No bounce yet if nickel is a guide

CRITERION: Tim Boreham | April 01, 2009

HERE'S a theory for the optimists: as a leading indicator of demand, nickel is always the first commodity to tumble and the first to recover when economies start to tick over again.

The metal -- used mainly for stainless steel -- has certainly done the tumble bit, having retreated from a $US35,000 ($52,000) a tonne high of a year ago to about $US9660 a tonne at the time of going to press.

While global demand is forecast to remain subdued, the question is whether recent mine closures will go far enough to equalise the supply-demand balance.

More than a few players have got themselves into a nickel pickle, the most embarrassing being BHP Billiton's mothballing of its $3.2 billion, 50,000 tonne a year Ravensthorpe facility in Western Australia. Oz Minerals also has closed its acquired Avebury mine in Tassie, removing another 8000 tonnes. Norilsk has closed five mines here and abroad, accounting for a further 41,000 tonnes.

Our very own Albidon (ALB) called it quits last month by putting its low-grade Zambian Munali mine on care and maintenance.

An eternal optimist, Criterion sought to identify a half dozen or so nickel miners that are reasonably placed for when prices recover. It's a tough ask, but Mincor (MCR) chief David Moore presents a reasonable case that his company -- the third biggest local miner with two mines in Kambalda -- is well-placed to weather the slump.

Mincor has no debt and is sitting on net working capital of $79 million, which compares with its $120million market cap.

Mincor posted a maiden December-half loss of $22.27 million, dragged down by $17.3 million of non-cash write-downs and $9.3 million of provisional pricing adjustments.

Despite mothballing its flagship high-cost Miitel mine, Mincor produced 8976 tonnes of nickel in the December half and expects to do 16,500 tonnes to 17,500 tonnes in the full year. That's a lot of the stuff by any measure, but of course the imperative is to ensure profitable production.

On this note, Mincor has reduced cash costs from $5.76 a pound in the December half to $5.19 in January and February (spot nickel is trading about $US4.40 a pound).

Western Areas (WSA) retains a fan base because of the high grades at its Forrestania sulphide deposit in WA. This month the miner opened its own nickel concentrator, thus freeing itself from Norilsk's facilities up the road.

Western Areas also struck an offtake deal to sell 10,000 tonnes of concentrate a year to BHP Billiton, which will stump up $45 million funding.

The agreement is part of a two-pronged plan to lock in long-term revenues through the BHP contract and short-term income through another deal, yet to be announced.

Mincor's Moore says only a brave person would predict the nickel price.

"I just have no idea, but in the medium term it's hard not to be bullish when you look at the level of production cutbacks around the world and the ongoing difficulties laterite nickel miners face," Moore says.

According to Moore, most of the known nickel resources are laterites, rather than sulphides. Although laterites are closer to the surface, they are more expensive and difficult to process.

It's no coincidence that most of the problem nickel mines -- including Ravensthorpe and Murrin Murrin -- are laterite deposits.

Before we can get at all excited about nickel's recuperative powers, we need a price catalyst. With global stockpiles of 100,000 tonnes -- 8 per cent of global demand -- we sadly conclude the metal is unlikely to rally in a hurry.

borehamt@theaustralian.com.au

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