'Dusted Off' - BHPB holds cards close on nickel

Anyone who has been through a takeover knows how unsettling it can be on business and morale.

BHP Billiton would have factored in the potential cost of disruption when it undertook due diligence of WMC Resources and decided to acquire the iconic miner.

After the takeover, BHP has moved the head of its stainless steel division, Chris Pointon, to Perth from London and created a new nickel identity, Western Nickel, to ameliorate transition pains for WMC’s nickel division.

The move is of particular interest in Kalgoorlie, where talk circulates about who will leave the local operations, even though BHP would like to keep the operational workforce together.

Although there has been no sign of a mass exit, key people will inevitably leave – at the very least those who feel loyalty to the former management, most of whom have lost their jobs.

And, as is so typical in the mining industry, that team will end up reconfiguring at some other mining company.

But it is unclear whether BHP’s headquartering of nickel in Perth was undertaken to contain potential costs or was an indication of the value BHP places on nickel.

I remain uncertain because I have come across an interesting presentation BHP’s former head of stainless steel, Mike Salamon, delivered in 2000 to the Salomon Smith Barney World Nickel Congress titled ‘Nickel – Running hard for little reward?’

The presentation explored the question of whether “high demand growth in our industry implies also that investors in the industry are well rewarded”.

Mr Salamon came to the conclusion that nickel projects are capital intensive and high risk, and the financial hurdles for greenfields projects are particularly challenging.

“Similar to most capital intensive resources businesses, the nickel industry works its projects hard, continuously innovates and continuously reduces costs,” Mr Salamon said.

“It is also blessed with a demand growth rate typically double that of other metals.

“Yet it rewards its investors, at best, moderately and fails miserably in terms of stock market ratings.”

His message to investors was to be discerning. Just because nickel demand is high does not make every nickel project worthy of investment.

Mr Salamon has been appointed the post-takeover chairman of WMC.

Taking into account the nickel price is almost double what it was in 2000, have his views on nickel changed?

Well, BHP has bought an integrated nickel business, which has been at different times the bane and saviour of WMC’s existence, depending on the price of the metal.

Analysts believe BHP will keep the division running as it is, the only potential change being to extend the Kwinana nickel refinery, which represents a bottleneck. But, overall, it is a mature operation with proven technology and sustainable reserves in Western Australia.

BHP seems also to have moved beyond Mr Salamon’s fears for nickel projects.

The miner has given a green light to a greenfields nickel project at Ravensthorpe, which uses newer high-pressure acid leaching processing technology.

But has the horse already bolted?

BHP also bought a 10 per cent stake in nickel explorer Heron Resources, which owns enough nickel reserves in the Kalgoorlie Nickel Project to attract development interest and capital of world nickel giant, Inco.

Analysts believe BHP regards the shareholding as a blocking stake should Inco wish to take over Heron.

It is also understood BHP had a man on site at the Bulong laterite nickel project, before it was sold in what amounted to a fire sale to LionOre, which is transforming the processing plant to treat nickel sulphides big enough to produce 40,000 tonnes of nickel matte a year.

BHP was, therefore, in a prime position to buy the Bulong project.

Time will tell whether BHP made the right investment choices.

• Based in the Goldfields, Sharon Kemp is a former reporter, most recently with The Age newspaper.