Nickel - a speculator's playground

Low prices have pushed Australia's nickel-mining industry close to collapse, but if conditions are so bad, why have investors just tipped close to $100 million into three small nickel-exposed stocks?

The answer is a belief that a price-recovery is inevitable, if only because it can't get much worse and that nickel has a habit of falling into a deep hole before springing back with an explosive rebound and a burst of takeover action.

Signs of “jockeying” for position before any merger and acquisition activity gets underway can already be seen in a number of nickel stocks with the some of the fresh cash undoubtedly being earmarked for asset purchases before a price rebound.

Events at Talisman Mining, which has copper and gold assets as well as a dormant nickel mine, are a pointer to the change process underway, with the chief executive quitting three weeks after completing a heavily-over-subscribed capital raising, followed by the appointment of a new chairman with a track-record of success in the nickel industry.

Apart from Talisman, which raised $16.7 million on March 10, the other companies getting a cash injection, even as the price of nickel fell another 10 per cent last month from $US4.22 a pound to $US3.79/lb, were Western Areas and Panoramic Resources.

Western Areas, which operates a number of nickel mines in WA, raised $70m last Thursday (March 31), while Panoramic, which has closed most of its mines, raised $10.7 million on the same day.

A fourth nickel miner, Mincor, which has also suspended most of the its operations because of the low price, has said it is getting ready for a price rebound by dusting off plans for “a path back to recovery”.

This is easy to dismiss as misplaced optimism because the nickel price has fallen by 70 per cent, from around $US13/lb five years ago, and there are pressures building which could soon force a number of major producers to quit the industry, in much the same way Queensland Nickel has been mothballed.

The problems at the Townsville-based Queensland Nickel go beyond the price of the finished product because they are tied to the fortunes of financially stretched entrepreneur and member of parliament, Clive Palmer.

Queensland Nickel, however, is a minor player in an industry which is dominated, in terms of volume, by three big producers: BHP Billiton and its Nickel West business, the Murrin Murrin mine of Glencore, and the Ravensthorpe mine of London-listed First Quantum.

None of the big three are believed to be profitable at the current nickel price and all are under pressure to cut output, or suspend operations while the nickel market remains flooded with supply, especially from Norilsk Nickel in Russia, which is enjoying the benefits of rouble-based costs and US dollar income.

It is Russian nickel, plus low-grade but cheap material from Indonesia and the Philippines, which is keeping stockpiles high and prices low.

But, with an estimated 60 per cent of the world's nickel currently being produced at a loss, there is a widely-held view that something has to give, and that something is most likely to be the closure of some (or all) of Australia's big and uncompetitive mines; Nickel West, Murrin Murrin, and Ravensthorpe.

At Western Areas, the lowest cost Australian nickel producer thanks to its high-grade ore, the plan is to use the $70m in fresh capital raised through issuing new shares at $1.95 (slightly below the current price of $2.01) in strengthening the balance sheet and getting ready for a recovery in the nickel price.

One area of interest will be the potential for a re-start of mining at the Cosmos mine, which Western Areas acquired from Glencore last July for $24.5m.

Western Areas said in its capital raising announcement that studies were underway to test “the ability to re-start discretionary capital projects at short notice when justified by nickel market conditions”.

Cosmos is a mine close to the heart of the modern Australian nickel business thanks to its discovery by Jubilee Mines, when that company was led by Kerry Harmanis, who successfully sold it to Xstrata (now Glencore) for a $3.1bn in 2007. This generated a personal payday for Harmanis of $500 million.

That deal, done at a time when the nickel price was six times its current level at more than $US22/lb, is a guide to the volatile nature of the metal and the lure for investors by its extreme price movements.

Harmanis, despite adopting a low key since selling Jubilee, has never left the nickel business, maintaining a major shareholding in Talisman Mining, contributing to last month's capital raising – and almost certainly having a say in last week's management shuffle.

The changes at Talisman, which owns the dormant Sinclair mine (acquired from Glencore last year) have seen Gary Lethridge replaced as temporary chief executive by the company's chief financial officer, Dan Madden, while Jeremy Kirkwood was appointed chairman.

The well-connected Kirkwood worked with Harmanis during the Jubilee sale and his new position at Talisman means the two will once again be working closely.

At Panoramic an equally interesting situation appears to be emerging, with the fresh $10.7m being raised via an underwritten share issue priced at 10c, slightly more than the latest on-market price for the stock at 9.7c.

In theory that might see the underwriters, led by Bermudan-based Zeta Resources, lift its current 19.3 per cent stake in Panoramic to a notional 35.47 per cent if no other shareholder subscribes for the issue.

A potential change of control at Panoramic is listed as one of the risks in the rights issue, though the biggest risk is almost certainly the price of nickel.

What happens next in the nickel business will keep investors on their toes because either the industry will collapse further with more mine closures – or the closures will trigger a nickel revival.

Look at either way, recovery or downgrade, nickel is no place for the faint-hearted investor, but a wonderful playground for speculators.