09/07/2013 - 15:43

Not good news on nickel

09/07/2013 - 15:43

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Not good news on nickel

Gold and iron ore are the newsmakers in Western Australia’s mining industry but nickel could be the troublemaker, with most nickel mines now operating at a loss, potentially triggering another round of closures and job losses.

The damage caused by last week’s plunge in the nickel price to a four-year low of $US6 a pound was offset slightly by the falling value of the Australian dollar, which boosted the domestic price to $A6.52/lb.

Price, however, is only part of the problem for nickel miners. A bigger issue is the alarming build-up in stockpiles of the metal, and the prospect of those stockpiles being released into an already oversupplied market.

According to data from the London Metals Exchange, the nickel stockpile in its licensed warehouses has more than doubled over the past 10 months from about 85,000 tonnes to a 10-year high of 190,000t.

Four factors are at work in the nickel business, all negative.

• A flood of low-grade but ultra-cheap nickel ore shipped directly from Indonesia and the Philippines to China where it is processed as ‘pig-iron nickel’ or ‘pig nickel’.

• Declining rates of stainless steel production in China, the major market for nickel.

• Minimal production cutbacks, so far, by traditional nickel miners despite poor levels of profitability.

• The threat of warehoused metal being released in greater volumes as the LME considers rules changes to make more metal available to customers.

The net result of the oversupply of nickel is the depressed price, and the potential for it to go lower as it did in 2008 when the price dipped to a crisis level of $US4/lb.

Back then, as stockpiles were sold off in the panic of the early days of the GFC, LME warehouses held around 70,000t of nickel, but were on their way to 167,000t by early 2010, a stockpile that is significantly less than today.

The damage of the depressed nickel price can already be seen in the share prices of local nickel miners. Panoramic touched a 10-year low of 20 cents two weeks ago but is now trading at around 23 cents. Mincor is back to its GFC low of 51 cents, and Independence is close to a four-year low of $2.54.

The problem for those three Kambalda-focused nickel producers is that the nickel price is either below their cost of production, or close to it.

June quarter costs will be reported over the next few weeks, but in the March quarter Mincor was producing nickel at a cash cost of $A6.79/lb, with a target for the year of A$5.50/lb. Panoramic’s March quarter cost was $A6.20/lb and Independence was $A4.36/lb.

For investors, the issue with the reported costs is that they are so-called C1 cash costs, which do not account for statutory charges, financing and other costs that can lift the true cost by more than 25 per cent.

Also unseen in the current downturn is the financial performance of the two big laterite nickel producers –the Murrin Murrin operation of Glencore Xstrata and the Ravensthorpe operation of First Quantum.

Both of those mines will be feeling the price squeeze, with Ravensthorpe under the most pressure unless it is able to make big cost cuts after reporting a C1 cash cost of $US5.36/lb in the March quarter, which grew to a C3 all up cost of $US6.59/lb.

Clive Palmer is another person watching the nickel price with concern because the would-be prime minister owns the Yabulu nickel refinery in Queensland, a high-cost processing facility that always struggles during periods of low metal prices.

If Yabulu is in trouble it will compound the problem Mr Palmer is having with the Chinese company behind the Sino Iron project in WA, where a bitter dispute over royalty payments has spilled into multiple layers of legal action.

Perhaps BHP Billiton occupies the most interesting position in the Australian nickel industry, with management undoubtedly pleased it sold both Ravensthorpe and Yabulu before the current nickel price downturn, but is now pondering the future of its remaining WA mines and processing facilities.

Nickel is a notoriously cyclical business, but unless BHP Billiton can soon find a buyer for its ageing mines, smelter and refinery, WA’s most important player in the nickel business could have no choice but to mothball its assorted assets and wait for a price recovery for a re-start, or sale.

 

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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