From www.minesite.com (a must read every weekday morning with 2 new articles every day, often covering small aussie miners):
Date : March 26, 2004
BHP Billiton Takes Bullish View Of Nickel Market With Its Decision To Increase Production.
Interesting to see that BHP Billiton intends to increase output from its Yabulu nickel refinery in Australia by more than 100 per cent. It is going to spend £778 million on the development of a new mine and treatment plant at Ravensthorpe in Western Australia. The nickel/cobalt concentrate will then be shipped around the coast to Townsville in Queensland where Yabulu is situated. At the moment all the concentrate treated at Yabulu is imported from New Caledonia and elsewhere in the Asia-Pacific region. BHP Billiton has been sitting on Ravensthorpe for some time and the rather complicated logistics have to be accepted.
The question that has to be asked is why is took the Anglo Australian major so long to make up its mind about this. It has been pretty clear for at least the past twelve months that demand from China and other countries in the Far East was going to keep the price of nickel in an upward trend for some time to come and that production was going to be hard pressed to keep up. In February Scott Hand, chief executive of Canada’s nickel giant, Inco gave a refresher course on the outlook for nickel when releasing his company’s results for 2003. He said “the nickel market has been strong to date in 2004 and we believe it should get even stronger.” His marketing director, Peter Goudie, drove the nail home by pointing out that stockpiles of nickel around the world have effectively ceased to exist with inventories at “their lowest level in recent history”..
As Goudie put it: “Drawdown of inventory from countries such as Russia will not be a solution in this cycle.” His expectation is that demand for nickel will maintain the remarkable 7 per cent growth rate seen last year – but with no supply to provide satisfaction. “We currently project that the underlying deficit in 2004 will reach 75,000 tonnes”. He went on to state the obvious, that the prospect of sky-high nickel prices will force some users to switch to lower nickel-content products, mild steel with a coat of paint and fibreglass laundry sinks. “Lower cost, decorative applications, will be substituted before functional ones.”
Putting a measure on this window of opportunity is the question sensible investors now ask, and the answer is encouraging. For a start it will take over two years before supply will be sufficient to meet current demand. That is the time it will take for the next major nickel mines to deliver product to the market to ease the supply gap. Inco, surprise-surprise, owns both of the mines heading for 2006 and 2007 start-ups, Voisey’s Bay in Canada and Goro in New Caledonia. Each is in the 50,000 tonne-a-year class. But, now comes another fascinating statistic – 50,000 tonnes is roughly the current annual world growth in demand for nickel. In other words, Voisey’s Bay in 2006 satisfies 2006 demand growth. Goro in 2007 satisfies that year – but nothing will have eroded the on-going shortfall. Thus it will have reached 175,000 tonnes by the time Voisey’s Bay starts to make an impact and will stay that way for another year after Goro clicks in.
This has to be good news for BHP Billiton which is also aiming to bring the enlarged Yabulu into production in 2007 with an additional 44,500 tonnes of nickel/year.It will not be an instant cure for the production shortfall, but it should reduce the gap. The Ravensthorpe resource is 252 million tonnes at 0.68% nickel so the life of the mine is no problem. What could be a problem according to analysts Charles Kernot and Jonathan Guy at brokers Seymour Pierce is the ongoing impact on earnings and NPV. They have added the project into their earnings and valuation model of the company and consider that it will be relatively NPV neutral, but should impact earnings from 2008 onwards.
It has to be pointed out, however, that they are using US$3.50/lb as their long term average nickel price compared with the present price of around US$6/lb. How long is long term, is the first question. The ongoing deficit seems unlikely to push the nickel price back significantly provided the present growth trend is maintained. Growth can never be maintained for ever in a cyclical world, but it has to be accepted that we are moving into a new era with the geo-political axis swinging from west to east and China is not the only country undergoing an industrial revolution. Presumably BHP Billiton takes a fairly bullish view of nickel as Ravensthorpe /Yabulu is not a simple or cheap operation. The brokers say that it will involve utilising new technology and a dual processing route if processing costs are to be kept under control.
According to Lex in the Financial Times the nickel market is expected to be back in surplus by the time BHP Billiton’s new production comes on stream. Maybe a quiet word or two with Inco would not go amiss.
