A nickel nugget in the spotlight

Could Australia's Western Areas be "the next" LionOre and/or Jubilee Mines, bought in 2007 by Norilsk and Xstrata for $5.5bn and AUD2.7bn, respectively?

Author: Barry Sergeant
Posted: Thursday , 07 May 2009

JOHANNESBURG -

Now that some dust is starting to settle around the crisis that has swept over nickel miners around the world for nearly two years, some specialist investors are asking whether Australia's Western Areas could be "the next" LionOre and/or Jubilee Mines. The latter two stocks were taken over in 2007 by Russia's Norilsk (the world's No 1 nickel miner) and Xstrata, for $5.5bn and AUD2.7bn, respectively.

Nickel prices famously traded close to $ 25.00/lb during 2007, before a precipitous decline to multi-year lows of less than $ 5.00/lb seen during the past six months, but recovering recently to around $5.90/lb. Nickel, a relative junior among base metals after aluminium, copper and zinc, has notoriously long held the reputation of being the most price-sensitive of all base metals, if not commodities generally.

Demand for the metal is also notoriously narrow, being hostage to levels of activity in the global stainless steel sector, which has, separately, never shown any hesitancy in searching for nickel substitutes. And then there is the issue of low grade nickel ores out of Indonesia that become economic above certain higher prices, and flood the market.

With a severe supply-demand imbalance tracing back to 2007, the situation for nickel was aggravated by a general wipe out in most markets, a phenomenon which appears to have peaked around October and November 2008. In the aftermath miners of all kinds have implemented many variations of cash conservation measures, not limited to curtailments, and delays on new projects and exploration, but in some cases including closures.

Not least among these, it was on January 21 2009 that BHP Billiton, the world's biggest diversified resources company, 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 $3.4bn were recognised by BHP Billiton for the half-year ended December 2008.

The survivors have benefited from production cuts. It has been said that Western Areas has a low profile outside Australia, a mining jurisdiction where nickel projects and mines have a somewhat controversial history. The big deal at Western Areas, for now, hinges around costs. In its most recent financial report, Western Areas remarked that "the single most important outcome from the half was the December [2008] quarter reduction in cash costs at Flying Fox to $1.36/lb nickel in concentrate, probably the lowest in Australia". Independent analysts put the all-in cost at Western Areas at around $3.00/lb, giving the stock the characterisation of bombproof.

Western Areas, as such, dates back to December 1999, and was listed in Australia in July 2000, with a focus on exploration for nickel massive sulphide projects, in turn multiple exploration projects in Australia, where the company is still involved, not least Mt Alexander, Mt Jewell and Koolyanobbing. Western Areas owns 18% of Mustang Minerals Corp, 75% of AOA Kola Mining and 78% of Polar Gold. But Western Areas acquired its now-core asset, Forrestania, in 2002 from Outokumpu and grew there through exploration successes, including discovering completely new deposits and finding significant extensions at previously mined deposits.

Calendar 2008 marked Western Area's first full year of production at its high grade Flying Fox operation, where output was some 18m pounds of nickel at average cash costs of about $2.11/lb. Western Areas continues to grow, with the target of reaching output of around 75m pounds a year by 2011.

The Spotted Quoll deposit, also within Forrestania, ranks as one of the highest grade nickel deposits in the world containing, as known to date, 2m tonnes of ore at 6.2% nickel, equating to some 275m pounds of contained nickel. Spotted Quoll is shallow; independent analysts reckon it could be initially brought online as an open pit deposit, with an initial capital requirement of only about $15m, allowing Western Areas to increase production to 75m pounds of nickel without perhaps a single call to shareholders or banks, if any banks are still out there.

On the public record is the charming information that Western Areas has discovered hundreds of millions of pounds of contained nickel in one of the highest grade deposits in the world, and one where the geology is quite friendly. In the past five years Western Areas has increased its resources by at least 25% each year, with significant potential still remaining. After all, Western Areas has only explored three of the nine prospective lava channels on the 25km long western nickel belt at Forrestania.

By now some kind of balance appears to have been restored within the global nickel mining subsector. Over the past month, listed nickel miners have almost been the most heavily purchased, second only to zinc miners, among global mining subsectors. If grade is king, Western Areas appears to rank as natural royalty. The longer term picture for Western Areas appears consistent with its remarkable progress: the stock could have been had for around AUD0.20 a share in 2002, and then peaked close to AUD12.00 a share during 2008, before ploughing down to AUD2.46, and recovering to current levels around AUD5.30 a share.

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