Australia To Protect Its Nickel

- October 20th, 2009

By Kishori Krishnan Exclusive To Nickel Investing News
A crisis of sorts appears to be playing out in Australia, which is the third largest nickel producer, after Canada and Russia. Mining experts have woken up to the fact that Australia needs to protect against potential loss of market overseas.
“Two years ago, we had nickel resources in […]

By Kishori Krishnan Exclusive To Nickel Investing NewsCharging to the fore

A crisis of sorts appears to be playing out in Australia, which is the third largest nickel producer, after Canada and Russia. Mining experts have woken up to the fact that Australia needs to protect against potential loss of market overseas.

“Two years ago, we had nickel resources in this country of 29 million tonnes in-ground,” said Poseidon Nickel‘s chief executive officer, David Singleton.

At the current market rate, that is well over half a trillion dollars worth of nickel already reserved in Australia…a prize well worth protecting and pursuing.

“In Western Australia alone, in 2008, nickel exports were worth A$4.2 billion and were responsible for employing 3,500 people directly,” he added.

The situation appears to have dovetailed thereafter. The global financial crisis impacted construction and transport, major factors in the associated reduction in stainless steel demand and therefore nickel.

Mining trouble

All of Australia’s nickel mines are situated in Western Australia, most in and around the Kalgoorlie-Leonara regions. Most of Australia’s nickel production is exported to Europe, Japan and the United States.

Some of the notable lateritic nickel mines are Murrin Murrin, Cawse, Bulong, Ravensthorpe and Marlborough (in Queensland), as also the Radio Hill mine, Kambalda, Mount Keith, Forrestania and Black Swan mines.

The scenario does not seem to be improving in Australia, where the economic downturn has ensured that several mines have shut shop. In August 2009, BHP Billiton said it would cut another 70 jobs from its Mt Keith nickel mine in Western Australia, following on from 300 job losses at the operation earlier this year.

Chinese capers

Incidentally, WA Premier Colin Barnett said that he knows of at least two Chinese companies that are looking to buy the Ravensthorpe nickel mine. BHP Billiton has been in talks to sell the mine since it was mothballed in January, resulting in the loss of 1,800 jobs.

Barnett said he is optimistic the mine will re-open as long as BHP agrees to a realistic selling price. He said he expects the new buyer would want to start production straight away.

For its part, BHP Billiton has set up a $5 million fund to support the West Australian community it shattered when it abandoned the nickel mine. The assistance from BHP subsidiary Ravensthorpe Nickel Operation was announced in a statement by the West Australian Nationals leader Brendon Grylls on Saturday.

Grylls said the company would contribute $5 million to establish a future fund, matching a contribution made to the community by the WA government in January.

Workers at Ravensthorpe nickel mine learned the operation was closing when BHP called them to a safety meeting on January 21 this year.

The mine, built at a cost of $2 billion, had been forecast to have a life of between 25 and 30 years.

Business owners who had set up in the towns of Ravensthorpe and Hopetoun, on WA’s south coast, faced bankruptcy or financial ruin after the company’s decision.

Cautious on improvement

Things haven’t improved for them. But it does seem to have for some like Australia’s second-largest nickel producer, Minara Resources, which remained cautious about where prices were headed “because inventories are high and stainless steel markets in Europe and the US are soft”.

Minara’s share of nickel production at its Murrin Murrin mine in Western Australia rose 10.92 per cent in the September quarter from the same period a year earlier to 5219 tonnes, it said. Minara said its share of cobalt production rose 18.94 per cent to 452 tonnes in the same period.

But the company warned in its production report of an uncertain outlook for nickel prices. The nickel market improved during the quarter with nickel spot prices ranging from US$ 15,755 per tonne on July 1, 2009, to a peak of US$ 21,070 before closing the reporting period at US$ 17,355, Minara said.

Company scene

Things also seem to have got off the ground for White Cliff Nickel (ASX: WCN) which has commenced reverse circulation (RC) drilling at the gossan area. Significant Komatiitic ultramafic bands have been intersected in each of the first three holes. Though the assay results are pending, the geophysical survey of additional primary targets are to commence soon.

However, managing director of Western Areas (ASX:WSA), Julian Hanna, told conference attendees that while laterites would be needed to meet market demand they would always face high capital costs to establish. He said what the industry needed now was another “world class” nickel sulphide discovery.

