Squeezing Nickel Till It Screams

by Sean Brodrick
Thomas Jefferson

A Note From the Editorial Director: Sean's report this week makes me nervous. It's the kind of information we would normally reserve for subscribers of his newsletter, Oxford Resource Explorer. But because you haven't yet had the chance to see the newsletter - the first issue won't be released until next week - we're making an exception... just this once.

The price of nickel touched a three-week high this week. The short-term trend is up. The bigger trend is even higher. And you can potentially make a boatload of dollars on nickel.

The reason: Nickel faces supply problems, starting in mineral-rich Indonesia.

On January 12, Indonesia imposed an export ban on raw mineral ores. The intent is to force companies to build smelters on Indonesian soil. This affects all sorts of minerals. The list includes copper, iron, lead, zinc, chromium, tin, gold, silver and bauxite.

But it especially affects nickel.

Why? Because Indonesia supplies 20% to 25% of the world's nickel, most of it as raw ore, and there aren't many nickel smelters there.

So we could see nearly a fourth of the world's nickel supply shut off.

Mark Selby, vice president of Royal Nickel (TSX: RNX), explains, "This is the equivalent to all of the OPEC Gulf states ceasing oil production."

In China, producers of "nickel pig iron" - a lower-grade substitute that nevertheless includes some real nickel - imported more than 30 million metric tons of nickel ore from Indonesia last year.

"And the export ban will also severely impact nickel producers in Ukraine, Australia and Japan," Selby says.

Sure, there are stockpiles of nickel. And those stockpiles were built in anticipation of the ban. But they will deplete rapidly. If the ban is strictly enforced, Selby says, the world could enter a severe nickel shortage in as little as 12 months.

It doesn't help that Indonesia issued its export ban without written guidelines. Some miners halted operations while they tried to sort things out.

Indonesia is causing this chaos because it wants miners to build smelters on its soil to process ore. That would create local jobs.

But the small, private operators that do most of the mining in Indonesia can't afford to build smelters. So this is actually going to cost jobs... a lot of jobs.

But Indonesia's loss could be your gain. The potential for investors to profit from this government-caused nickel shortage is clear.

How You Could Win Big

Maybe Indonesia's politicians will wise up. After all, this entire crisis could go away with the stroke of a pen. But in case they stay stubbornly stupid - and nobody's stubbornly stupid like politicians - there are several ways you can profit.

  • The iPath DJ-UBS Nickel TR Sub-Index ETN (NYSE: JJN) tracks the physical metal. It has very light volume, so think twice before you buy it, and use a limit order if you do.

  • The ISE Global Platinum Index Fund (NYSE: PLTM) is weighted nearly 9% to OAO GMK Norilsk Nickel, a Russian company that is the world's largest producer of nickel. Again, volume is very light. Be very careful.

For my money, some great nickel miners are in Canada. After all, Canada is one of the world's top five nickel-producing countries, and you avoid the political risk that is ruining other parts of the world. Vale SA (NYSE: VALE), the second-biggest mining company in the world, owns seven nickel mines in Canada.

Other nickel miners that might benefit if prices spike include First Quantum Minerals (TSX: FM), Lundin Mining (TSX: LUN), Royal Nickel (TSX: RNX) and PolyMet (NYSE: PLM). I'm not recommending any of these companies or funds today. Just citing places to start as you conduct your own due diligence.

Good investing,


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Profiting From Our Own Government's Folly

Indonesia's virtual war on nickel calls to mind the Obama administration's war on an American natural resource: coal. Our own government's effort to - let's just say it - destroy the coal-mining industry has had a punishing effect on the industry.

But all is not lost. In fact, with Democrats on the ropes in an election year, some analysts expect 2014 could be a rebound year for coal.

And if you're looking for a way to play it, David Fessler suggests Alliance Resource Partners LP (Nasdaq: ARLP). He's been recommending it to his Peak Energy Strategist subscribers since December 2012, and those who've heeded his advice have been rewarded with a 44% gain. But Dave thinks more good things are ahead for Alliance precisely because it is "probably the best-positioned coal company for the current EPA regulatory environment."

He had more to say about Alliance just this week:

"Alliance operates 11 different underground mines in the Central and Northern Appalachian regions in the Illinois Basin. Alliance's big advantage over just about every other coal producer is the cost advantage of Illinois Basin coal.

"Even though Illinois Basin coal is high-sulfur content coal, EPA regulations allow its use in electric utility scrubbers.

"The recent spike (and likely continued higher) in natural gas prices will see many utilities switch back to cheaper coal. The coal they'll be switching to is precisely the kind that Alliance produces.

"Alliance will likely take even more market share regardless of the market conditions for coal. For 2014, Alliance already has 32.6 million tons sold at favorable prices. It has another 10 million tons left to sell at higher prices.

"Those higher prices will happen as electric utilities switch back to coal. At the same time, Alliance is in the process of developing new mining sites. The rest of the industry is frantically cutting back on capacity.

"The other reason we like Alliance is it distributes most of its income to the unitholders of the master limited partnership (MLP). Alliance currently sports a yield of 6.24%...

"We still view Alliance as a growth and income story that will just get better in 2014."

- Bob Keaveney with David Fessler

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