BHP’s biggest unwanted asset

Investors should hear on August 25 whether BHP stays in nickel.

Summary: A plan for the future of BHP Billiton’s unwanted Nickel West business is possible when the Big Australian releases its full-year results on August 25. Offers last year for the business were well short of the initial price tag, and the way BHP Billiton manages its exit will be closely watched.

Key take-out: A quick exit would suit everyone – BHP Billiton just has to work out whether that’s the best financial option.

Key beneficiaries: General investors. Category: Mining stocks.

Most nickel miners are losing money at the current price for the steel-hardening metal but that could be the reason why the sector is worth watching as BHP Billiton moves closer to a decision on its big, but unwanted, Nickel West business.

The future of Nickel West, which was once the nickel division of Western Mining Corporation, has been in doubt for several years despite it producing a whopping 90,000 tonnes of nickel annually.

If that amount of material, equivalent to 5 per cent of total global supply, was suddenly removed from the market the effect on the price of nickel could be significant.

A decision on the fate of Nickel West has not been revealed by BHP Billiton but it is known that an attempt to sell the business last year failed, and it was omitted from the assortment of assets shifted into the South32 spin-off.

Today, Nickel West sits oddly as a separate item in BHP Billiton’s production reports under the heading of “other”. It is also the last business mentioned after the favoured divisions of oil, copper, iron ore and coal.

A sale, at a bargain basement price or even with a cash incentive from BHP Billiton for a new owner, is possible but the costs associated with eventually closing 50 year-old Nickel West are believed to total more than $1 billion, whoever owns it.

The next critical date for Nickel West is August 25 when BHP Billiton releases its financial result for the year to June 30 and could use that event to reveal a plan for a business unit which is losing money and could continue to bleed for several more years unless an exit route is found.

Last year’s attempt to sell Nickel West produced a number of valuations and likely closure dates as well as revealing the complexity for BHP Billiton as it tries to extricate itself from a business it doesn’t want.

Offers for Nickel West were reported to have included $250 million from Glencore which owns the Murrin Murrin nickel mine, an offer well short of the initial $800m price tag put on Nickel West by BHP Billiton, and the final, discounted, price of $350m.

When the sale process collapsed BHP Billiton said in a statement that: “At this time, Nickel West will remain in the BHP Billiton portfolio as a non-core asset and the company will continue to operate the business to realise its full value.”

When that statement was made the price of nickel was around $US7 a pound. Last night nickel closed on the London Metal Exchange at $US4.87, its lowest for six years and down 30 per cent since the start of the year.

While the nickel price was in the $US7/lb range BHP Billiton could probably justify operating Nickel West on a cash-only basis with no fresh capital being invested, giving it time to work through a range of problems such as honouring commitments made to the WA Government, managing its 1800-strong workforce, and meeting contractual obligations to some small miners which have their ore treated at Nickel West’s processing facilities.

But, with the nickel price below $US5/lb the cost of keeping Nickel West in business has become less likely, especially as its 90,000 tonnes of metal are having a significant depressing effect on the nickel price.

How BHP Billiton manages its exit from Nickel West will be closely watched by the rest of the nickel industry and by BHP Billiton shareholders with both of those groups keen to see it close in order to stem the flow of nickel into a flooded market, and to stem the heavy losses being incurred by keeping the business alive.

A quick exit would suit everyone. BHP Billiton just has to work out whether that’s the best financial option, or whether it continues to operate Nickel West in the hope that either a buyer emerges, or the nickel price recovers – or, preferably, both.