supply that can be used, and you just addressed it cannot be used. For our listeners, please do take note here. But I want to stick with this theme here for the supply deficit. Where is current production coming from and will that remain for the future?

Sam Broom:

Yeah, so there’s two very distinct, again, different styles or different classes of nickel supply here. The pig iron and the ferronickel that’s coming out of … that’s getting fed into the Chinese furnaces, so this is the supply that can’t be used by electric vehicle fabricators and manufacturers. It’s coming from primarily from places like Indonesia and the Philippines.

Basically what they do is they literally just dig it up, and put it on a ship, and ship it to China, and it’s basically like iron nickel-rich dirt that goes over there. That’s where that supply largely comes from. There’s a little bit coming out of Australia, but mainly places like New Caledonia, Indonesia, and the Philippines.

Class one nickel, or refined nickel, comes from a whole host of other places around the world. Major, major producer is Russia, with Norilsk Nickel, one of the larger mining companies out there that is a major producer of nickel. Outside of that, another major name you’ve probably would have heard of is something like Voisey’s Bay up in Canada. Outside of that, there’s very little in the way of primary nickel production. It’s primary nickel sulfide productions, I should say; so sulfide mines.

We won’t get too much into the weeds here, but they are the type of mines that can easily produce refined nickel. They’re very rare, and there’s been next to no major discoveries, at least in the last five years. The last one I can think of was the Sirius Resources, who was run by legendary Australian prospector, Mark Creasey. They discovered the Nova Bollinger, I think it was back in 2012, if I remember rightly. That’s the last major nickel sulfide discovery that I can think of, so that was over five years ago now.

That gives you an idea about how little nickel exploration there has been and how many new high-quality class one nickel discoveries and new projects are the in pipeline. It’s basically non-existent.

Maurice Jackson:

Sam, with the exclusion of Canada, for our listeners, how mining friendly are these jurisdictions?

Sam Broom:

Yeah, I mean I guess Russia’s pretty topical at the moment with the … all the sanctions that are going on at the moment. The Norilsk company, the Russian company I mentioned, their share price got smashed 20 percent yesterday on the news. So Russia’s kind of self explanatory. I personally think Russia’s very cheap right now, but it does come with a high degree of geopolitical risk, given the tensions there.

The other … the ferronickel and the pig iron producers, I would say have a moderate to high degree of geopolitical risk. For those of you that aren’t familiar, the Philippines have been doing all sorts of things. A lot of talk about cracking down on their mining industry, and banning all sorts of open-pit mining. Basically exclusively because of the damage that these nickel laterites mines have been causing to the countryside.

I would say there’s a relatively high degree of risk and potential disruptions to supply from that side. Outside of that, you’re looking at places like Australia, Canada, the US, parts of Africa. There’s potential around the world, but it’s just finding these deposits, because they are so rare and so hard to find that we’re just seeing next to nothing come through in terms of new, high-quality sulfide deposits that are capable of cheaply producing class one nickel.

Maurice Jackson:

Give us some numbers here. What are the global costs for production versus the all in sustained costs on nickel?

Sam Broom:

Yeah, it’s hard to give an exact number, but last I checked I would say cash costs, industry-wide cash costs are somewhere average around, somewhere around $4 dollars a pound, $5 dollars a pound. If you take in all sustaining costs, you’re probably looking above $6.50 a pound. If you take into consideration the true cost of production, including capital costs, which you should always do, it’s probably above $7 or $8 dollars a pound. Nickel’s currently treading $6.50 a pound, or about 13, 14,000 dollars a ton. By and large, the industry is underwater at these prices.

Maurice Jackson:

Switching gears, let’s delve into cobalt. Sam again, at the 10,000 foot level, share with us the supply and demand fundamentals for cobalt.

Sam Broom:

Sure. Cobalt’s completely different to nickel in a way, even though they’re often found together. The main … By far and away, the main producer in terms of a jurisdiction of cobalt is the Democratic Republic of Congo; which I would probably describe as one of the worst and … worst … I should say the highest … It’s a country with the highest geopolitical risk of almost any that I know right now. There’s a whole lot of strife in terms of what’s happening with the government there. Their … formerly democratically elected president has failed to step down as he is constitutionally mandated to. That was over a year ago now, so there’s a whole lot of shenanigans going on there, a whole lot of conflict, potential for civil war, and that type of thing. I don’t know whether that will happen or not, but there’s some not good things going on over there.

 

On top of that, it’s a very poor country. There’s a lot of historical conflicts between … different tribes within the country, and things like that. It’s not a very … safe place to have one of the key ingredients for electric vehicle lithium iron batteries. 65 percent of global supply coming from this country, so that’s what initially got me interested in cobalt well over a year ago. I don’t know if you’re able to link to some articles, but I can send you some articles, Maurice, that I’ve put out about a year ago, that kind of explain the situation there.

Basically, we’ve got huge amounts of supply coming out of a single country that is extremely elevated geopolitical risk. Demand side of the equation, the main driver moving forward is going to be the growth of electric vehicles. Now, cobalt is, along with nickel and a few other elements, is one of the key ingredients in the cathode component of electric vehicles. It is the part that is the … It is the ingredient that controls or has a large impact on both the stability and the amount of energy a battery can store, the amount of time you can … with the amount of energy that the battery can hold. It greatly affects the range of your electric vehicles.

