Nickel fills Palmer's pockets

Clive Palmer’s big win of the past year, contrary to popular opinion, was monetary not political.

His Palmer United Party's election to the Senate (and his own election to the House of Representatives) advanced his political ambitions, but an extra $500 million in annual sales revenue for the Yabulu nickel refinery in Queensland has provided a much-needed boost to his finances.

Over the next few years, if nickel-price forecasts from Macquarie Bank are correct, the extra sales revenue flowing to Palmer could amount to more than $1 billion a year.

How much of the cash sticks as profit is unknown because the operational and financial performance of the wholly-owned Yabulu refinery, like much of Palmer’s business interests, is a personal secret.

But, with the nickel price up by more than 40% over the past six months from around $US13,500 a tonne to its current $US19,400/t, there seems little doubt that Yabulu is not the loss-making investment for Palmer which it probably was for several years when there was a global oversupply of the steel-hardening metal.

Not only is Yabulu no longer believed to be an albatross around Palmer’s neck, it is fast becoming something better than a goldmine given that nickel has outperformed gold over the past year and could double again from its current price, according the Macquarie.

Over the next five years the bank expects the nickel price to rise as high as $US38,000/t, thanks initially to an Indonesian Government ban on the export of unprocessed nickel ore, with the effects of that “supply-side surprise” being compounded by natural demand growth.

For Australian investors, the swelling of Palmer’s fortune from nickel sales is an interesting comment on the state of the metal market. It is also a pointer to what has been driving up the share prices of nickel-mining stocks such as Mincor, Panoramic, Western Areas and Independence.

At a political level, the higher nickel price could result in added pressure on the federal government as it tries to win support for its controversial budget at the same time Palmer finds he is in a much stronger position to finance the activities of his Palmer United Party.

There is no doubt that Yabulu – despite its controversial environmental record – is an important asset in Palmer’s eclectic mix of assets. What is less well appreciated is the importance of the refinery (and the price of nickel) in politics, and the success, or otherwise, of the federal budget.

Until now, Palmer’s fortune has been in dispute. He undoubtedly received one-off cash payments several years ago of more than $400 million for iron ore tenements in WA. But, he has not yet been able to access the bulk of a royalty stream expected from the Chinese-owned Sino Iron, which is operating a mine on those tenements.

Nor has he enjoyed strong profits from Yabulu, a problem which is probably being fixed by this year’s sudden increase in the nickel price.

Acquired by Palmer’s privately-owned Mineralogy Group in 2009 from BHP Billiton, Yabulu has a checkered history dating back to its first metal production in 1974 when it was known as the Greenvale project and was treating locally-mined ore.

The depletion of nearby ore in 1995 caused a switch to imported ore, mainly from the Pacific island of New Caledonia, which contains some of the world’s biggest nickel deposits.

Import costs, plus high local energy costs, hampered Yabulu’s profit performance and led to BHP Billiton’s disposal of the refinery in 2009.

For his first few years as the owner, Yabulu was a handy source of revenue for Palmer thanks to the nickel price rising as high as $US30,000/t in early-2011. But the nickel price plunged back to $13,400/t last year, and stayed there for six months.

Always a mercurial metal thanks to periods of over- and under-supply, the most recent down years are a factor in BHP Billiton progressively selling its other nickel assets, including the Ravensthorpe project in WA. Its current plan is to quit the Nickel West business, which is effectively the nickel division of the former Western Mining Corporation.

Yabulu, while in private hands for the past five years, is believed to still have the same capacity as when BHP Billiton sold it. This is around 76,000 tonnes of nickel metal a year, plus 3,200 tonnes of cobalt – a metal used mainly in the production of super-alloys such as the material used in jet turbine blades thanks to its high melting point.

The challenge for anyone trying to work out the operational and financial performance of Yabulu is its private ownership.

However, if the refinery is sticking to the same production levels when it was in the hands of BHP Billiton, the value of its 76,000 tonnes of nickel a year has risen from around $US1 billion annually in the middle of last year to around $US1.5 billion today, and perhaps substantially more after adding in the value of the cobalt.

If Macquarie’s forecasts prove to be correct, and nickel rises to an average of $US26,000/t next year, and then up to $US30,000/t in 2016, and $US38,000/t in 2018, the revenue base of Yabulu from nickel alone could hit $US2.8 billion – with a large proportion of that sales revenue sticking as profit in Palmer’s bank account given that the refinery’s operating costs are fixed.

The political implications of a person with more than a billion dollars annually of spare cash at his disposal should the nickel price continue to rise are interesting. The money at Palmer’s disposal would become even more interesting if he is able to resolve his differences over a disputed royalty with the Chinese iron ore miner, Sino Iron.

The combination of nickel profits, and iron ore royalties, could elevate Palmer to genuine billionaire status, with the potential for him to claim a position as one of Australia’s three richest people, alongside iron ore magnates Gina Rinehart and Andrew Forrest.

The problem for Palmer, and everyone else exposed to nickel, is the way in which it has always suffered extreme price fluctuations.

Today’s driver behind the nickel price is the Indonesia ban on ore exports, an event which could be ended tomorrow if the government of that country changes its policies.

Macquarie’s view of the nickel market is that Indonesia could be sidelined for several years, driving the industry into a sustained “structural deficit” which will wash away the surplus nickel output of the past few years.

The latest forecast from the bank is for last year’s worldwide surplus of 191,000 tonnes of nickel being replaced this year by a deficit of 36,000 tonnes, with the 2015 deficit rising to 131,000 tonnes. This will initially be satisfied by stockpiled material, but will set the scene for a doubling of today’s already stronger price.

For Palmer, that forecast is more than music to his ears. It’s cash in the bank, and it’s more political clout.