an informed opinion on nickel

Minara’s shiny future
By Michael Pascoe
Watch the Peter Johnston interview
Hear the Peter Johnston interview



PORTFOLIO POINT: Its new heat leaching extraction process is likely to enable a production boost to about 10,000 tons a year, at a current margin of close to $20,000 a ton.


Volatile nickel prices have given investors an exciting ride this year, one that has calmed since hedge funds left the market and allowed it to trade on fundamentals.

It’s a ride that Peter Johnston, chief executive of nickel miner Minara Resources, is glad is over. In just a few months he watched nickel prices peak above $50,000 a ton, drop to $25,000 then edge back up above $28,000.

Now he says the market’s demand side is “looking comfortable” and that the “normal supply side equation will now run its course”.

Johnston says Minara’s restructuring from the troubled Anaconda Resources is almost complete, and the expects Minara will increase production in the next few months, to as much as 10,000 tons a year, with a very healthy production margin.

The interview

Michael Pascoe: The nickel price has been jumping around so much it’s really looked like the gambler’s metal. Where do you think it’s going?

Peter Johnston: I guess you’re right. The market has been extremely volatile for the entire year but it did rise early in the year to unprecedented heights when it peaked above $50,000 a ton. It then plummeted to $25,000 and has now risen to about $28,000–29,000. This is all in the past six or seven months so you can see it has been a bit of a rollercoaster, particularly for producers but also for our major customers. It’s very hard to project revenues going forward when you have that price volatility.

It also makes it a bit hard for investors, doesn’t it – whether or not to invest in a nickel miner?

I have to say even when it got down to its lows this year of $25,000 that’s still, in historical terms, a very, very good nickel price so you must be careful. I think the higher $50,000 was certainly unprecedented but even the average price this year has been in the true historical sense, very strong.

Has the credit confidence crunch taken the hedge funds out of the market? Are we likely to see a more stable market now?

Certainly the producers think a lot of the more speculative hedge funds have vacated the market and that was evidenced by the price collapse. The demand from China is still strong so that’s why we thought we would see some recovery in the second half, and this has occurred. Also, during summer, the Europeans did delay some of their purchasing. They are now coming back into the market so the demand side is looking comfortable. We think the speculative hedge funds have exited and we think the normal supply demand equation will now run its course.

Well how do you think the price is going to perform now?

I think the price will stay reasonably firm for the next two to three years, just on the back of Chinese demand. I don’t expect to see the surreal heights that it reached in the past but anything between $25,000 and $35,000 is a very solid nickel price and gives you a healthy margin on your production.

And $25,000–30,000 compares with what sort of production costs for Minara?

Our current production costs are about $5 a pound which is about $10,000–11,000 a ton, so we have a very healthy margin. Of course, in the first half of this year all nickel companies had very healthy revenues and we announced a profit of $245 million for the six months – a net profit, which was a record. We think we’ll have a very good profit in the second half but not at those real highs.

Well you’ve got a nice profit margin on your current technology. You’ve got a verdict, though, coming up on heat leaching by the end of this year. What will that do to your cost of production?

People must remember the heat leaching is the end of a four-year R&D program. It is now setting the growth platform for Minara going forward. If it’s proven up within the last quarter, we will announce a substantial increase in production up to 10,000 tons of nickel per annum and we believe the costs will certainly come down quite significantly. The pressure acid leach circuit is very maintenance-intensive and naturally the heat leach is much less maintenance-intensive, so without having an established circuit yet the numbers look encouraging but we think that the overall costs will be lower on heat leach but there is still only … there are about three months to go to prove up that technology.

Three months to go after four years of R&D … you must be pretty confident.

We are confident. The recoveries are on our expected path and that gives the board a lot of confidence. The first phase will require substantial capital of approximately $250 million of capital, plus or minus $30 million. Unfortunately, in Western Australia right now there’s not a lot of minus and that will enable us to expand about 25% of our total production. We are of course looking at a further expansion in growth beyond that first phase but that will be proven up in the first half of next year.

To greatly simplify Minara’s history, you basically fixed up the mess that was Anaconda – the mess that Andrew Forrest left. How hard has that been?

Well look it’s been a long tale and I don’t like dwelling on the past. The first couple of years were very difficult. We went through one of the most major financial restructurings a company had undertaken in Australia and we came through that relatively unscathed. We then invested a lot of capital back into the plant. We’ve returned about $300–400 million of capital to fix the known design deficiencies. That phase is now largely over and we’re clearly entering a new phase of growth.

Is it fair to say that Minara will have an unusual profile for a resources company – more of a production company, a known resource, a long life, more of a manufacturer?

That is a good summary. We are clearly setting ourselves up to differentiate ourselves with our long life. We will have two processing streams – one from the pressure acid leach and one from the heat leach – which does de-risk the project substantially, and we have sufficient capital and a clean balance sheet to fund a major growth platform going forward.

So Minara becomes a resources company for people who like getting dividends?

Well we paid our first dividend in 2005 and that was rather modest. Last year we gave over 50¢ a share in dividends and this year even our interim dividend of 25¢ a share places us as one of the highest-yielding stocks in the market and we would like to continue that. It very much also though depends on the nickel price assumptions you make going forward, but with China being so strong and we believe the future for nickel is the best of all the metals.

RAB