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Nickel gets hammered but some keep faith

PURE SPECULATION: Robin Bromby | June 16, 2008



It was reported midweek that Goldman Sachs had made drastic cuts to its nickel price outlook. The metal would average $US24,522 a tonne, down 15 per cent on their previous estimate for 2008. They cut their 2009 forecast by 34 per cent on the previous outlook out of Goldman Sachs.

Just about everyone lately has been giving nickel a hammering. On Tuesday, the ABC was reporting analysts concerned that many smaller West Australian nickel mines would struggle to stay in business if the nickel price continued to slide.

Well, as all now know, BHP Billiton (BHP) has announced it will shut down its Kalgoorlie smelter for an overhaul. This came after Norilsk Nickel said it would close a smelter in Finland and relocate the plant. Overnight, the nickel price in London shot up by 5.6 per cent.

Julian Hanna, who runs nickel star Western Areas (WSA), says most people are misreading the nickel market. Supply is much tighter than many realise, and there is very little surplus production. One event, such as an unforeseen smelter closure, can have a huge impact on the nickel price. But he does agree some companies will have a problem if the metal falls substantially below $US22,000/tonne over a prolonged period. He doesn't think that's likely.

Incidentally, traders obviously didn't bother to read WSA's announcement on Wednesday that it was not affected by the disruption to gas supplies in Western Australia, as the stock was marked down heavily that day and Thursday. By Friday, it seemed, the news had sunk in and the price recovered from $9.15 to $9.54.

Just for the record, WSA is not affected by the BHP closure, either.

Shortage looms

BHP's subsequent announcement that it hoped to increase production from other plants caused nickel to slip back to $US24,000/tonne on Friday night, but the four-month closure could mean that nickel ends up with a 17,000 tonne deficit for 2008. The people at Australian Mines (AUZ) are not deterred by the nickel naysayers. They have begun drilling at the Goodyear sulphide project near Kalgoorlie, where there is already an inferred resource of 16,000 tonnes of contained nickel.

This is the project that was drilled in the mid-1990s by Titan Resources (which was later swallowed by Consolidated Minerals, now also swallowed), with one hole returning 3m at 7.9 per cent nickel.

None of the other holes could replicate that and then the metal price sank. Goodyear was drilled again in 2000 by MPI Mines (later part of LionOre). AUZ has been putting together all the data and will be testing other areas it believes can increase the resource. The mineralisation runs into the neighbouring Dunlop project owned by Mincor Resources (MCR), and the two companies are sharing data.

AUZ's Blair mine produces about 2000 tonnes of nickel a year, but the company is looking for longer term operations to sustain growth. Goodyear is one, the Marriott's project near Leinster is the other.

In another nickel development, Proto Resources (PRW) and Metals Finance Corp (MFC) are planning to complete a feasibility study on the Barnes Hill deposit in Tasmania by early next year. Proto has well and truly hitched its wagon to the nickel star, with its other main project being a laterite joint venture with Poseidon Nickel (POS) at Menzies in Western Australia. At Barnes Hill it is doing its sums based on a long-term nickel price between $US19,800 and $US22,000 a tonne.