When will the nickel killing let up?

BHP Billiton's financial year to 30 June 2009 already has a USD 3bn nickel headache, highlighting the agony of a metal in transition.

JOHANNESBURG - 

What is it about nickel? The recent announcement that BHP Billiton has sold its Yabulu, Australia, nickel-cobalt processing unit for an undisclosed sum, and taken a carrying value write-down of some USD 500m, plus a further estimated USD 175m of unrecoverable tax benefits, has again put the spotlight on one of the world's most trashed up commodity subsectors, the only one that has caused any real kind of a headache for the world's biggest diversified resources group.

On 21 January 2009 BHP Billiton had already announced the indefinite suspension of the Ravensthorpe nickel mine, Australia, and halted processing of the mixed nickel cobalt hydroxide product at Yabulu. The impairment charge and increased provisions for rehabilitation of USD 3.36bn (USD 1bn tax benefit) were recognised for the half-year ended December 2008. Ravensthorpe, a relatively new mine, cost AUD 3bn to build.

The closure of Ravensthorpe rendered Yabulu non-core for BHP Billiton, with Yabulu left at the top north east part of the continent processing materials from offshore third parties. During the second half of calendar 2008, total underlying EBIT (earnings before interest and tax) for Ravensthorpe and Yabulu was, indeed, a loss of USD 233m. BHP Billiton also runs the so-called "Nickel West" assets, in Western Australia, which include its own Mt Keith and Leinster mining operations, Kalgoorlie nickel smelter, and Kwinana nickel refinery.

Acquired as part of the WMC acquisition in June 2005, Nickel West ranks as the world's third largest producer of nickel in concentrate, including material taken in from third parties. It ranks as a fully integrated nickel business, with mines, concentrators, a smelter and a refinery. Nickel ore from Leinster and Mt Keith is concentrated on-site; the combined concentrate product is transported by rail and mixed with concentrate from BHP Billiton's Kambalda concentrator at its Kalgoorlie smelter. By now, it's possible that nickel is no longer regarded as a core area for BHP Billiton.

More broadly, for those on the wrong side of the nickel story over the past five years, tens of billions of dollars have been lost. Nickel prices zoomed upwards after the onset of the so-called commodities supercycle, commencing early in 2002, and peaked prematurely, near USD 25.00/lb, in mid-2007, given that most other commodities peaked around mid-2008. Nickel hit USD 4.00/lb during some of the darkest days of 2008, and has since recovered to over USD 7.00/lb, continuing to unleash wreckage on nickel diggers across the world.

The pain for nickel miners has been significant, from the top five producers, Norilsk, Vale, BHP Billiton, Xstrata, and PT Aneka Tambang, to the smallest names, such as Australia-based Albidon, which has all but disappeared behind the smoke of its Zambian development, Munali, despite its relatively high grade orebody.

PT Aneka Tambang, one of the world's best endowed nickel names, posted profits of INR 54.7bn for the first quarter of 2009, representing a 94% fall from the INR 936.9bn recorded for the first quarter of 2008. Sometimes, the compression, and then destruction, of profits in the nickel subsector is difficult to comprehend.

During 2008, EBIT (earnings before interest and tax) from Xstrata's Falcondo operation in the Dominican Republic collapsed to USD 76m, a fall nearing 90%, from USD 655m in 2007, "as a result of higher oil prices and the decline in nickel prices".

Falcondo was temporarily suspended in August 2008, and subsequently went into care and maintenance. Xstrata, easily the most acquisitive mining company across the supercycle, was attracted time and again into the nickel cauldron, shelling out USD 18.9bn in cash in 2006 for nickel-copper digger Falconbridge.

Xstrata continued its belief in nickel into 2008, paying USD 2.9bn in cash for Australian nickel specialist Jubilee Mines. Xstrata's EBIT from nickel already collapsed from USD 2.2bn in 2007 to just USD 341m in 2008; beyond Falcondo, Xstrata has taken a number of drastic steps in its nickel division.

As nickel market leader, at least in production, Norilsk posted a loss of USD 555m for 2008, a dramatic fall from the USD 5.3bn profits declared for 2007. Norilsk's copper output provided something of a buffer, given the way that copper prices have managed to maintain a semblance of reality during the downcycle, but insufficient to even neutralize the collapse in nickel profits.

Nickel, the world's fourth biggest base metal after aluminium, copper and zinc, about two-thirds of which is used in the fabrication of stainless steel, attracted some of the most overpriced mergers and acquisitions seen during the commodities supercycle. In 2007 Norilsk outbid Xstrata for LionOre, paying USD 5.8bn in cash for operations that today are mainly under care-and-maintenance. Vale, the world's No 2 miner by market value, outbid Xstrata in 2007 for Inco, paying USD 18.9bn in cash.

Vale's biggest division is, of course, its ferrous division, which houses iron ore, where it ranks No 1 in the global seaborne trade, plus manganese and ferrochrome. The Inco deal was aimed at substantially enlarging Vale's non-ferrous division, which already produced an array of base and other metals, and minerals.

