19/03/2015 - 13:47

Would Forrest consider a return to nickel?

19/03/2015 - 13:47

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It might be bold to suggest that Andrew Forrest consider a career change, but as his fortune shrinks and as his iron ore business struggles in a flooded market, there is a nickel deal to be done that could be a lot more fun than playing the role of fading star.

Would Forrest consider a return to nickel?
Fortescue Metals Group chairman Andrew Forrest.

It might be bold to suggest that Andrew Forrest consider a career change, but as his fortune shrinks and as his iron ore business struggles in a flooded market, there is a nickel deal to be done that could be a lot more fun than playing the role of fading star.

Nickel West, an unwanted division that BHP Billiton has failed to sell, and which also failed to be offloaded into its South32 spin-off, might turn out to be hidden gem, especially under new management with a taste for high risks and potential high rewards.

Mr Forrest, who debuted as a wheeler-dealer in the 1990s as the man behind Anaconda Nickel, would be a perfect new owner of Nickel West because nickel promises to be a lot more rewarding than iron ore over the next few years.

A blizzard to recent events is pointing to Nickel West making a return to the headlines, not least because iron ore is doomed to spend a decade in the dog house, but also because the South32 spin-off has produced some interesting nickel asset values.

What’s happened is that BHP Billiton has split its nickel assets into two parts – the wanted and the unwanted. The Cerro Matoso project in Colombia has been put into the South32 spin-off, while Nickel West has been shunted to one side, waiting for a buyer, or closure.

That treatment means that Nickel West seems to be a business with a limited future, partly because it requires high maintenance and repair costs, and a management team with capital and drive.

It also might mean that someone could acquire Nickel West at a bargain basement price and use it to act as a consolidator of a large number of nickel assets scattered across Western Australia’s eastern Goldfields.

While unquestionably an old business it is also a big business, with the potential to produce more than 100,000 tonnes of nickel a year thanks to its combination of mines, offtake deals with third parties, a smelter and a refinery – and that’s before considering the question of exploration potential.

Other factors that might be making Nickel West more attractive include the outlook for nickel relative to the outlook for other minerals and metals, especially iron ore, and the yawning gap in valuations recently assigned to Cerro Matoso in the South32 spin-off.

According to independent experts working on South32, Cerro Matoso, which is much smaller than Nickel West, is worth between $US529 million and $US670 million, with a “preferred” value of $US593 million.

Interestingly, not everyone agrees with that value, including analysts at the US investment bank Citigroup, who reckon Cerro Matoso is worth $US1.036 billion – close to double the value from the independent experts.

It’s the Citigroup value on Cerro Matoso that throws fresh light on Nickel West because both projects are in the same business, nickel mining, with one is being formally valued as part of a spin-off process while the other is sitting in the BHP Billiton departure lounge.

There’s a deal brewing somewhere there, and it’s a deal that has the following ingredients.

• Nickel West is available, at the right price; perhaps even a low-ball offer to complete the clean-up process BHP Billiton has started with the South32 spin-off.

• Outsider experts at Citigroup value nickel assets at double the price of experts working for BHP Billiton on the creation of South32.

• Nickel is seen as one of the few bright stars in a rather dull mineral world.

• Iron ore has crashed, but might have further to go before it settles as a ‘new normal’.

• Mr Forrest has seen his fortune devastated by the iron ore crash, and while it’s late in the day for a change there is an opportunity to be involved in an asset with growth potential.

A few numbers help understand the changing nature of the WA mining industry and why a break-out strategy might make sense for anyone stuck in a relatively high-cost iron ore business, which is also carrying large debts that need refinancing.

Fortescue Metals Group, the company that made Mr Forrest famous, is a shadow of its former self, plunging in value from $20 billion as recently as four years ago to around $6 billion today – a fall that has cut Mr Forrest’s fortune by around 70 per cent, to $2 billion.

As Fortescue fades, South32 is rising, tipped to be valued at $22 billion when it lists on June 2, becoming WA’s third biggest listed company, and pushing Fortescue further down the queue.

The missing billions (corporate and personal) will be annoying Mr Forrest, but being overtaken in the blink of an eye by a new Perth-based mining company will be even more irritating.

It might be late in the day, and perhaps too late, but there is a lot going for nickel as a revival metal for WA, and Mr Forrest.

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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