Nickel supply crunch to continue beyond 2006.

Mining stocks and metal prices are surging, but nickel is in a class by itself.

With nickel prices hitting a 14-year high, what is driving prices skyward is no more complicated than supply side economics, says Marc Leroux, information and marketing services manager with the Ministry of Northern Development and Mines in Sudbury.

"The Chinese market has just exploded" as a result of ongoing growth in the Asian stainless steel industry, to the point where demand is greatly exceeded supply, says Leroux.

Frenzied market activity in February reflected a decade's worth of neglect in new mine investment, combined with declining worldwide inventories of nickel and other metals such as copper and aluminum, and recent labour disputes at Falconbridge and Inco, all contributing to a global supply crunch expected to continue beyond 2007.

Commodity prices are the primordial factor in boosting exploration and spurring investment in nickel and other precious metals in Northern Ontario, says Leroux. With the burst of the dot-com bubble and shaky confidence in mutual funds last year, the investment climate for mining exploration has never been better.

"It is not your traditional blue-chip investment; there is an element of risk, but there seems to be an interest in high risk, high return," says Leroux.

Flow-through shares--a tax incentive launched by the Eves government--has played a significant role in generating big-time investment dollars in mining exploration.

"It's been an extra $100 million raised in these special flow-through shares (in 2003)," says Leroux, with much of the money raised in southern Ontario and redistributed for exploration projects in the North.

"We always think of all the money going down to southern Ontario. Here's an example of how it's coming back."

The junior exploration companies are making their mark in a big way.

Always regarded as a vital link in the exploration chain, juniors are exploring scattered little nickel deposits considered too uneconomical for larger seniors and are raising the bulk of the risk capital too.

"It's a great relationship that's always existed, but it is evolving to a new level," says Leroux.

Leroux says exploration in the past was limited to Inco and Falconbridge. Today, dozens of juniors are sprouting up everywhere searching for nickel, gold, platinum group metals and diamonds in many historically productive northeastern Ontario camps.

For years, most of the prospective properties in the Sudbury basin were tied up by Inco and Falconbridge.

"We used to think there were no opportunities, but we see (juniors) like FNX and Wallbridge playing a role in nickel exploration in Sudbury," says Leroux. "It's been innovation and thinking out of the box that made these companies successful in a very old and traditional mining camp."

Not burdened by large management teams or massive bureaucracies, juniors can shift gears quickly depending on commodity prices to refocus their energies on nickel or gold projects.

"That is a really critical element of the success of the junior companies. They're very lean, mean and flexible."

Today, a huge portion of the exploration risk capital being raised is by juniors. Having the backing of a major mining company like Inco helps, but juniors attract some of the brightest scientific, financial and business minds, lured on board by good-paying salaries and given some leeway to apply their skills and theories.

"The (investment) climate out there is great for this stuff right now," says Leroux, with plenty of interest in diamonds in Attawapiskat, platinum group elements found east and west of Sudbury and traditional gold areas like Red Lake in northwestern Ontario attracting swarms of new juniors because of gold prices.

"There seems to be some kind of planetary alignment. All the commodities in vogue happen to be great prospects in Ontario. Between that and the investment climate, things are lining up."

One of the North's big-ticket nickel exploration projects is being led by FNX Mining. The Toronto-based junior optioned five previously-mined properties from Inco Ltd. and has spent $40 million in exploration over the last two years and plans on spending $12.5 million in 2004 on an exploration program.

They struck a joint-venture deal with the mining giant, received permission to access all the properties Inco was not interested in and went to the stock exchange to raise money with Inco as a backing partner.

FNX does all their exploration, Dynatech Corp. (owners of a 25 per cent interest in the joint venture) does the mining and Inco gets a sizeable cut on the production and makes money on the extra tonnage in processing.

Their McCreedy West property went into commercial production last November producing 550 tonnes a day with a resource estimated at 2.5 million tonnes.

The Levack Mine and McCreedy PM deposit are scheduled to begin production at the beginning of 2005 and are expected to deliver between 1,000 and 1,500 tonnes per day to the smelter.

"Inco is busy at Voisey's Bay and Goro and (the deal) allows them to take properties growing grass-on and we deliver much-valued nickel ore on a daily basis on properties that were worth nothing to them," says Dave Constable, vice-president investor relations. "It's a real win-win."

Constable says Inco can focus its priorities on these heavy-tonnage projects in Labrador and the South Pacific, juniors like FNX can raise the high-risk capital, do the exploration and bring these smaller operations into production faster.

"To some extent, we're recycling mines. All that metal is gone to waste if we're not there to take it out."

Other juniors such as Mustang Minerals, Crowflight and Aurora Platinum have copied similar models with the major mining players or private landholders.

Falconbridge's Nickel Rim project, dubbed the richest ore body in the Sudbury Basin, is scheduled to have a feasibility study delivered to its board of directors this quarter.

Without its development, the nickel producer could cease operations in Sudbury within six or seven years.

In Timmins, work has started on the construction of Falconbridge's $100-million Montcalm nickel project, which is expected to produce 8,000 tonnes annually for the next seven years, starting in mid-2005.

The Kidd Creek metallurgical smelter will be modified to accommodate these nickel ores, suddenly allowing smaller deposits around Timmins to be profitable with a nearby mill operation to process the ore.

"It changes the economic viability of a lot of little satellite deposits," says Leroux.

By IAN ROSS 

Northern Ontario Business