To preface this article, I do want to share that I do own shares of companies I will be talking about. I’m not in any way shape or form endorsing you to do the same. However, I’d like to be able to take a look back at this 5 years later and see how different my thoughts have changed. Furthermore, my major is not related to finance nor economics, so please take this with a grain of salt!
First off, we see a rising demand of electric vehicles in 2020. Or maybe mostly Tesla. Most other primarily ICE car manufacturers are struggling with sales. However, we see one company that is seemingly seeing growth.
Well, let’s assume that most people are opting for electric cars from Tesla, can they produce enough such that everyone who wants to buy one can get one?
Well, not quite… They’re quite constrained on batteries needed to produce these vehicles. Since their cars are split into three types of batteries (LFP, NMC, High nickel), a limiting factor is currently with Nickel and how to secure a steady supply.
As said on Q2 earnings report,
“Tesla will give you a giant contract for a long period of time if you mine nickel efficiently and in an environmentally sensitive way,” — Elon Musk
Now you may ask, what about China with CATL or Korea with LG and Samsung or even Japan with Panasonic? Can’t they produce all the batteries and just give them to Tesla. Well…. yes, but Tesla wants denser cells that are cheaper to manufacture and faster to manufacture. Tesla wants to drive costs down for cars, so a key component is reducing battery costs.
Additionally, with heightened tensions with China and possible Trump presidency, the supply chain may be cut off anytime. So how will Tesla secure this valuable resource?
“Manufacturing is on Fire” -Cathie Woods
Contracts with mining companies. As stated by Cathie Woods, CEO of Ark Invest, a fund manager looking at growth companies, manufacturing will be a rising sector in the upcoming decade. So, I put 2 and 2 together and thought well, maybe a cyclical company, such as nickel and manufacturing could be worth taking a look into if Tesla needs this resource.
So I mainly took a look at leading competitors of this marketplace as well as upcoming businesses. Current Nickel companies, such as Vale, Norilisk, BHP are producing anywhere ranging from 160–210 Million Tonnes of Nickel per year. From Vale’s 2019 Investor relations page, The annual EBITDA was 1.2 Billion from producing 208 MT of Nickel and some precious metals that came along with this nickel (e.g cobalt).
However, since Nickel is a metal which is cyclical, rising prices will increase mining and thus will reduce prices while lowered prices will decrease mining. This is why companies, such as Canada Nickel and Giga Metals each with measured and indicated nickels totaling 1.5 Mt and 2.5 Mt respectively seem like a great investment.
- They’re trying to mine cleanly (in a carbon neutral fashion using hydroelectric technologies)
- Suppose they are able to mine the same amount of nickel in a year as Vale is able to, Canada Nickel would last 7 years and Giga Metals would last 10 years.
- Their current valuations are 132 million and 45 Million respectively. (Vale is 58 Billion)
So, without following others blindly, I tried to create my own model of what could be become of these companies in the following decade to try to put a value as to how big these companies could grow based on nickel resource.
Forgive my DCF model for not accounting for a more granular detail. Also, it is assuming a very high amount of production, equaling that of Vale, which I believe is highly unlikely, but as I lack further information, I am using a guesstimate which is likely a very good scenario.
I assumed Canada Nickel would start producing at year 2025 and Giga at year 2024.
CANADA NICKEL
Giga Metals
Assuming an 8% Discount rate, technically their stock price could grow 11,000% and 36,000%. Now of course, since Nickel is cyclical, I’d expect the stock to fall nearing the end of this cyclical journey, but since their current market valuations are so low, I don’t see the point not to invest as while there is risk, the reward to risk is quite high.
