Ceasing coverage: Mincor

Nickel: The big picture

Tim Treadgold writes:

Mincor and Panoramic, two small WA-based nickel-mining specialists, were not the first victims of the crash in the price of the steel-hardening metal, nor will they be the last as over-production and “ghost” stockpiles threaten to drive the price to a level not seen for 20 years.

There are multiple problems with nickel, but the core issue is that it has flipped from being a relatively scarce commodity to one that is readily available.

From a price close to $US30 000 a tonne five years ago, nickel is now selling for $US7900/t, a drop of 74 per cent, rendering an estimated 80 per cent of the the world's nickel mines unprofitable and driving some high-cost producers, such as Queensland Nickel, into the hands of administrators.

Compounding the supply surplus is the fact that nickel has only one major use – strengthening stainless steel – and with demand for that material slipping away, especially in China, the price has had only one way to go; down.

As if that was not enough to kill the nickel market there are serious questions being asked over the true level of stockpiles, because what you see in the official figures published by the London and Shanghai metal exchanges do not appear to be telling the full story.

Financialisation, a term used to describe the business of using metal as collateral for bank loans, remains an active trade in China despite it being discouraged by government authorities.

The net result is that large amounts of nickel appear to be in private storage in China, hidden from official view, but hanging over the market.

Rounding off an already long list of difficulties is the currency factor, especially in Russia, which is one of the world's biggest producers of nickel as well as being a country desperate to earn US dollars thanks to the collapse of its own currency, the rouble.

Rather than cutting back nickel output, Russia is increasing production thanks to its competitive currency advantage, ensuring that pressure continues to build in the nickel market.

Without a change in this toxic cocktail of excess supply, financialisation, and falling demand the outlook for the nickel industry is dire, with producers much bigger than Mincor and Panoramic being pushed to the brink of closure.

Cold comfort it might be for investors exposed to small nickel stocks such as Mincor, but they might soon see much biggest nickel producers, including BHP Billiton, Glencore, Vale, and First Quantum, forced to mothball their nickel operations to stem cash outflows.

Ceasing on Mincor

Chris Booth writes:

Mincor has been at the mercy of the falling nickel price for months now. As LME stocks remain steady despite the low metal prices, a likely turnaround in the nickel price may not be seen for some time. This marks the end of an era for Mincor and Eureka Report will be ceasing coverage from here.

Since we last reported in August it has been quiet on the announcement front for Mincor as the spot nickel price dropped rapidly, and last week we saw the LME price fall to US$7900 tonne, a price not seen in nearly 13 years. For Mincor, already struggling at prices above US$10000 tonne, this was the expected final nail in the coffin.

On January 27 Mincor announced the implementation of the final stage of their progressive mining strategy. This stage is to place the Mitel and Mariners mines on care and maintenance to preserve capital for when the nickel price strengthens.

On February 10, a $35m dollar net loss was reported in the half-year results. This was heavily attributed to by impairments, depreciation and redundancy costs. The statement also outlines a cash position of around $25m and a net cash position of $19m.

With the volatility of the previous six months in mind, their cash position shows the incredible discipline in its preservation and keeps the balance sheet in a strong position to hopefully ride out what's left of the downturn.

Also announced late last year was the succession plan for outgoing chief executive Mr David Moore who will be stepping down to a deputy chairman role in early March. Mr Moore has led Mincor since its creation almost 16 years ago, and has provided the passion and strength to compete in the sometimes-difficult nickel market. Ex-chief geologist and now chief operating officer, Mr Peter Muccilli, will be taking over the role as of the February 1.

Final Recommendations

With $20m in net cash, Mincor is currently trading at around 12 cents, which is a premium to cash backing, currently at around 10 cents.

Whilst still some way from the record sub $US4000 prices seen in 1998, recent forecasts are predicting current prices have generally bottomed, however outlooks on the price growth will be slow, and prices above $US12000 tonne may not been seen until at least 2017. With the recovery of nickel expected to be slow, we do not expect Mincor to be in a position for a restart until at least then if not later.

To make a comeback, Mincor will need some growth. Whilst Mariners mine has most likely seen its last bogger, current feasibilities for Durkin North and Mitel/Burnett are being conducted and can provide this growth while out of production.

With $20m in reserve, adding the costs of these feasibilities, potential ongoing fixed costs and the capital required for a restart, we fully expect Mincor's cash position to be depleted significantly by this time.

From here we would expect the price to drop below 10 cents a share (DCF Price target 5-7 cents) and thus is not a company we would expect our investors to park their money in, even at the current low price they are too risky. Our sell recommendation stands.

To view Mincor's forecast and financial summary, click here.