LONDON () -- Nickel has been the come-back kid of the metal markets according to Vanessa Davidson, Research Manager of the CRU (Commodities Research Unit) Special Steels and Alloys team in her presentation at the Mining Journal Nickel Day.
Nickel's Long and Rocky Ride - but Rush to the Summit
Davidson described the long and rocky road followed by nickel prices which averaged $2-$4/lb throughout the nineties (see chart further below from the Inco [NYSE:N;TSX:N], but then the 'rush for the summit' as prices have climbed from under $3/lb in 2001, through $6/lb at the start of 2006 to peak at $15.76/lb in August.
The recent high prices were attributed by Davidson to the conjuncture of a number of factors including the strong increases in demand for nickel but only limited growth in world supply, the resultant low inventory levels and fund involvement.
On the demand side growth in stainless steel, which accounts for around 65% of nickel consumption has been very robust in recent years averaging some 5-6%pa since 2000. Growth in non-stainless applications has also been strong, up 8% in 2005. While growth in both stainless steel and nickel consumption has been particularly strong in the last two quarters, with a year-on-year change approaching 20%, this will almost undoubtedly represent the peak of the cycle; leading indicators suggest a slowdown next year. Moreover the recent high price level for nickel has encouraged some substitution away from Chromium/Nickel stainless alloys, and the explosive growth seen in China has partly resulted from the displacement of demand elsewhere. Nonetheless CRU are anticipating that stainless steel production will grow at a rate of 5%opa for the next 5 years while primary nickel consumption is anticipated to accelerate slightly to a growth of 4.2%pa.
Meanwhile on the supply side there has, so far, been a limited growth in world production due to earlier underinvestment, unforeseen disruptions caused by strikes, bad weather, ramp-up delays and feed shortages, and under-performance of some of the HPAL (high pressure acid leaching) projects. HPAL is the relatively new hydrometallurgical process used for extracting nickel from laterite ore. Although the process works it has proved difficult to scale up to the size required for major mines. There has been a shortage of trained operators and cost overruns, particularly as energy prices have increased.
Nickel occurs predominantly in either sulphide or laterite ores. Since nickel production is easier from sulphides they account for around 60% of current production. However only 27% of known global resources are sulphide and there is a lack of potential sulphide projects that are large and high grade. The industry will be have to depend in future on laterite projects and HPAL operations. While there are a number of plans for new laterite capacity there are significant risks to CRU's production forecast that in theory nickel supply could keep pace with demand.
The recent high level of nickel prices has been supported by the very low level of industry stocks. LME stocks are currently just under 7,000 tonnes, down from 36,000 at the beginning of the year and well below the critical 10 week level. Prices have also been driven higher by fund involvement, though Davidson's view was that funds merely enhance trends. They do not create them.
Davidson's conclusions were that:
- Primary nickel demand will continue to grow at an average rate of 4.3%pa. Additional demand will be required to replenish world stocks which are currently at low levels.
- Sulphide deposits are being used up at a faster rate than they are being replenished. Moreover 20% of new sulphide production will be required merely to fill the gap left by depleted older mines.
- To guarantee future supply the industry will therefore have to depend on more costly laterite ore bodies. While at first sight there appear to be sufficient projects to fill this gap there is a serious risk that some of these projects will underperform.
- Prices will fall from today's current high levels of $13-14/lb but will not return to the historical trading range of $3-4/lb and are likely at a minimum to average $6/lb well into the next decade with considerable upside potential.
Mirabela Nickel
A company well on track to benefit from the fundamentals of the nickel market and the shortage of sulphide projects is Mirabela Nickel [ASX:MBN], which has a number of projects in Brazil, including the Santa Rita deposit, which was recently confirmed as the largest greenfield nickel sulphide discovery in the world in the last 10 years.
There is no doubt that the market has appreciated the success to date of Mirabela Nickel. Since listing on the Australian Stock Exchange in July 2004 the share price has rocketed from 20 Australian cents to close on 3 November at an all time high of A$2.20. The market capitalisation in that time has increased 47-fold from A$3.5-A$165 million (US$127 million).
Mirabela has an impressive clutch of shareholders. Amongst others Inco (now CVRD [NYSE:RIO] and the world's second largest nickel miner) hold 10.9% of the project, Canadian-based Dundee Wealth Management own 6%, and the Australian investment bank Macquarie hold 3.7%. Unusually for Macquarie, who typically impose tough conditions, there are no strings attached.