I can’t see it being replaced any time soon, and I can see a huge increase in demand coming as electric vehicles proliferate. Given we’ve got an extremely highly risky geopolitical supply backdrop, with an exceptional growth outlook in terms of the demand side, it’s a very interesting proposition. Obviously, the cobalt price is … has already gone up dramatically in the last sort of 12 to 18 months. We’re already well into the cobalt price re-rate.

Maurice Jackson:

Well, you’ve already answered part of my question here. The current production is coming from the DRC, and as a speculator, your eyes light up when you have this geopolitical turmoil. Let me ask you this, will that change in the future? Do you foresee other production countries coming with production?

Sam Broom:

Cobalt’s a really interesting one, because it’s rare but it is … it’s relatively pervasive in the … in very low quantities in rocks around the world. What is really rare is cobalt in economic concentrations. There are very places around the world that have cobalt in economic quantities that it can be mineable. Basically, the main source of cobalt that I see outside of the Congo moving forward is likely to be … laterite, so the very same type of deposit that … The nickel pig iron we talked about earlier, often has very high … or not very high, but it economic quantities of cobalt. The one key jurisdiction I’ve been focusing on is Australia, because it has the same type of deposits as the Philippines and the Indonesians, and the New Caledonia’s that we’ve talked about. Yet it’s obviously a fair safer jurisdiction.

There are a handful or more of these nickel-cobalt laterite plays in Australia, and that’s where I’ve largely been focusing my attention, because I think that the electric vehicle industry is going to value security of supply over price in the mid to long terms. In other words, they’ll be willing to pay up for their nickel and their cobalt, cobalt in particular, if it’s been mined in a jurisdiction they’re not worried about blowing up into a civil war and losing that supply in six months’ time. These companies are spending billions of dollars in capex building these factories. The last thing they need is supply crunch when it comes to cobalt.

I’m keeping a very, very, very close eye on the Australian nickel cobalt play. I will say though, that these type of plays are more of a speculative investment than an investment grade type of proposition. I view them as being almost at the money of current prices. They do require higher, nickel in particular, prices; but nickel and cobalt prices to actually pay off in the long run.

Maurice Jackson:

Sam, before we leave cobalt here, let me ask you this one final question, because I asked it about nickel. Talk to us about the global costs for production versus the cash costs and the all in sustaining costs for cobalt.

Sam Broom:     

                 

Sure. It’s very hard to say because 90, probably I would say 97 percent of cobalt is produced as a byproduct. There isn’t really a cost curve out there for nickel that you can examine. Usually it goes as either a credit towards nickel or copper production. Looking at it in terms of the cost to produce cobalt, it doesn’t … I don’t really have any good figures out there. Sorry.

What I would say is … Look at cobalt as a way to make … to render these other, nickel in particular, but nickel and cobalt … sorry, nickel and copper projects economic. For example, there’s a company I watch relatively closely that just put out a feasibility study that the nickel all in sustaining costs per pound are something like five to six dollars. With the cobalt credits, that drops to about a dollar. That goes to show you how much these … the cobalt credits they’re getting from their project go towards making these projects economic. Basically reading this project that would be completely uneconomic at current nickel prices. Moderately economic at current prices, and extremely economic at say, 20,000 dollars a ton of nickel.

Maurice Jackson:

Well Sam, thank you for a very comprehensive interview regarding cobalt and nickel. Let me ask you this does Sprott Global Resource Investment still provide a free grading of one’s natural resource portfolio at no cost and obligation?

Sam Broom:

Absolutely, yes. So if you want me to take a look at your portfolio, particularly those with a sort of EV metal and material focus, I’d be more than happy to give you a no obligations ranking of your portfolio. Bear in mind that this is not a … wouldn’t be investment advice or anything. It’d be a one to ten ranking. But if you would like to take me up on that offer, my email is sbroom@SprottGlobal.com. I’d be more than happy to receive your request and give you a no obligations ranking there.

Maurice Jackson:

Now Sam, let me ask you this as well, how do you want someone to forward an email to you? Is this an attachment or just in the body of the email?

Sam Broom:

Either/or. You can either attach an Excel attachment, or simply just list your portfolio in bullet point form in the email. With the subject line: Proven and Probable

Maurice Jackson:

All right, and also, do we have a contact phone number for you there at Sprott?

Sam Broom:

Yes, we do. You can get me at 800-477-7853 and just for me. My name again is Sam Broom.

Maurice Jackson:

Sam, give us that number one more time.

Sam Broom:

It’s 800-477-7853.

Maurice Jackson:

For our listeners, we want to remind you to register for the Sprott Natural Resource Symposium, which will be conducted the 17th through the 20th of July in Vancouver, British Columbia. Just click on the registration tab on our website, free tickets. Featured speakers will be Rick Rule, Doug Casey, Jim Rickards, Jim Grant, just to name a few. We will be present and we look forward to meeting you. Sam, let me ask you this as well, will you be in attendance?

Sam Broom:

I am certainly planning on being there. I have my first child due in early August, so as long as that doesn’t happen ahead of schedule, I will certainly be there.

Maurice Jackson:

All right, look forward to seeing you there. Last but not least, please visit our website, www.ProvenAndProbable.com, where we interview the most respected names in the natural resource space. You may reach us at Contact@ProvenAndProbable.com. Sam Broom of Sprott Global Resource Investments, thank you for joining us today on Proven and Probable.

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