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BHP seeks good value in nickel

When BHP Billiton Ltd officially opened its Ravensthorpe nickel mine last week, many pundits focused on the cost blow-outs that hit the project, but industry insiders reckon the development looks like good value in the current environment.

The pricing of two recent nickel acquisitions - that of Jubilee Mines Ltd by Swiss-based Xstrata plc, and Allegiance Mining NL by Zinifex Ltd - make Ravensthorpe look relatively cheap, some believe.

BHP has spent $2.2 billion, up from the original estimate of $1.1 billion, establishing a mine it hopes will produce 50,000 tonnes of nickel a year by 2010.

With a resource of 2.4 million tonnes of nickel grading at 0.62 per cent, BHP expects the mine to have a lift of at least 25 years.

By comparison, Xstrata paid more than $3.1 billion for an operating mine that produced 8,633t of nickel last financial year, along with plans to increase production to 30,000tpa by 2012.

Jubilee's resource was 460,000t of nickel at 0.82 per cent.

Zinifex spent more than $850 million buying Tasmanian producer Allegiance, gaining 8,500tpa in production.

The difference in valuation may be valid given the established track record of Jubilee and Allegiance, whereas BHP has to prove-up its laterite production capacity at Ravensthorpe.

The difference may also reflect varied production costs.

In its last annual report, Jubilee said its production cost was $US4 per pound, while Zinifex estimated Allegiance's costs at $US3/lb.

Argonaut analyst Paul Carter said another comparison would be with laterite nickel specialist Minara Resources Ltd, which has a market capitalisation of $2.5 billion based on production forecast to be 30,000tpa of nickel.

Mr Carter said nickel was proving better value than gold at current prices, when it came to ore in the ground, even after coming off last year's highs of around $US50,000 per tonne.

While the current price of nickel has since more than halved to around the $24,000/t mark, it is still significantly more than when BHP first signed off on the Ravensthorpe project in 2004, when nickel prices hovered around the $14,000/t figure, according to metals market watcher Kitco.

At full capacity, the project is expected to fill around 800 sea containers each month with nickel concentrate. Each container is worth $A150,000 at today's prices, a BHP spokesperson said.

Currently the project is operating at 35 per cent of full design capacity.

The mixed hydroxide product is then shipped to the company's Yabulu refinery in Townsville on the BHP-leased ship Spirit of Esperance, where it undergoes further processing.

While the project is still in the ramp-up phase, BHP's stainless steel division head Jimmy Wilson said there was potential to further expand capacity at Yabulu, which was currently at 75,000t.

"We would cement down what we're doing now and make those considerations then," Mr Wilson said.

However he was coy with any expansion plans at Ravensthorpe.

"I think the job here for the team is to get the facility running at the 50,000 tonne mark and after we've done that sustainably for a while, we'll consider further opportunities."

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BHP Billiton (BHP)

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