Nickel Market Skewed?

By Kishori Krishnan Exclusive To Nickel Investing News

Nickel prices recently recovered from a seven week-low, but obviously not enough for Canadian mineral exploration company Crowflight Minerals Inc (CML.TO) which has decided to down shutters at its Bucko Lake nickel mine in Manitoba for three months. Around 45 employees are to get the pink slip, albeit temporarily.

For the third quarter, the company posted a loss of C$2.9 million, or 1 Canadian cent a share. It had reported a net income of C$9.9 million, or 4 Canadian cents a share, a year earlier, helped by a gain on derivative instruments.

The nickel producer said it expects to reduce fixed operating costs by C$3 million.

Crowflight has revised its production guidance for 2009 and now expects to produce 1.3 million pounds of nickel, generating approximately 1.2 million pounds of payable nickel.

Average cash cost of sales per pound of nickel for the full year 2009 is expected to be approximately US$ 7.50 – $8.50 per pound at an exchange rate of CDN$ 1.10 to US$ 1.00, primarily from costs incurred for the year-to-date and lower than expected production for the remainder of the year.

Management expects that costs will decrease significantly as full capacity production is sustained at Bucko in 2010

The firm reported total metal revenue of C$2.3 million in the quarter. In the year-ago period, its Bucko mine was not yet in production.

Commercial nickel sales settled during the third quarter were realized at an average price of $7.41 per pound, the company said.

Shares of the company closed at 20 Canadian cents Monday on the Toronto Stock Exchange.

Though the idea to suspend operations is to complete ramp development, accelerate mine development and upgrade the backfill plant, it is a telling story on how the industry as a whole is faring.

Striking work

Also in the doldrums is the strike at Vale Inco which began in mid-July at Sudbury. For the past three and a half months, workers at Vale Inco in Canada have been engaged in a test of strength with the Brazilian multinational that absorbed Inco, the Canadian nickel giant which initiated the Goro Nickel project in Caledonia.

Workers are accusing the Vale group of taking advantage of the global crisis and lower profits to make underhanded cuts in employees’ wages, pension plans and social assistance programs.

In a push for diversification, Vale, a leading iron ore producer, purchased the Canadian nickel transnational Inco two years ago. Despite raking in almost £8 billion profits last year, the current economic crisis suddenly forced down raw materials prices, particularly for nickel.

In 2008, Vale made a profit of US$ 13.2-billion. Its subsidiary Vale Inco made more profits in two years (2006-2008) than Inco did in ten (1996-2006): US$ 4.1-billion. In the third quarter of 2009, together with the new rise in nickel and iron ore prices, its profit doubled from the previous quarter although it was only a third of what it was in the same period in 2008.

The company was so proud of this result that it announced it would be distributing $2.75-billion in dividends in 2009 – more than the cost of the wages and benefits of its 100,000 plus employees in 35 countries worldwide.

Then the workers struck work. And their strike has been relatively effective. Nickel production in the third quarter of 2009 is down by 45 per cent from the second quarter and by 55 per cent from the equivalent quarter in 2008, not to mention the direct cost of $200-million for the strike.

However, the new rise in nickel prices has somewhat offset the lower volume. The picture will not remain positive for long though.

Miningweekly quoted Terry MacGibbon CEO of FNX Mining as saying that the nickel market is skewed at the moment by a strike at Vale Inco’s Sudbury and Voisey’s Bay operations, which raises questions over the sustainability of the current price

The firm is ready to focus on growth after a challenging year.

Price watch

On November 17, nickel was at $16,675 a tonne from $16,800.

Also weighing on nickel was the latest data which showed LME nickel stocks jumped 1,032 tonnes to total 132,912 tonnes, their highest since early 1995.

It has been the worst performing metal in recent weeks.

Down and down

Finnish stainless steel maker Outokumpu also told Reuters that nickel prices are unlikely to rise strongly in the next two years due to weak fundamentals.

Nickel, heading for its worst week in two months, is set to decline 8 per cent by the end of the year as demand weakens.

Karri Kaitue, deputy CEO of Outokumpu said current London inventory levels are at their highest in about 15 years. They continue to play on the industry, beset with other issues.

The firm’s ferrochrome Tornio plant went back into production at the end of September after being idled for six months.

China story

There is a growth story for nickel taking place on the other side of the world.

In China, nickel inventory is set to rise by 153,000 tons before the end of 2009. MetalBiz reported that China state-owned research institute Antaike has reported that China’s actual nickel consumption in 2009 will increase by 39.7 per cent to 447,000 tons, rising by 10.6 per cent than the expectation’s 404,000 tons in September.

It is the second time that Antaike has adjusted up China’s nickel consumption volume expectation, mainly due to the stainless steel production which is higher than the previous estimation.

Also, China’s Jien Nickel announced that its acquisition of Canadian Royalties Inc has been approved by two thirds of the latter’s shareholders and convertible debt holders.

In April 2009, Jien Nickel announced it would co-found a mining company in Canada with Goldbrook Ventures, so that it could fully acquire Canadian Royalties.

Once completed, Jien Nickel said it would invest C$ 148.5 million (US$ 140 million) to gain a 75 per cent stake of the new company. Later in mid October, Jien Nickel increased the investment to C$ 192 million.