The Crimean nickel effect

Where gold was once the key barometer for geopolitical bad news, lately nickel has been hogging the stage.

The base metal has been on a strong run since the beginning of the year, gaining 16% and trading for US$7.33 per lb. at press time.

The first leg up in that climb was due to the increased political risk in Indonesia, as the world’s largest nickel producer banned unprocessed exports of the metal on Jan. 12 to encourage upstream processing within its borders.

Now investors are worried about the metal’s largest corporate producer, and its ability to get product out of its home country.

With the recent crisis in Ukraine’s Crimea region, investors are concerned that Russian supply from Norilsk Nickel could soon face sanctions from the West.

The worry is based on the fact that both the U.S. and the European Union included a former Nickel baron with ties to the company on a list of names subject to sanctions.

Both the U.S. and European Union are targeting Andrei Klishas, among others. Klishas is a Russian senator, the head of the upper house council committee on constitutional law and a long-time business partner of Vladimir Potanin, an oligarch who is the CEO and largest shareholder of Norilsk.

Klishas has served as CEO of Norilsk in the past. 

Norilsk accounted for 8% — or 183,000 tonnes — of the world’s total nickel production last year.

The global nickel surplus is expected to narrow to 68,000 tonnes this year from 207,000 tonnes last year, and such geopolitical disruptions can cause greater fluctuations in the nickel price compared to other base metals, due to the market’s small size. By way of comparison, the copper market is nearly five times larger than the nickel market, and is better equipped to handle disruptions.

As for how investors can best play the uptick in price, Scotiabank analyst Orest Wowkodaw says Sherritt International (TSX: S) is the go-to name in nickel, with two near-term catalysts for its stock price: the Ambatovy mine ramp-up, and having sold its coal assets.

The Ambatovy nickel laterite mine in Madagascar has been hobbled by delays, but the company says its ramp-up is now on track. At the end of 2013 Sherritt said the mine averaged 53% of nameplate capacity, but that it would have to invest another US$200 million into the project this year.

The coal and royalty sales could close in April, and bring $800 million in cash to the company’s coffers. The cash injection — combined with a recent dividend cut — has improved the company’s financial outlook, according to Wowkodaw.

Wowkodaw says the company has by far the largest leverage to nickel prices of the producers in Scotiabank’s research coverage universe. 

Scotia rates Sherritt as a “sector performer,” with a $3.50-per-share price target.