Mirabela Nickel's Project Base
Mirabela was incorporated in March 2004 to pursue the Mirabela nickel deposit and other base metal opportunities in Brazil where the directors have existing relationships and industry knowledge. It now has several base metals projects all 100% owned and based in the Bahia province of Brazil.
Santa Rita: The Largest Greenfield Nickel Sulphide Discovery in 10 Years
The main focus of the company is currently the Santa Rita nickel sulphide deposit which was discovered on an unpopulated area of open farmland in November 2004. It lies 340 kilometres south west of Salvador, the third largest city in Brazil, 140 kilometres from the nearest port, Ilheus and 6 kilometres from a town of 50,000 people. It is close to power, water, sealed roads, accommodation and engineering facilities. A small airport is nearby.
The deposit has a strike length of 1800 metres and an open cut depth of 300 metres. To date 244 holes have been drilled for 56,000 metres and an updated JORC resource estimate was published on 27th October. The estimates exceeded expectations; in the week since publication the share price has jumped 60 Australian cents (37%).
Highlights of the update were:
- The estimated global resource is now 70.4 million tonnes of 0.61% nickel and 0.14% copper representing 430,000 tonnes of contained nickel. This represents an increase of 50% on the previously published estimate which dates from August 2005. Details are given below.
- Around three quarters of the resource lies within open pit limits. This resource is now estimated at 52 million tonnes with a grade of 0.6% nickel and 0.14% copper representing 312,000 tonnes of contained nickel. Confidence levels in the open pit resource have increased significantly with 90% (46.4 tonnes) now in the indicated category. The strip ratio (waste:ore) for the resource is estimated at 6.6:1.
- The expected life of the open cut mining operation has been increased from 10 to 13 years with room for further extensions.
- Four separate drilling programs are underway to: (i) explore the highly prospective land to the east of Santa Rita, (ii) extend the resource along strike to the south, (iii) convert the remaining inferred resources to indicated status, and, (iv) convert the 8 million tonnes planned for the first two years' production from indicated to measured status.
- The open pit mining operation will feed a conventional crush-grind-float-filter circuit to produce a combined concentrate of nickel, copper, cobalt, PGMs and gold. The recent extension to the resource and project life has opened up the possibility of additional downstream processing.
Mirabela have therefore begun a scoping study to investigate the possibility of building a mini-smelter on site on the basis that the deposit is now potentially large enough to justify the capital expenditure, it has favourable infrastructure for the smelter including cheap electricity, the value added per tonne would reduce the resource cut-off grade, increase the tonnes available within the resources and thus extend the project life and the nearby Serra Azul resource could also feed directly into the smelter.
A full bankable feasibility study for the project is underway. Mirabela hope that this will be completed and the necessary mining and environmental permits granted by April 2007. There will then be a further financing round to finance construction in the third quarter of 2007 with a view to commissioning in Q4 2008 and attaining full production in the first half of 2009.
Studies have indicated that the optimal rate of production will initially be 4 million tonnes of throughput producing 17 million tonnes of contained nickel. For a modest capital outlay this could be increased to 4.5 million tonnes (19,000 tonnes of nickel concentrate).
Other Projects
Mirabela's other projects include:
- Mirabela Saprolite project: Saprolite is a type of nickel laterite which is in strong demand but there is only limited supply. The Mirabela saprolite, which lies within 50 metres of the surface and is close to Santa Rita, has an indicated resource of 1.34 million tonnes at 2.3% nickel implying a contained nickel resource of 30,790 tonnes.
- Palestina Nickel Exploration: Located just 25 kilometres south of Santa Rita Mirabela have identified a layered intrusive feature which is similar to that hosting Santa Rita but twice as large. This is considered by the company to be an exciting target but there have been some delays due to land access difficulties. However a geophysical survey over the area will start shortly and a drilling programme is planned for next year.
- Sao Francisco Nickel Sulphide Exploration: Mirabela acquired this relatively advanced exploration project in September 2005. It has 7 exploration tenements and has submitted applications for a further 11. It has the opportunity to test for near surface mineralization along 50 kilometres of strike length.
Mirabela are also seeking JV partners to help develop the Ponto Novo nickel laterite prospect and the Aragucema copper prospect. It has formed an exploration JV with Inco who can earn up to 70% interest by completing a bankable feasibility study on new discoveries.
Bull Points
- The geology of Santa Rita is favourable with relatively high grade near surface mineralization. Moreover the resource is continuous and continues at depth. The table below puts the Santa Rita project into the context of the three open cut nickel sulphide mines currently in production. All three are profitable with low cash costs after credits; Mount Keith, which has a similar style of mineralisation to Santa Rita is one of the most profitable and low cost nickel mines in the world.
