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NIckel mining in New CaledoniaInvesting in nickel is a bet on the prospects of the industrial and manufacturing sectors, both of which use lots of this base metal. Nickel investing, and investing in other base metals like zinc, iron, aluminum and uranium, is different from investing in precious metals like gold and silver. Base metals’ prices move with the economy; precious metals’ prices often move in the opposite direction of the economy. If you want to include nickel in your investment portfolio, consider working with a financial advisor.

Nickel demand appears set to grow. Recently, Elon Musk, founder and CEO of Tesla, commented on the need for nickel in the production of electric cars. He pleaded with miners to mine more nickel. Another spokesperson for Tesla said that there is global underinvestment in the mining sector and noted that a shortage of base metals for electric vehicles may be on the horizon as a result.

The Nickel Market 

Nickel is a key base metal in a society moving toward renewable energy and electric vehicles. It is in a wide variety of products like batteries, mobile phones, wind turbines, gas turbines and medical equipment. Most nickel currently used in production is found in stainless steel. Nickel is excellent in alloys, and there are 3,000 of them.

Electric vehicles and their batteries will drive most of the demand for nickel. There is a push to tap into renewable energy sources, and nickel is used in solar and wind farms. Nickel is also present in the type of batteries that will power electric vehicles. The World Bank issued a report discussing the future of renewable energy and the drive toward that goal. They stated that moving toward that transition would be nickel-intensive. China is and will continue to be a huge market for nickel as urbanization and industrialization in the world’s No. 2 economy grow.

Nickel reserves lie primarily in the Philippines, Indonesia, Australia, Canada and Russia. There are supply issues with nickel. It takes years for a new nickel operation to come online. Current nickel operations generate a fairly low rate of return. The various supply issues increase nickel’s price volatility.

Key Metrics in the Nickel Market

Nickel mining is a capital-intensive operation. Few new nickel mines ever open due to extremely high capital investment requirements and huge entry costs. Nickel mining also leads to pollution in the area of the mines, both air and water pollution. Both require a lot of capital investment both to clean up pollution or, in the best-case scenario, to install equipment to mitigate the levels of pollution.

There are several important key metrics to consider regarding an investment in nickel.  If you are going to invest in nickel mining securities, it’s important to look out for high leverage ratios. If the ratios of debt to assets or debt to equity are too high as compared to the rest of the industry, that can lead to possible bankruptcy. When nickel prices are low, companies can accumulate a lot of debt since the necessary capital investment is so high and the company may not have enough cash flow to service the debt.

Because nickel is a capital-intensive industry, nickel mining companies have large amounts of depreciation and amortization on their financial statements. Depletion is also a factor. These items lower net income.

It is wise to look at the income statement and analyze the EBITDA instead of just relying on net income. EBITDA is earnings before interest, taxes, depreciation and amortization. It may give you a different picture than just looking at net income since nickel mining has high depreciation and amortization. Analyzing a company’s debt to the EBITDA is important since it measures debt as compared to earnings before removing the big costs of depreciation and amortization.

Companies mining nickel may also try to mine another base or precious metal. You may find a company mining both nickel and gold or nickel and copper. Nickel companies undertake this venture to maximize their profit.

Types of Investments in Nickel

Nickel sheetsThere are various ways to invest in nickel, some direct and some indirect. Indirect investments in nickel would include companies that make mining and processing equipment, provide transportation and companies that use nickel for manufacturing. Below are a few of the more common direct ways.

Bullion

Purchasing the actual nickel bullion in the form of coins or bars is the most direct way to invest in nickel. Investing in physical nickel requires a storage facility with security. Since nickel is heavy and is low in value as compared to its weight, substantial storage must be available for investment in nickel bullion.

Stocks

Most of the stock investment in nickel is in mining companies. Before you invest in nickel stocks, run the key metrics to determine the viability of the companies in the industry. Look at their history and plans. Then, go a step further and determine the global economic outlook for nickel as well as environmental and corporate governance issues. Analyze how the companies rate in their industry, their historical performance and their prospects.  Besides pure-play stocks, there are companies that have exposure to nickel, but nickel may not be their primary product.

Futures

Nickel futures are traded on the London Metal Exchange. A casual investor does not want to get involved with nickel futures due to the complexity of the commodities and futures market. Futures are derivative securities because their value comes from the underlying asset. When a futures contract is placed on nickel, both the seller and the buyer have to fulfill their obligations. You also have to factor in storage costs for nickel and how interest rates affect them. A financial advisor can help you if you are interested in nickel investing using futures.

Options

Nickel investing can be done by purchasing options on the future’s contracts. If the owner of an option decides he doesn’t want to fulfill his contract, he can walk away and only lose the money he has already paid to purchase the contract. Options have a strike price and if the value of the option rises above that, options owners can exercise their option since they will be in the money.

Other options

One of the best ways to gain exposure to the nickel market may be to invest in one of the two exchange-traded notes (ETNs) available. Exchange-traded notes are debt instruments, issued by financial institutions. They are similar to zero-coupon bonds.

Risks and Rewards of Nickel Investing

There may be several benefits in trading nickel. Portfolio diversification is one possible benefit. Even if you have an investment in precious metals, base metals like nickel have different properties and tend to move with the market instead of counter to it. Nickel is also a way to hedge against a weak dollar and inflation. In today’s market, it seems to be a given that there is going to be large-scale demand for nickel due to the demand for it by China. There is increasing demand for nickel to use in stainless steel. As the electric vehicle industry expands, and the need for batteries with it, the demand for nickel may explode. As demand increases, the price of nickel will rise.

There are substantial risks in nickel investing. There seems to be a growing undersupply of the metal. There are significant barriers to entry when opening a new mine. Nickel is a commodity and speculators try to trade on small price movements. If there is a global economic slowdown, the Chinese might not buy as much nickel. In this case, the U.S. could put its infrastructure plans on hold and that would decrease the demand for nickel.

The Bottom Line

Pure nickel pelletsNickel could have a place in your portfolio, especially if you need to diversify into a base metal or believe that the global economy is on the upswing. Both the short-term and long-term outlook for it is good, although the risks inherent in commodities trading are significant. Keep in mind that commodities in general are subject to a lot of speculation and are considered highly risky investments.

Tips on Investing

  • Due to the risk associated with trading commodities like nickel, especially since it is a base metal, it’s wise to work with a financial advisor who can help you with how to do it and how much of your money to put into the metal. Finding a  financial advisor doesn’t have to be hard. The SmartAsset financial advisor matching tool can connect you to local advisors in just minutes. If you’re ready, get started now.
  • If you want to include nickel investing in your portfolio, use SmartAsset’s asset allocation calculator to give you an idea of whether or not such an investment makes sense for you given your risk tolerance, time horizon and investment goals.

Photo credit: ©iStock.com/Ivorr, ©iStock.com/SlobodanMiljevic, ©iStock.com/35007

Rosemary Carlson
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