Found this on the net, Pelsaert.Mincor ? Nickel's Quiet...

Found this on the net,


Pelsaert.

Mincor ? Nickel's Quiet Achiever
22/04/2010 7:15:02 PM
By Greg Peel

Nickel is all the rage at the moment as the global economy attempts to recover from the GFC and China's stainless steel factories once again fire up into full production. The most expensive of the five major base metals, nickel likes to act as the standard bearer for an advancing army. It usually leads the way with gusto into the fray but then, unarmed, turns and flees at the first sign of trouble. To that end, it is also usually the most volatile of the metals.

As the following chart shows, investors looking to play nickel have to be prepared to strap themselves in:



Nickel's great expense (US$12/lb compared to US$3.50/lb for copper, US$1/lb for aluminium and zinc) obviously reflects a lack of general supply versus global demand for stainless steel but it also reflects the high cost of nickel production, from ore to concentrate to end-use metal. This is a factor in nickel's price volatility as mines and smelters are shut down when prices spiral downwards and then take a long time to ramp up again. Right at the moment both supply of ore, old and new, and active smelter capacity is struggling to keep up with the renewed demand for stainless steel, particularly for the Chinese manufacturing industry and domestic economic expansion.

That's why a rise in the nickel price tends to signal to the market that an overall rise in metal prices is afoot, and thus why nickel is now up 50% since the ?Greek Dip? in February and up 200% from the GFC bottom.

Unfortunately it works the other way as well. Clearly metal prices can't just going up forever because high prices must eventually cause demand destruction. This is problematic for copper and aluminium, as the market has little alternative than copper for wiring and aluminium for light-weight construction (although plastic composites are moving in on aluminium now). But nickel is substitutable (as is zinc).

Quality stainless steel is made using a high proportion of nickel. Lower quality stainless steel is made using a lower proportion of nickel or by using chromium, for example, instead of nickel. And this is what happens when the nickel price is just too high ? rather than shut up shop producers offer lower quality stainless steel onto the market instead. And then suddenly the nickel price collapses.

This occurred in early 2007, as the above graph notes. The great nickel price blow-off occurred despite the GFC-related metal collapse not occurring until 2008, and despite the prices of iron ore and coal used for steel-making jumping significantly in the 2007 contract price negotiations. Zinc responded similarly (zinc is used to make galvanised steel), but copper only stumbled for a while and aluminium barely blinked.

Further twenty-first century volatility was added from the great influx of speculative commodity funds into the financial market arena.

Nickel then dropped again in the GFC. So over the five year period displayed in the chart, nickel went from (all USD/lb) $8 to $24 to $12 to $4 and back to $12 again. Over that period, marginal nickel producers simply came and went. Hero one day and gone the next. It is not hard to see why investing in pure-play nickel miners is not a game for the risk averse.

One way for a nickel producer to ward off destructive nickel price volatility is to hedge, whether by forward-selling nickel for future delivery at price received today (often used as a source of funding as well as hedging) or by simply trading in offsetting futures contracts. But to hedge means to miss out on upside profitability potential in the good times and as such investors tend to punish miners who hedge even if it provides insurance.

If you are a privately-owned miner, unconcerned about the opinions of flighty investors, another way to hedge against the inevitable rollercoaster of nickel price cycles is to take things steadily, conserve cash and manage resources pragmatically to provide a natural smoothing mechanism. Funnily enough, this is exactly what Mincor (MCR.AX


MINCOR RESOURCES23 April,201023/04/2010 10:47 Sydney, Australia.
Price Change % Change
2.150 +0.020 +0.940%

Company overview
Real-time quote
MCR.AX , 2.150, +0.020, +0.940%) has been doing since 2001 when it became nickel miner. The problem is, that's not what listed miners are supposed to do.

Stock analysts will never look favourably upon listed companies who hoard cash and reserves for a rainy day. Money lying idle is simply money not working, undermining the potential for earnings growth and ultimate shareholder returns. It must be used for acquisitions, or to pay down debt, or to return capital to shareholders and thus affect earnings per share accretion. The paying down of debt is not all that favourably looked upon as well if times are good. Listed companies should borrow to their absolute capacity to fund new projects and to avoid shareholder dilution arising from raising fresh equity for such a purpose.

All this changes, of course, when the cycle turns and high gearing and low cash reserves are seen by analysts as an obvious folly. Witness the fortunes over the last three years of a cashed up BHP versus a debt-laden Rio Tinto.

?Before 2007,? noted Mincor CEO David Moore last week, ?the analysts all told us we were carrying too much cash. Then in 2007-08 they told us well done for having cash, but by 2009 we were carrying too much again?. I met with David at a presentation lunch hosted by Cameron Stockbroking.

