26/02/2013 - 08:26

Analysis: BHP Billiton’s convenient nickel discovery

26/02/2013 - 08:26


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Psst! Wanna buy a second-hand, slightly shop-soiled nickel mining business? If you do here’s the tip, call Andrew Mackenzie, the new guy in charge at BHP Billiton and he’ll make you an offer you can’t refuse.

If anyone thinks that sounds like a badly-written scene from a movie about mining and money they are forgiven, though if you take the time to look at recent events at the top end of the resources sector you will see the reason why it has the appearance of a used car yard.

New chief executives at BHP Billiton and Rio Tinto mean that it’s spring-cleaning time for the two companies which control the lion’s share of WA’s mining industry.

Fire sales, or the closest equivalent in the corporate world, are being organised but, as with all such events it will be very much a case of “caveat emptor” – a Latin expression which all shoppers should keep in mind when visiting the bargain basement: “let the buyer beware”.

There are two reasons for being wary about reports of BHP Billiton preparing its nickel division for sale, one ancient and one modern.

The ancient example, which includes an enormous clue to the modern, was in the exploration section of the annual report of Rio Tinto some 15-or-20 years ago which featured a glowing reference to a copper project that I had never seen mentioned before.

Curiosity piqued a call was placed to Rio Tinto’s public relations department to see if there was more detail available on what was said to be a wonderful discovery.

“Oh that,” came the reply. “That’s for sale”.

What Rio Tinto had done was what all sellers of assets do. Dress them up in their Sunday best, parade them to the widest audience possible and encourage bids. It’s why cars in second-hand yards are so well washed.

BHP Billiton’s nickel division is showing the hallmarks of a second-hand car as it is spruced up and promoted despite having a few million miles on the odometer and a track record of rising losses, including another $US205 million in the December half which followed a $US355 million impairment charge (write-off) in the last full year accounts to June 30.

Despite the heavy losses, caused largely by old mines battling a low nickel price, BHP Billiton is talking up the value of Nickel West, the business which retains the company’s WA nickel assets left-over after it closed and then sold its Ravensthorpe operations two years ago.

A glimpse of the sale process which is underway, and what caused a flash-back to the Rio Tinto sales technique is on display today with what seems to be a well-sourced story about BHP Billiton making a significant nickel discovery adjacent to its Leinster mine, north of Kalgoorlie.

No assays, and no detailed drilling results are contained in the report carried by The Australian newspaper, though an unnamed BHP Billiton source described the Venus discovery as having “high nickel grades and proximity to existing infrastructure”.

The BHP Billiton source added that Venus has the “potential to materially increase Nickel West’s mining inventory and reshape the profitability and direction of the Nickel West business”.

Really? Because if that’s the case why has Nickel West been dumped into a BHP Billiton division called Aluminium and Nickel which just happens to feature the two worst performing divisions of the company with both showing all the signs of being quarantined from the more profitable parts and available for sale, or for floating off as separate businesses.

The important question for buyers, whether of the entire aluminium and/or nickel divisions, or shares in a float, is why bother?

Prices for both metals are depressed and look like staying that way for some time. The global aluminium market is grossly over-supplied, and the nickel market damaged by cheap, low-grade ore, shipped directly to China from Indonesia and elsewhere.

As for Nickel West and other nickel assets in Colombia being valued, as reported, at $US4 billion in a spin-off to existing BHP Billiton shareholders, or as an outright trade sale, the issue comes back to whether the nickel division can make a profit because that’s the best way to value any business.

And then there’s the Leinster discovery itself, code-named Venus, about which BHP Billiton is yet to file a formal report to the stock exchange, perhaps because it is not material to the company’s share price and perhaps because a lot of detail seems to have already been leaked, including the length of the find (300 metres) and the number of drill holes (21 in total) with 20 said to have intersected high-grade nickel sulphide mineralisation.

If Venus had been discovered by a smaller company, and a story as detailed as that leaked without a report lodged with the ASX, its shares would almost certainly have been suspended and “please explain” demands lodged by the corporate cops.

Interesting as the Venus discovery story is in The Australian newspaper (and well done to the reporter for getting it) there is a much bigger story behind why it was leaked, why the discovery has not been reported to the stock exchange, and what effect the discovery will have on the value of Nickel West, a business routinely reported to be for sale.




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