Nickel diggers: pickled and minced

Albidon's request for a trading halt on Friday reflects the brutalized condition of so many nickel assets around the world.

JOHANNESBURG -

The trading halt requested on Friday by African nickel miner Albidon highlights the devastating and ongoing hammering being taken by so many mining companies, aggravated, as in Albidon's case, by a severe lack of standing capital or cash. The pain at Albidon is compounded by exposure to one of the most damaged of commodity prices. Dollar nickel prices are looking for fresh six year lows, having declined from highs of around USD 25/lb during 2007 to current levels of some USD 4.33/lb.

A selection of 32 listed stocks specialising in nickel production shows a weighted fall in market value from highs seen during 2008 of USD 109bn to a current number of USD 18.2bn, a fall of 83%. The market value of Norilsk Nickel, the global production leader, which also produces impressive volumes of byproduct such as palladium, where it is world leader, and platinum, has collapsed from a high of USD 60bn to USD 9.3bn, but has been as low as USD 6.7bn.

Norlisk, however, remains among the least indebted of major miners, and also benefits from flexibility at its giant metals combine in Siberia. For far smaller developers, such as Albidon, the escape routes are limited. As recently as 30 January, Albidon announced that it had reached agreement in principle for up to USD 26m in funding from Pacific Road Resources Funds, a large private investment fund specialising in investing in mining projects worldwide. Friday's halt request indicates that the deal may have fallen through; in any event, Albidon's stock price is down 99% from its highs, with a current market value of just USD 8M.

Sherritt, an erstwhile popular stock, has hit one wall after another with its Ambatovynickel project, in which Sherritt holds 40%, in Madagascar. This month, Sherritt referred to an updated cost study for Ambatovy, with a new number of USD 4.5bn, on a 100% basis. On 31 December 2008, Sherritt reflected long-term and similar liabilities on its balance sheet of CAD 2.5bn, and cash of CAD 500m. Following net earnings of CAD 370m in 2007, Sherritt's net turned out at a loss of CAD 290m for 2008.

Sherritt's market value is down at USD 478m, nearly 90% off its long lost highs. But it seems that gloom and doom is not a totality in the global nickel sector. European Nickel, with a relatively modest market value of around USD 45m, managed to pull off an exceptional offtake transaction, among others, earlier this month. Chinese partners Jiangxi Rare Earth and Rare Metals Tungsten Group Company and China Tianchen Engineering Corporation agreed, in return for certain undertakings, to arrange a guaranteed USD 350m debt facility for European Nickel.

The world leaders in nickel production, after Norilsk, rank as Vale, BHP Billiton, andXstrata, all diversified producers, followed by PT Aneka Tambang, possess very different profiles. In general terms, it can be said that some heavy premiums were paid for nickel assets and companies during the co-called commodities supercycle from 2002 to 2008; huge amounts were spent developing assets over the cycle.

On 21 January 2009, BHP Billiton announced the indefinite suspension of the Ravensthorpe nickel operations in Australia, and the halting of processing of mixed nickel cobalt hydroxide product at Yabulu. As a result, an impairment charge and increased provisions for rehabilitation of USD 3.4bn were recognised by BHP Billiton for the half-year ended December 2008. While this kind of negative news has been rare for BHP Billiton, the magnitude of the impairment remains impressive, even for the world's biggest diversified resources stock.