There is a lot of pressure on listed companies to make hay while the sun shines. Mincor's stated ?purpose? is to maximise total shareholder returns (TSR). Going bust at the bottom of an inevitable cycle is not one obvious way to achieve that. Staying alive throughout cycles is, even if it means sacrificing some TSR upside in the up-cycle for the sake of the longer term investor and not the short-term trader.

On the release of its FY10 interim result in February, Mincor was capitalised at $430m, had made a profit of $14.2m for the half on earnings of $40m and was carrying $107m in cash with no debt. To a stock analyst, that is not a balance sheet that maximises potential. But such a balance sheet has seen Mincor through the bubble-and-bust of the nickel market over 2007 and the GFC of 2008 while still paying out consistent discreet dividends to its shareholders.

Yes ? Mincor is a pure-play miner-explorer that likes to pay its shareholders dividends, and pretty resasonable dividends at that. Many pure-plays don't play dividends and any miner that does usually keeps payouts to a minimum and withdraws payouts immediately when prices fall. But Mincor paid a 6cps dividend in FY09 and has paid 3cps for the first half FY10 with the intention of doing the same for the second.

In the middle of FY09, at the bottom of the nickel market, Mincor shares fell below $1.00. At that point they were yielding 6%. A miner yielding 6%! Mincor's share price is now back over $2.00 so that yield is under 3% which is more consistent with your larger-cap miners. But the point is that throughout the cycle, the dividends kept coming.

Obviously the share price went for a rollercoaster ride but you can't do too much about that when your fortunes are strongly leveraged to the nickel price. Particularly when stock analysts don't like you. Mincor is an ASX 200 company, but it only attracts coverage from three out of ten FNArena database brokers and researchers, and one of those is Aspect Huntley (Hold). The other two are Macquarie (Outperform) and Deutsche Bank (Sell).

Macquarie appears on Mincor's register with a 5.2% holding, but that is not a reflection of the analysts' rating. It is probably a reflection of why Macquarie covers Mincor, nevertheless. Deutsche, on the other hand, is simply down on all nickel producers at present, factoring in a long term nickel price of US$6.50/lb currently compared to an average US$9.70/lb derived from nickel miner stock prices, and compared to a spot price of US$12.31/lb.

Mincor's other ?hedging? policy ? or if you like, longer term smooth sailing policy ? is to keep a running balance of proved-up reserves against actual production, thus ensuring longevity but also providing a ?hedge? to the upside. If the global nickel market does go into hefty supply deficit for a period, Mincor has reserves to draw upon. The company is always exploring for and proving up reserves several years ahead of production expansion plans.



Mincor's operations are centred in Kambalda which is 60km south of Kalgoorlie in WA. Kambalda has been a nickel producing area for decades and Independence Group ((IGO)) and Panoramic Resources ((PAN)) are neighbours. Mincor turns all its nickel sulphides into concentrates at the nearby smelter owned by BHP Billiton ((BHP)) and on a longstanding agreement all concentrates are purchased by BHP. Were this relationship to be terminated either way, there are plenty of other options.

Mincor's tenement lies in the Kambalda dome, which hosts four of the six biggest nickel sulphide ore bodies in Australia. Two-thirds of Mincor's Kambalda Dome holdings have not been effectively drilled to date. Mincor's North Kambalda site has shown in testing what appears to be an ?ultra-size nickel ore body? formation, known delightfully in mining parlance as a ?US nob?.

Mincor is pioneering the use of ?advanced in mine geophysics? which has also shown potential for the existence of further US nobs at its Otter Juan site. Mincor's exploration, suggests David Moore, is throwing up ?game-changing potential?. Emerging discoveries are also being made at the once discarded (before Mincor's time) Miitel sites. Miitel is the ?sleeping giant? of ore bodies with existing reserves or 468kt of nickel including 100kt of developed ore, and a re-opening study is now underway.

That Mincor should be a nickel sulphide miner is important. I noted earlier that nickel is the most expensive of the base metals reflecting lack of supply. Specifically, new nickel sulphide discoveries are now almost non-existent across the globe. New discoveries and projects are mostly those of nickel laterite reserves, and nickel laterite is a lot more expensive to process.

In short, Mincor is a nickel miner with a consistent track record of total share holder returns. Since foundation in 1999 (previously listed in 1997 as a different company), Mincor has provided a TSR of 5900%. But the company is also now looking to diversify. Mincor has a pipeline of regional exploration sites across Australia focusing on copper and other base metals.

Mincor sells itself as providing cashflows, profits, dividends, nickel price leverage, financial strength and ?unlimited exploration upside?. Analysts don't like Mincor because it plays the game too conservatively, protecting its production capacity by constant rolling forward reserves and exploring for new ones, and protecting the company and its shareholders by not borrowing money but self-financing out of a constantly healthy cash balance.

Mincor is a company suited to longer term investors who want nickel exposure. An investment in Mincor is obviously not without risk but the company's policy is one of longevity rather than simple death or glory.