“To put this in context, some 40 per cent of global nickel sulphide production comes out of discoveries made as far back as 120 years ago,” he said. “There have been worthwhile and useful smaller discoveries since but not on the scale necessary to sustain smelters in the long term.”

Western Areas is aiming to double its nickel metal output to 20,000 tonnes per annum in calendar 2010. “We are then looking from the end of next year to achieve sustained production at around 25,000 tonnes per annum primarily though our Spotted Quoll and Flying Fox mines on the way to becoming Australia’s second largest and highest grade nickel producer,” Hanna said.

“Our objective is to reach this output performance while maintaining a cost target of between US$ 2.00 and US$ 2.50 per pound before smelting and refining.

Global scene

Though cases like these are few and far between, comments made by Carey Smith, a research analyst at Alto Capital speaking at the Australian Nickel Conference last week, have sounded the deathknell for high cost nickel producers.

Smith said the easing of monumental stimulus programs and the ongoing depressed demand in the developed countries were going to result in a further deterioration in nickel demand next year.

From a current price of over $18,000 per metric ton, Smith said they expected prices to fall to a range between $8,500 and $17,000 a ton over the next few years as prices cannot be justified by current supply and demand fundamentals. Specifically Alto Capital are calling out $11,000 in 2011 rising to $14,000 by 2014.

On the supply side, Smith said global stocks (equivalent to 35 days) are the highest since the fall of the Soviet Union in 1991 and there are additional but unknown quantities in Russia and China. Even with global stimulus packages estimated at $7 trillion, demand has failed to significantly pick up outside of China. And when these come to an end, demand is sure to slide further.

Weak demand

Price easing is also expected to be fuelled by the fact the spate of mine closures globally has not been enough yet to offset weak nickel demand and the winding back of globally stimulus packages estimated in size at a total of US$ 7,000 million.

To put the stimulus packages in perspective, that is over nine times the size of the Australian economy and enough to acquire the whole pool of combined Australian mid-cap nickel producers.

Then, there are the yay-sayers, who insist that nickel prices will likely rally going into 2010 as the market switches into a deficit. They insist there are several pointers to this – production cuts and delays to mine projects have helped tighten the market; stainless steel output appears to be recovering and inventories of ferronickel are low.

Finally, the long-term nickel floor price appears to have “turned the corner” and would continue to rise over the coming decades. Analysts are of the opinion that with the increasing evidence of nickel in emerging alternative energy forms such as nuclear, solar and wind, the metal is here to stay.

Analyst viewpoint

David Wilson, metals analyst at Societe Generale SA notes that prices are well supported and that “we don’t see a downside for the moment.”

Wilson forecast that nickel prices would average US$ 20,700 a tonne in 2010, up from an expected average of around US$ 15,000 per tonne in 2009.

He estimated about 200,000 tonnes of nickel will be lost because of production cuts, strikes and delays to mine projects in 2009, causing mine output to fall 7.5 per cent on the year.

At the Paydirt Nickel conference in Perth at the start of the month, some analysts did give the metal the thumbs up. While there will be periods where the base metal grapples with price fluctuations within a new “super cycle”, resources advisor Martin Pyle said the bottom line was that the nickel price had grown 5-6 per cent (on average) for the past decade.

“In fact, forecasts of 500,000 tonnes a year in new nickel demand by 2020 now look conservative. I am expecting that the long-term price, although influenced by the short-term spot price, will be in the top end of the range of between US$ 6.00-7.50 per pound – and that does not fully account for the emergence of a new super-cycle driven by demand growth from China,” said Pyle.

Pyle said nickel also has the added appeal of high recyclability and in every sense, is the ‘metal of the future’. The major threat to nickel’s long-term price trend upwards would be from nickel substitutes from lower quality stainless steel use – although some of that risk was being mitigated as nickel prices fell from their lofty 2007 levels, encouraging a return to higher nickel stainless, post the global financial crisis.

Bloomberg quoted Arif Siregar president director of PT International Nickel Indonesia as saying that nickel price between US$ 18,000 a tonne and US$ 19,000 a tonne is a fair level for the company.

Siregar said that “Demand for the metal is picking up mainly from China and Taiwan and that’s helped support the price.” He added that PT Inco may produce about 60,000 tonnes of nickel in matte this year. That compares with 72,400 tonnes in 2008.

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