"The question is does BHP need MCRs ore to achieve its concentrator requirements."I think you'll find it's more accurate to say that the question is just how much BHP needs MCR's ore,
via BHP's Kambalda concentrator, to achieve its Kalgoorlie
smelter requirements (i.e. a different asset that is the next step downstream in the value-add process as part of BHP's broader vertically-integrated WA Ni ops).
It's important to understand the difference between the concentrator and the smelter. The Kambalda concentrator's sole purpose is to perform the primary processing of raw ore into Ni-bearing concentrate. Nowadays that concentrator is wholely dependent on taking raw ore from local third party Ni mines. Those mines are also wholely dependent on BHP's concentrator. It's a very unusual situation which came about because of a unique set of historical decisions made by WMC (pre-BHP ownership) to divest its Ni mines around Kambalda, while retaining strategic ownership of the local concentrator.
The main game for BHP is in having access to a sweeter concentrate (from anywhere, but in this discussion from its Kambalda concentrator) to blend with their other problematic low Fe:MgO concentrate (produced at Mt Keith) at the Kal smelter.
There are numerous metallurgical ducks that need to line up in order to run a Ni smelter. Having suitable Fe:MgO ratios (i.e. the main attraction in using MCR's ore) isn't the only thing.
Punters need to understand that high levels of As (the current problem child for MCR) can cause problems at the smelting stage. That's why certain threshold specs are set for the raw ore feeding the concentrating stage (because the output of one directly feeds the next step in the processing chain). There comes a point at which As levels become a sufficiently large enough problem to overwhelm the benefit of MCR's nice sweet Fe:MgO ratios. BHP isn't going to continue to accept, at any cost, sufficiently problematic ore (at the concentrating stage) to the detriment of its downstream smelter.
Before jumping to an inferred conclusion that there may be some kind of conspiracy afoot, I recommend considering the distinct possibility (I think its a certainty) that the SP was down because the Ni price is off its highs and also that the market (MCR punters) simply didn't believe the production guidance -- notwithstanding the recent reiteration of it as recently as end-Jan. (It think few will argue with the poor look of reiterating guidance, only to yank it reasonably shortly thereafter because a known off-spec product issue bites management on the a$$.)
The timeline: Management reiterates guidance (31/01/23). Wyloo lobs an opportunistic unsolicited on-market bid seven weeks later (21/03/23) without having had the benefit of access to a MCR data room to conduct DD. (Wyloo would have known it wouldn't have that opportunity prior to bidding by going down that pathway). Unbeknown (imo) to AF's crew there's also an As problem lurking in the shadows which MCR has been quietly trying to resolve with BHP. BHP then formally notifies MCR management that it would not alter the offtake agreement spec, thus amounting to a rejection of off-spec material moving forward, as alluded to by MCR in the announcement. Did Wyloo's bid trigger BHP to play hardball by moving to refuse off-spec material or was this always gonna happen in due course? We'll never know for certain, but it looks to me like BHP's
timing was tactical, but not necessarily in preparation for their own competing bid. No need when you have a captive customer.
From a valuation perspective, the real question is just how material these problems are (scope) and how long they are likely to persist (duration). If it emerges they're likely to be transitory, then the market will look through it (assuming it can trust management's messaging) and Wyloo's $1.40 will revert to being seen as opportunistic. If there's more unsavory detail to the metallurgical/mine plan story yet to reveal itself, then it may change the near-term fundamentals and may well make Wyloo's bid look rather full and like rather unfortunate timing, to say the least. With management's credibility having taken a hit, I do wonder how much benefit of the doubt the market will be prepared to extend to management in the near/mid-term.
Z
PS. For the avoidance of any doubt I believe this will resolve itself in due course and the underlying assets will continue to be economic over the long term. However, that doesn't change the fact that there are now material problems/question
today which are likely to have a bearing on today's risk-adjusted valuation and the outcome of a corporate action that is active right now.
PPS. It occurred to me that, maybe, just maybe AF has highly speculative strategic sights on purchasing and re-tasking IGO's Nova concentrator for MCR's benefit in due course. Naturally that's a BIG 'IF' which assumes the popular consensus around Nova's long-term prospects ends up being accurate. Just a bit of a '
cheeseburger' scenario, for giggles only.
