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Investors once again flock to the prince of base metals: nickel

PT Aneka Tambang's president director, Alwinsyah Lubis, had lots to crow about when announcing numbers for the first half of 2010: net profit of INR 756.3bn was 238% higher than the INR 223.8bn posted for the comparable period of 2009. Much of the reason can be found in the nickel price, which ranged between USD 8.10/lb and USD 12.40/lb during the second quarter of the year.

In terms of price volatility, nickel (most of which is used in producing stainless steel) ranks as one of the most dangerous minerals of all. Go back five years, and nickel roared up from around USD 5.00/lb to a peak of nearly USD 25.00/lb in 2007. Then it crashed back to about USD 5.00/lb during the great commodities wipeout of 2008. Today the price is trading around USD 10.65/lb.

Russia-based Norilsk, the world's No 1 nickel miner (and also No 1 in palladium, No 3 in platinum, and also a producer of gold and copper) also showed an extraordinary return to form this year (leaving aside a corporate battle, which is now waging once again). Group revenue for the first half of 2010 rose 68% to USD 6.8bn; nickel revenues rose 86% to USD 3.1bn. Bottom line profits increased 434%, compared to the same period in 2009, to USD 2.5bn.

The extraordinary increase in nickel prices to the peak in 2007 attracted significant attention from major transnational miners. Around USD 50bn in cash was piled into acquisitions which, even today, look a little overstuffed. In 2006, Xstrata, seemingly never one to miss a party, paid 18.9bn in cash for nickel-copper digger Falconbridge.

Vale, the world's No 2 miner by market value, outbid Xstrata in 2006 for Inco, also paying USD 18.9bn in cash. In 2007 Norilsk outbid Xstrata for LionOre, paying USD 5.8bn in cash for operations that today are mainly under care-and-maintenance. Xstrata continued its belief in nickel into 2008, paying USD 2.9bn in cash for Australian nickel specialist Jubilee Mines.

The collapse in nickel prices took a heavy toll. In January 2009, BHP Billiton,  the world's biggest diversified resources group, closed the relatively new Ravensthorpe, in Australia, and took impairments running into billions of dollars, including also the halting of Yabulu, a processing plant. Both interests were later sold.

When nickel prices are good to excellent, profits can be astonishing. During 2008, EBIT (earnings before interest and tax) from Xstrata's Falcondo operation in the Dominican Republic collapsed to USD 76m, a fall nearing 90%, from USD 655m in 2007, "as a result of higher oil prices and the decline in nickel prices". Falcondo was temporarily suspended in August 2008, and subsequently went into care and maintenance.

Australia's Western Areas, which arguably operates the world's highest grade nickel mines (and appears to have discovered a nickel province), sees four key supply side issues dominating global nickel. First, nickel sulphide deposits, which are relatively easy to process, are not being found any more. Mines based on nickel laterite deposits, which now contribute around 50% of global output, are expensive to build, and relatively expensive to operate.

Nickel pig iron, a relatively new supply, developed by Chinese smelters using low grades ores, mainly from Indonesia and the Philippines, contribute about 10% of current world output. Here, there have been a string of announced cutbacks; the technology may be innovative, but it is hugely energy intensive, and polluting. Fourth, bacterial leaching, where Talvivaara Mining is pioneering the world, in nickel. Here, capital expenditure is relatively low, and energy requirements are relatively modest.

All industry eyes are on the Talvivaara mine, in Finland, which is building up to produce nickel, zinc, copper and cobalt concentrates from bacterial leaching. Around 50,000 tonnes a year of nickel-in-concentrate is anticipated for 2012. Western Areas may also use the technology at its targets in Finland, where Norilsk also mines.

First Quantum, which is building up into a transnational miner, is busy at its Kevitsa nickel/copper/platinum group metals project, also in Finland, where commissioning of the processing plant is anticipated to commence early in 2012.

The relatively modest nickel market is another challenge for investors to contemplate. During 2009, global production of nickel was 1.4m tonnes, according to the US Geological Survey. Compare that, so say, copper, with annual primary output running around 16m tonnes. Norilsk alone is likely to produce around 280,000 tonnes of nickel this year, about 20% of the world total.

There are a number of big projects coming on stream; Vale, for one, earlier this month announced the successful commissioning of its two large nickel projects, Vale New Caledonia (VNC), formerly Goro, where, after a long ramp up, nominal production capacity is anticipated at about 60,000 tonnes of nickel and 4,600 tonnes of cobalt a year. This has been a painful build for Vale; it seems that the final capital spend could be around USD 5bn. At Onça Puma, which cost Vale around USD 2.7bn, full output is projected at about 58,000 tonnes a year.

And then there are the restarts. Given improved market conditions, and a new source of power, Falcondo was restarted earlier this month, targeting reaching 50% of its capacity by March next year. Ravensthorpe, now owned by First Quantum, is under preparation for restreaming. There are other possible restarts across the industry.

Disclosure: No Positions