Mining industry observers predict that the surging nickel price behind rocketing profits for the metal’s mid-cap producers will remain at record high levels for the next 12 to 24 months, with a round of consolidation in the sector on the horizon.
Mining industry observers predict that the surging nickel price behind rocketing profits for the metal’s mid-cap producers will remain at record high levels for the next 12 to 24 months, with a round of consolidation in the sector on the horizon.
The collective profits made by six of Western Australia’s biggest nickel producers surged by 476 per cent to $465.6 million in the six months to December 31. Minara Resources Ltd headed the pack with an 800 per cent increase in net profit after tax to $238 million as the nickel price soared more than 35 per cent from $US22,275 per tonne to $US34,205/t.
In July 2003 the nickel price stood at about $US8,450/t and reached more than $US42,000/t this week.
Jubilee Mines Ltd also enjoyed the benefits of bumper production, posting a net profit after tax $107.6 million in the first half, up 362 per cent and more than the $103.4 million it posted for the 2005-06 financial year.
Mincor Resources Ltd also eclipsed its 2005-06 result in the six months to December 31, posting a $37.2 million profit compared with $29.3 million recorded during the past financial year.
Argonaut Securities resources analyst Troy Irvin expects the nickel price to remain high for the next two years due to a lack of new supplies.
“They’ve [the producers] really got a two- to three-year window before any major supply comes in,” Mr Irvin said.
BHP Billiton’s $2.8 billion 50,000t a year Ravensthorpe project, which has been hit by cost blow-outs and delays, is expected to start producing nickel in early 2008.
Production at Inco’s Goro nickel project in New Caledonia, which has also been hit by delays and increasing costs, is not expected to be under way until at least the end of the year.
According to a recent report by The Australian Bureau of Agricultural and Resource Economics, growth in nickel production this year will be absorbed by increasing stainless steel output for China.
It predicts the nickel price to come close to its all-time high in 1988 after accounting for the effects of inflation.
Several nickel miners will share their profit spoils with shareholders this year, but while profits were up a collective 476 per cent, the total percentage increase in dividend payout came in 255 per cent on the same period last year.
Minara’s dividend increased in line with profits but Jubilee’s dividend was up 130 per cent compared with its profit jump of 362 per cent.
Jubilee executive chairman Kerry Harmanis said the dividend was a record for the miner but it represented a slightly lower payout ratio of 36 per cent.
He said this reflected the company’s “anticipated capital requirements going forward with the development of new mines at Alec Mairs 2, Tapinos/Prospero and potentially at Sinclair as well as our increased exploration commitment”.
Sally Malay chose to keep its more than 330 per cent profit in the bag, declaring it would not pay a dividend.
Hartleys resources analyst Andrew Rowell said most companies would be putting money aside for a “rainy day”.
“No-one thinks that the nickel price will stay this high forever,” Mr Rowell told WA Business News.
“I think they’ll put some cash away. In these times it is prudent to work out how you may pay out when there’s a lower price environment.”
Industry watchers believe the ballooning profits will trigger a round of consolidation in the sector in the next 12 months.
Jubilee’s cash and cash equivalents sat at $22.61 million at December 31, up from $47.4 million in 2005. Minara’s cash equivalents for the year ended December 31 was $311 million up from $72 million, while Sally Malay had $41.8 million in cash and cash equivalents at December 31, up from $19.3 million. Mincor’s stash of cash has also grown, jumping from $11.2 million at the end of 2005 to $87.4 million at December 31.
In its half-yearly report, Mincor said it was conducting feasibility studies on three separate nickel projects which, if successful, would take it into another major phase of new mine development.
Argonaut Securities resources analyst Troy Irvin said WA’s mid-cap nickel producers were probably too small in size to arouse the interest of big international players.
“It’s more likely that there will be consolidation in the sector,” Mr Irvin said.
Mr Rowell predicts there could be consolidation among producers with Kambalda projects, which include Mincor Resources, Sally Malay Mining, Independence Group and Consolidated Minerals.
Mr Irvin said it was possible that ConsMin could attract more corporate interest after it recently entered into an elaborate scheme to funnel 60 per cent of its business to a UK private equity fund, Pallinghurst – chaired by former BHP Billiton chief executive Brian Gilbertson – and private coal and energy company AMCI.
Mr Rowell said Western Areas could be a target for Kagara Zinc, which has the rights to explore for nickel around Western Areas’ Flying Fox mine.
Western Areas started producing from Flying Fox late last year.
Mr Rowell said many share prices had a premium priced in and may make a takeover an unattractive option.
