BRENDA BOUW
RTGAM



VANCOUVER - Nickel doesn't have the same credentials as Dr. Copper and hasn't been the centre of any heated takeover battles for quite some time, but the practical metal is still reaping the benefits of strong demand.

The price of nickel, a product used mainly to produce stainless steel, is being driven higher by tight supply and a strong appetite from China as its construction boom continues unabated.

Royal Nickel Corp. , created by a group of former Inco executives, is betting on that steady demand for its namesake metal as it moves forward with plans to build the $2.3-billion Dumont nickel project in Quebec, which the company says has the potential to become one of the world's largest nickel operations.

The Toronto-based company is expected to announce results on Thursday that will show it's a step closer to making Dumont a reality.

Royal Nickel has completed a study on processing Dumont ore that supports the construction of a "simplified, lower-cost, more robust" operation, the company says. The study suggests Dumont ore can be treated using conventional mill processes, rather than a four-stage crushing and mill process that was envisaged previously. That had raised investor concerns over capital and operating costs.

"We believe the successful test results provide significant operating benefits to what we expect will become one of the largest nickel sulphide operations in the world," said Royal Nickel chief executive officer Tyler Mitchelson.

He said the test results address a key risk for the project, and helps the company move forward "with an even greater level of confidence" to pre-feasibility permitting and construction.

The pre-feasibility study is expected later this year, with construction expected to begin in about 30 months. The company will also seek a minority partner to help finance construction of the mine. Production is forecast to begin in 2015.

Dumont contains about seven billion pounds of nickel resources in the measured and indicated category and approximately 3.2 billion pounds of nickel resources in the inferred category, Royal Nickel said.

The deposit was first identified in the late 1930s and nickel was first found there in the mid-1950s. It has changed owners several times since. Frank Marzoli, one of the founding shareholders of Royal Nickel, picked up the claims in 1997 and Royal Nickel was formed in 2006.

"This deposit has been around for a long, long time," Mr. Mitchelson said, adding that few people looked at it in the past because of its lower grades.

However, he said BHP Billiton Ltd.'s Mount Keith project in Western Australia, which has similar characteristics to Dumont, proved it could work.

Although nickel prices are poised to drop over the next few years, as production from a handful of new mines enters the market, Dumont will be profitable as long as price stay above $6.50, Mr. Mitchelson said. Increased production in China of nickel pig iron, a low-cost alternative to refined nickel, also threatens to depress future prices, which analysts are forecasting will range from about $7.50 to $9 a pound within the next four years.

Nickel has been trading between $11 and $13 a pound so far this year, driven higher due to a supply deficit resulting from a pullback in production during the 2008-09 global recession, when the metal dropped to about $5.

Today's supply crunch is due to a spike in demand, particularly from China as it builds out its infrastructure, said Patricia Mohr, commodities market specialist at Scotia Capital.

"China is now a huge driver of stainless steel demand and nickel as well," she said.

China consumed about one-third of the world's nickel last year, and is a significant producer of stainless steel. Demand for stainless steel is also growing in the recovering economies of the United States and Europe, although still lags levels seen in 2007.

Still, nickel is a small market compared to metals such as copper, "which is why the price often is quite volatile," Ms. Mohr notes.

While nickel prices are expected to retreat by the time Dumont begins production, Royal Nickel is confident demand from expanding economies such as China, India and Brazil will keep prices at levels that keep its mine profitable.

Since it launched on the Toronto Stock Exchange late last year, Royal Nickel has also been pushing the metal as an alternative investment to such hot commodity plays as copper, a sister metal that has spurred a flurry of acquisitions in recent months. Copper is sometimes referred to as "Dr. Copper" since it has become a reliable indicator of global economic activity.

Nickel hasn't been in the spotlight since the price ran past $20 a pound in 2007, months after the takeover battle for nickel mining giants Inco and Falconbridge a year earlier.

"In 2006, nickel was copper," Mr. Mitchelson said. " Today we are doing a lot of work to try to sell nickel, but I do think the sentiment is going to change ... People are getting more interested in nickel."

Royal Nickel (RNX)