With nickel trading in the first quarter at prices unseen since 1989, it shouldn't come as a major shock that Canada's Inco (NYSE:N) had a good Q1.

Although production and deliveries of nickel were actually down 4% compared with last year, higher nickel (and other metal) prices still led the company to post a 2.5% sales gain. What's more, Inco is like most miners with respect to having high operating leverage, so that relatively modest sales growth translated into net earnings growth of about 23%.

For the quarter, Inco produced about 122 million pounds of nickel, 67 million pounds of copper, and about 112,000 ounces of platinum group metals. What's more, the company is ahead of schedule with its Voisey Bay nickel mine. When this mine goes online in 2006, Inco management believes the company will be in position to produce more than 540 million pounds of nickel for the year and generate in excess of $1.6 billion in cash.

Readers who follow the Fool's stories on metals and mining are probably thinking, "Isn't the bloom already off the rose?" or "Isn't steel already starting to stall out?" Well, remember basic Metallurgy 101 -- nickel is not steel.

Although nickel and steel often travel together (and nickel is a key ingredient in stainless steel), they aren't locked at the hip or at the cash offer price. In fact, Inco management laid out three reasons why it believes nickel prices could remain strong for quite some time.

First, and not surprising to anybody, is the China factor. China has increased its nickel consumption by 20% a year for five straight years, and for the first two months of 2005, Inco management claims that Chinese nickel demand doubled over the prior year. To put this in historical perspective, consider that Japan's economic modernization boosted global nickel demand by 3% a year for roughly 14 straight years; China is much larger now than Japan was then.

Secondly, Inco management is seeing a recovery in demand for high-nickel alloys. Aerospace in particular is a big consumer of high-nickel alloy products, and new planes like the Airbus super-jumbo jet simply can't be built without large amounts of nickel. So as long as Airbus and Boeing (NYSE:BA) continue their recoveries, demand for high-nickel alloy should stay strong.

Finally, there's the issue of supply. Every nickel producer in the world is running at or above stated capacity, and there are just not too many new projects under way (and Inco has two of those at Voisey Bay and Goro) that will add a lot of new supply capacity around the world.

While I'm not going to pound the table on the prospect for nickel or Inco, I would point out that despite historically high nickel prices, Inco's stock really hasn't gone anywhere for the past year and a half.

Given that Inco's earnings are extremely sensitive to movements in nickel prices and the Canadian/U.S. exchange rate, investors with particular beliefs about either or both of those variables might want to look at Inco as an investment vehicle for those notions.

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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).