These 5 Mining Stocks Will Plummet On Falling Nickel Prices

| About: BHP Billiton (BHP)

BHP Billiton (NYSE:BHP) could lose its very successful Cerro Matoso nickel mine in Colombia because of a dispute over iron ore royalties. Billiton has increased production at Cerro Matoso by 72%, but it could lose its concession to mine there this year. Reuters reports that Billiton has been trying to negotiate a new concession to replace one this year, but has not had any success.

The Colombian government has refused to extend the contract, because negotiations over royalties on iron ore from Cerro Matoso are not going well, according to government officials Reuters talked to. The government wants to collect more than the 12% royalties that it is currently getting on iron ore from the mine.

It is obvious that Billiton does not want to leave Cerro Matoso any time soon. Production at the mine has risen by 72% from 7,800 tons last year to 13,400 tons this year. The Colombian government agency that overseas mining told Reuters that it expects nickel production at Cerro Matoso to be 51,000 tons in 2012. The production there has increased because of a new furnace installed by Billiton.

This would seem to indicate that both the Colombian government and Billiton want Cerro Matoso to stay open, so. So, it is not likely that the company will let this dispute interfere with production. Nor would Billiton be installing new equipment if its management did not think it was planning to stay there.

Colombian government officials have been willing to talk about the dispute, but Billiton has not. Billiton executives have refused to answer reporters' emails about the issue. The company has a big incentive to stay in Colombia. The South American country has six large nickel deposits with reserves that could contain between 37.8 and 46.48 million tons of the metal.

Norlisk Executive: 5% and 8% of Global Nickel Production is Unprofitable

Norlisk Nickel's marketing chief told Reuters that he thinks that around 5% of the world's nickel production is unprofitable. Speaking at the Reuters Mining and Metals Summit in Moscow last month, Viktor Sprogis said prices are so low that up to 8% of the world's nickel mining is no longer paying for itself.

He noted that even some of his company's operations in Africa and Australia could be affected by low prices. Sprogis also said that Norlisk's operations on its home turf, namely Russia, would be unaffected by prices. Norlisk Nickel (OTCPK:NILSY) is the world's largest nickel producer.

Sprogis's remarks were prompted by the fact that nickel was trading at $17,474 a ton in London at the time. He said the price would have to be around $18,000 a ton for current production to justify the current expenditures.

Sprogis also told reporters that Norlisk, part of a Russian consortium called Interros, is planning to increase its share of the world copper market. The company currently produces about 2% of the world's copper. Even though his company plans to increase copper production, it will probably drop plans to change its production processes so its cathode copper can be listed on the London Metals Exchange. Sprogis said such a move would not be justified.

The reason that such a large percentage of nickel production could be unprofitable is easy to see. The International Nickel Study Group estimates that there was a 17,000 ton surplus of the metal last year. This will lead to future falls in Nickel futures, Sprogis said. He predicted that futures prices will fall by 20% to 25% in 2012.

Vale Still Exploring in Canada

One company that thinks nickel has a pretty bright future is Vale (NYSE:VALE), the Canadian division of the Brazilian mining giant. The world's second largest producer of the metal has plans to start drilling and prospecting for nickel on the Melville Peninsula in Canada's far north.

The Canadian Broadcasting Corporation reports that Vale will send 30 people to conduct a five -year search for nickel in a region that's north of the Arctic Circle. The planned exploration still needs the approval of regulators in Canada's Nunavut region. The officials have not yet approved the plan. If Vale gets the go ahead, it could start prospecting in the area later this spring. Vale currently has Canadian operations at Sudbury, Ontario, Thompson, Manitoba, and Labrador. Its new processing plant at Long Harbor, Newfoundland is supposed to come on line next year.

Vale isn't the only company betting that Canadian nickel is still viable. A Toronto company called First Nickel (OTC:FNKLF) is trying to restart operations at the Lockerby nickel and copper mine just outside Sudbury (Canada's nickel center). The Lockerby mine produced 364,000 tons of ore when it was last in operation between 2005 and 2008.

First Nickel has reportedly bought new trucks and installed a new ventilation system at the underground mine, the Canadian Mining Journal reported. The company has also recalled the mine's workforce and plans to have production going again by the end of 2012. First Nickel is also trying to develop at least one new nickel mine in Southeastern Ontario. The company is drilling in at least three locations in that area. Vale's chief of exploration, Paul Davis, told the Mining Journal that he thinks that his company has located deposits there that are similar to the one Vale discovered at Voisey Bay in Labrador.

Falling Nickel Prices could affect Rio Tinto Project in Michigan and other Expansion Efforts

The falling nickel prices bring expansion efforts like Vale's exploration in the far north, First Nickel's attempts and Rio Tinto's Kennecott Eagle Mine on Michigan's Upper Peninsula into question. If between 5% and 8% of current nickel production is unprofitable, as Mr. Sprogis claims, how are these new projects supposed to make money?

The Kennecott Eagle, with its mile-long tunnel, is obviously one of the most questionable mining projects out there. On this website, Rio Tinto (NYSE:RIO) admits that Kennecott, which won't even open until next year, will cost $469 million. Kennecott will only be in business for 7-8seven to eight years, but it is supposed to produce 300 million pounds of nickel and 250 million pounds of copper.

With the demand for copper falling in China because that nation's economic growth is slowing, it is hard to see where Rio Tinto is going to find a market for Kennecott's production. It's also hard to see where companies like First Nickel are going to find a market for its added production as well.

The most likely scenario would be for copper and nickel prices to fall further and bring down mining stocks with them. With projects like Kennecott Eagle out there, it's easy to see why both the market and some analysts have been bearish on mining stocks lately.

Some mining companies, it seems, are their own worst enemies. They are making ambitious plans to increase production at a time when the demand for metals like nickel and copper just does not seem to be there. Not even the recent gains in copper and nickel prices may rectify this situation.

These price gains could be driven by the fact that weather has disrupted mining and ore shipments from Western Australia. Once the weather improves and the Australian mines get back to work, the prices could tumble again. It looks like a contraction in nickel prices and nickel prices is inevitable.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.