Macquarie held a Nickel Conference in Sydney yesterday with a range of nickel producers and nickel analysts presenting. The following article gives an overview of the presentations and MRE’s preferred nickel exposure, Jubilee Mines (JBM).
Short term weakness but good times to roll on. All speakers broadly agreed with Macquarie Research Equities (MRE) view of the nickel markets. The bull market of the past couple of years has been the result of an unprecedented surge in nickel consumption, due mainly to booming Chinese demand, combined with under investment in new nickel capacity. However, the sharp fall in the rate of stainless steel demand outside China in 2005 has led to a strong build up of stainless steel inventories, with large-scale stainless steel production cuts being enacted in the second half of 2005. This has resulted in a temporary oversupply of primary and secondary nickel units, promoting short term downward pressure on nickel prices.
Although this oversupply is expected to last into the first half of 2006, next year should eventually see a strong rebound in nickel demand and a rebalancing of the nickel market. MRE is projecting average nickel prices will fall to US$5.25/lb in 2006 but then rebound to US$5.75/lb in 2007. Prices should then progressively revert back towards MRE’s long run level of US$4/lb by 2009/10.
Jubilee Mines (JBM) is MRE’s preferred nickel exposure in the Australian market due to the company’s high operating margins, healthy dividend yield and first class exploration potential. Jubilee Mines (JBM) Executive Chairman Kerry Harmanis stated at the conference that he believed JBM had "cracked the geological model" around Cosmos and expected further significant exploration success to flow. Cosmos is increasingly resembling an overall geological model similar to the one found nearby at BHP's Leinster operations. The potential for an expansion of high-grade concentrate production at Cosmos was again floated as the company's studies on such a development continue.
FY06 outlook. JBM reaffirmed its FY06 production guidance of 11kt contained nickel at a cash cost of around US$2.50/lb. The company stated the obvious in saying that lower nickel prices in 1H06 and trailing nickel contract price adjustments would see a "soft" 1H06 result. JBM confirmed a continuation in its "generous" dividend policy (average payout ratio 62%).
Near mine news. The Alec Mairs exploration decline is expected to be finished in late January 2006. This will enable more expansive underground drilling of the highly prospective Alec 2 target - all six surface holes previously drilled into this target area encountered significant mineralisation. In other near-mine exploration plans, the company remains excited about the potential for up-plunge extensions of the Cosmos Deeps orebody (soon to be drilled) and further increases to the large Anomaly 1 resource base (from potentially higher grade depth extensions). Anomaly 1 development studies have been "accelerated".
Other exploration. Following the success at Tapinos (previously Anomaly 4), JBM is planning to re-drill the nearby Anomaly 3 area with the new flat-lying thesis developed through the discovery of Tapinos. BHP is currently drilling the Falcon Minerals (JBM 16%) Collurabie tenements. JBM still regards this investment as a strategic medium to longer term stake in an emerging nickel field.
MRE maintains their Outperform recommendation on JBM with a $7.50 price target (the stock closed yesterday at $6.69, a 12% discount to MRE’s target price). JBM remains MRE’s preferred nickel exposure with its high operating margins, healthy dividend yield and first class exploration potential.
JBM Price at posting:
0.0¢ Sentiment: None Disclosure: Not Held