The net result for Vale's non-ferrous division has been a disaster for the first quarter of 2009: EBITDA (earnings before interest, tax, depreciation and amortisation) crashed to USD 155m, compared to USD 1.8bn for the first quarter of 2008. Much like Rio Tinto, Vale was largely held together by strong results from its iron ore division.

In April, Vale announced "further steps" to adjust its nickel production "to the evolution of global demand". Vale has decided "to slowdown the conclusion" of the USD 1.5bn Onça Puma nickel project, state of Pará, Brazil, previously scheduled to come on stream in January 2010, with a nominal capacity of 58,000 tonnes of nickel in ferronickel. "Given that an environmental permit is still pending", stated Vale, "the start-up of Onça Puma will be postponed by at least one year".

Vale has also shuttered for eight weeks, to July 27, its nickel mining and processing facilities at Sudbury, province of Ontario, Canada, following a previously planned "normal maintenance period at the Sudbury plants during May". Canada ranks as No 2 primary nickel digger, after Russia.

At the Koniambo ferronickel project, New Caledonia, a joint venture between Société Minière du Sud Pacifique and Xstrata Nickel, first nickel production at the USD 2.2bn project was projected for 2010; now, however, following a "re sequencing", the Koniambo implementation timeline has changed.

The first ore is planned to be processed during the first half of 2012 and target ramp up is expected to reach full annual production of 60,000 tonnes of nickel in ferronickel within the following two years. Like a number of other nickel deposits, Koniambo has been described as "one of the world's largest and highest-grade undeveloped nickel laterite deposits".

At Vale Inco Nouvelle-Calédonie (previously known as Goro nickel), Vale started up production in early 2009 from low grade nickel laterite ores. The project cost USD 3.2bn, with scheduled production of around 60,000 tonnes a year of nickel, and about 5,000 tonnes a year of cobalt. Vale holds 69% in the Nouvelle-Calédonie project; the three provinces of New Caledonia hold a 10% stake, via Société de Participation Minière du Sud Calédonien, and Japan's Sumitomo Metal Mining the balance of 21%.

Sherritt, meanwhile, has announced refinancing (again) for Madagascar's 40%-held Ambatovy project, with other partners, Sumitomo Corporation (27.5%), Korea Resources Corporation (27.5%), and SNC-Lavalin Inc (5%).  The multi billion dollar project has been designed for annual production of 60,000 tonnes of nickel, 5,600 tonnes of cobalt and 190,000 tonnes of ammonium sulphate. Mechanical completion of the project is "on schedule for the latter part of 2010". Located in Madagascar, Ambatovy is described as "a world-class, large tonnage nickel project that is positioned to be among the world's biggest lateritic nickel mines".

Few of these huge new, or developing, nickel mines are endowed with the kind of grades that can survive a protracted period of traumatically lower prices. A good number of the highest grade nickel mines/deposits are located in Australia, where Western Areas ranks as one of the best-placed entities in the nickel space, inside and outside Australia.

The big deal at Western Areas, for now, hinges around costs. In its most recent financial report, Western Areas remarked that "the single most important outcome from the half was the December [2008] quarter reduction in cash costs at Flying Fox to USD 1.36/lb nickel in concentrate, probably the lowest in Australia". Independent analysts put the all-in cost at Western Areas at around USD 3.00/lb, giving the stock the characterisation of bombproof.

Western Areas, as such, dates back to December 1999, and was listed in Australia in July 2000, with a focus on exploration for nickel massive sulphide projects, in turn multiple exploration projects in Australia, where the company is still involved, not least Mt Alexander, Mt Jewell and Koolyanobbing.

Western Areas owns 18% of Mustang Minerals Corp., 75% of AOA Kola Mining and 78% of Polar Gold. But Western Areas acquired its now-core asset, Forrestania, in 2002 from Outokumpu and grew there through exploration successes, including discovering completely new deposits and finding significant extensions at previously mined deposits. Western Areas is one of the very few nickel names that has been able to raise fresh equity.

Ultimately, nickel is a metal in transition. Traditionally, around two-thirds of primary nickel has been taken up by makers of stainless steel. Sky high nickel prices may have peaked in 2007, but not before engineers and designers found ways to start substituting low-nickel, duplex, or ultrahigh-chromium stainless steels for austenitic (nickel rich) grades in a growing number of construction applications.

Nickel-free specialty steels have increasingly been used as substitutes in the power generating and petrochemical industries. If that was not enough, titanium alloys and also specialty plastics have been substituted for nickel metal or nickel-based alloys in highly corrosive chemical environments. Further, it has been observed that cost savings in manufacturing lithium-ion batteries allow open competition, in certain applications, against nickel-metal hydride (NiMH) units.

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Manipulation Nickel was knocked down to allow the Chinese to exchange dollars for it at great prices. If you notice, Treas Secy Paulson was over there a few weeks before the scheme to knock down all commodities was put into effect in early 2008, so the . .more Chinese could use their dollars to buy things with real value. And look at what just happened days after Geithner came back from China this year. Another downward manipulation in commodities for their benefit. . .less by DanC on July 09 2009, 01:49 Find this comment inappropriate? Report it

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