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This Is the Ideal Time for BHP Billiton Ltd to Offload Its Nickel Assets

Nickel prices have surged this year due to Indonesia's export ban, which has raised supply concerns. The nickel market, which has been oversupplied over the last few years, is now expected to go into a deficit. Not surprisingly, the outlook for nickel prices is robust. Strong nickel prices will help the likes of Vale (NYSE: VALE  ) and Norilsk Nickel (NASDAQOTH: NILSY  ) . They will also help BHP Billiton (NYSE: BHP  ) , which is looking to offload its nickel assets.

Surging nickel prices
After crossing $20,000 a ton, nickel prices surged to over $21,000 a ton last week amid concerns over supply due to Indonesia's export ban. Indonesia, which accounts for over a quarter of the world's production of nickel, banned exports of nickel ore grading less than 4% nickel earlier this year. The move has completely changed the fundamentals of the nickel market, which was oversupplied until last year. It has also sparked a huge rally in nickel prices.

While nickel prices saw a pullback last week after surging above $21,000 a ton, prices are still up sharply for the year. More importantly, prices are expected to further strengthen as Indonesia has not shown any intention of lifting the ban on exports.

On Tuesday, the world's largest producer of nickel, Norilsk Nickel said that the global nickel market will swing to a deficit next year. The Russian company said that the global nickel surplus will fall to a four-year low this year before swinging to a deficit in 2015. According to Macquarie, demand will exceed output through 2019.

Not surprisingly, the outlook for nickel prices is robust. Macquarie recently raised its price outlook for nickel for 2014 by 25% to $19,911 a ton. The bank notes that prices could nearly double by 2019. Deutsche Bank is also bullish on nickel as it recently raised its 2015 price target for the metal by 21% to $20,625 a ton. Deutsche Bank expects prices to hit $27,000 a ton by 2017.

The surge in nickel prices would be welcome news for miners such as Vale and BHP Billiton, albeit for different reasons. While strong nickel prices will help Vale in offsetting some of the weakness in the iron ore market, for BHP Billiton robust prices mean it will be easier for the company to offload its nickel assets.

BHP reviewing options for Nickel West business
BHP Billiton has said in the past that it wants to focus on its core business, which includes iron ore, copper, petroleum, coal, and possibly potash. BHP has already exited a number of non-core businesses, and earlier this month, the company said that was reviewing options for its Nickel West business. This doesn't come as a surprise as the surge in nickel prices has made it an ideal time for the company to offload its nickel assets.

BHP's Western Australian Nickel West business includes three mines: the Mt. Keith, Cliffs, and Leinster. The business also includes the Kalgoorlie smelter, Kambalda concentrator, and the Kwinana refinery. The company said that it is considering all options for Nickel West, including a possible sale. According to analysts at Investec, the business could fetch the Australian miner as much as $700 million. Given the robust outlook for nickel prices, the company is likely to see significant interest in its nickel business. The mining sector is seeing interest from private equity firms. In addition, there are mining ventures such as X2 Resources that have been created to invest in the metals and mining sector. 

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Varun Chandan

I have a Master in Finance degree from IE Business School in Madrid. I use the top-down approach when it comes to investing. I like to analyze macroeconomic factors and how they impact individual companies.

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8/27/2015 4:01 PM
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