- The Project cash flow and the payback period can be improved by mining at a higher grade and lower strip ratio for the first three years of operation. Preliminary pit scheduling work has indicated that it will be possible to mine 14.2 million tonnes in the first three and a half years at a grade of 0.66% Nickel and 0.16% copper with a strip ratio of just 2.9:1. If the nickel price were a conservative $4.75/lb (compared with today's price of $13.60) the expected cash flow of $188 million would enable the anticipated debt of $90 million to be repaid in 19 months. At $7/lb it would be debt free in 11 months.
- The metallurgy is simple: The metallurgy can be complex for nickel sulphides but preliminary work to date has suggested the flotation circuit for the Santa Rita deposit can be simple. The ore need only to be ground relatively coarsely (to 106-150 microns) to ensure adequate recovery (of 68-70%) and concentrate grade (expected to be 12% nickel and 3% copper). These grades are towards the higher end of the spectrum. While some deposits can reach 20% nickel many are in the 8% range.
- The local infrastructure is good: As described above water, a state power line, paved roads and am airport are all on site or nearby. Trucking costs are cheap.
- Brazil benefits from excellent infrastructure, geological potential and a supportive mining environment: Brazil is relatively stable politically. It has a large economy and a low cost manufacturing base. There has been a Western style mining code since 1995; in 2002 there were 1700 active mines. Current nickel production is 45,000 tonnes per annum. Mining costs are significantly lower than in other developed countries such as Australia and there is an established contract mining industry. Substantial tax breaks are available.
- Preliminary feedback has been positive for environmental permitting. The local community is broadly supportive : The project area is sited in an unpopulated area with no indigenous sites. An environmental impact study has already been submitted to the authorities and to date the feedback has been positive. There will be a number of presentations to the local community in coming months and surveys have already indicated a strong local approval of the project (with 80% according it a positive rating and 10% don't knows). The unemployment rate in the nearest town has run at over 50% after the demise of the local cocoa business and this project is expected to create between 1500 and 2000 direct and indirect jobs.
- The management team have extensive experience in Brazil and in Nickel: For example MD Nick Poll is a geologist who worked previously for 5 years for WMC's Brazilian operations. He also worked on their Kambalda nickel projects and has experience in start-up resource projects. Mirabela's Operations Manager, David Chapman, worked for 9 years as Exploration Manager for WMC in Brazil and then became the Geology Manager of WMC's Nickel Division. He has considerable experience in large, low-grade disseminated nickel deposits like Santa Rita, through his involvement with the Mt. Keith and Yakabindie deposits in Western Australia. Both Nick Poll and David Chapman speak fluent Portuguese.
- The quality of the project and its pleasant location has already attracted good people to work on it and an impressive shareholder base. Salvador is a historic and culturally rich city close to a number of resorts. The area offers an attractive lifestyle to residents which will help in attracting skilled labour in the current tight global labour market for skilled mining employees. Shareholders have been attracted by the economics of the project. Mirabela will be among the top five nickel producers listed in Australia.
- The fundamentals of the nickel market are favourable, particularly for sulphide producers: as discussed above.
Valuation
Strachan Corporate published a research report on Mirabela Nickel in August in which the NPV of the Santa Rita project was estimated to be A$487 million when the nickel price averaged US$6/lb. The share price target was A$2.87. The valuation gave no value for additional exploration success or the other Mirabela properties.
Using the Aguablanca and Tati mines as benchmarks (which were estimated to have enterprise values of A$333 million and A$500 million respectively) the Santa Rita project, once in operation, was valued at A$734 million which, after subtracting net debt, yielded a price target of A$4.60 per share (compared with today's price of A$2.15). Of course these valuations were based on the August 2005 resource estimates which have since been increased by 50% and the mine life extended by 3 years.
Mirabela included a chart in their corporate presentation which suggests that at current valuations its market capitalisation per tonne of global resource falls well below that of other nickel producers.
The chart does not include either the recent rise in market capitalisation or the recent update in resources. Nonetheless, taken in conjunction with the favourable fundamentals for nickel (particularly nickel sulphides), the quality of the project and the management team, the benefits of the location and the impressive share price performance to date it gives food for thought.
Note that Mirabela are considering listing on the Toronto Stock Exchange to give access to North American equity markets ahead of the project financing in 2007.
