The BarkerLetter

Xstrata plc announced last week it was buying LionOre Mining (LIM.TSX) C$4.6 billion in cash.

I believe this is the beginning of a very sudden wave of consolidation in nickel. Nobody expected the metal to rise to its current price on the LME, much less stay there.

The top four companies in the nickel market reportedly have 65% of supply and most of the big projects. I suspect that’s far from where they would like to be.

According to a report by Citibank, the world’s biggest nickel producer is Brazil’s Companhia Vale do Rio Doce (RIO), which acquired Inco Ltd last year. Russia’s Norilsk Nickel is second, followed by BHP Billiton and Xstrata.

Xstrata’s objective in acquiring Lionore is to secure a greater source of future supply. The Toronto listed Lionore expects to boost production by 40%, becoming the world’s 10th largest producer.

Nickel looks to be bulletproof: Despite a selloff in other base metals, its price has rallied 62% since the start of the year, peaking at US$48,500 per ton on March 16.

I think there could be a bidding war for Lionore, given its strategic position in the middle of the pack of world nickel producers.

But I also think any near term producer with a strategic land position in Canada’s Sudbury Basin is a good prospect for a takeover. These include FNX Ltd. (FNX.TSX), up better than a buck per share at $24 and change today, and First Nickel Ltd.(FNI.TSX), up a few cents to $1.16 in early trading.

FNX has been a poster boy for Canadian nickel. They snagged some very good projects in Sudbury including the Levack Mine before nickel prices began their dramatic rise, parlaying their portfolio into a multi billion dollar asset. They’ve had very good institutional support from the get-go, and lots of exposure.

First Nickel on the other hand is a more humble play, though it has a lot of nickel at the producing Lockerby Mine and elsewhere in Sudbury.

I’m not saying whether FNI will become a plus $20 stock like FNX: In fact it’s rather doubtful. FNX’s rise has stemmed mostly from the fortunate timing of its debut on the Toronto Stock Exchange and the sophisticated way it built the business, plus the fact it hit sufficient PGM grades to offset the cost of production at Levack. Its taken some years for institutional investors to realize that there are metals other than copper, and when they did finally come to understand the fundamentals for nickel, they bought the poster boy.

First Nickel on the other hand had some real challenges getting the mothballed Lockerby Mine up to speed last year, and hasn’t been as well capitalized.

But I daresay it will be a $3 stock if they keep hitting those high grades at the Lockerby Depth Zone, with the potential to go higher if management doesn’t sell out prematurely.

That is always a concern in this market. The handful of insiders with all the cheap voting shares are always tempted to take first offer after years of patience and diligence and hard work. The majors know this and exploit it to the full.

The wise investor at this point must calculate how much faith he or she has in the integrity of the guys running the show.