BHP Billiton's (NYSE:BHP) Nickel West unit in Australia has been on investors' radar ever since the mining giant announced that it may spin off or divest its non-core assets, which also include its manganese and aluminum mining businesses. It is expected that Andrew Mackenzie, who took over the reins of the company last year, plans to make a final call on these businesses by the year-end. For Nickel West, BHP Billiton couldn't have asked for a better time. According to Citigroup's latest survey, the nickel market is set to fall into a big deficit next year.
Also, Sirius, an Australian mining company based in Western Australia has supposedly found a mine with high-grade nickel concentrates. The company is on the lookout for smelters for their ore supplies. It is believed that if BHP Billiton could ink a supply deal with Sirius, then a steady flow of high-quality ores could substantially reduce smelting costs, and as a result Nickel West could fetch a higher valuation.
It has been a remarkable year for nickel, thanks mainly to the export ban placed on mineral ores by Indonesia. Indonesia's ban on mineral ore exports has helped many base metals, including nickel, to bounce back following last year's pounding. Indeed, nickel, which was the worst performing base metal in 2013, has now climbed about 40% year to date in the backdrop of a strengthening global economy and falling supplies. A surge in nickel prices should help miners such as Vale (NYSE:VALE) and Norilsk Nickel (NASDAQOTH:NILSY), as well as BHP Billiton, which is looking to offload its nickel assets.
Last Thursday, though, nickel futures slipped 1.4% at the London Metal Exchange amid speculation that Indonesia might change its policy stance on the export ban following the presidential election. Since Indonesia accounts for about 20% of the world's nickel-ore exports, lifting the ban could flood the market with the key raw material required to manufacture stainless steel.
Additionally, expectations that global nickel supplies were adequate to last all through the year also weighed on prices last week. In a previous article on nickel, I was also doubtful of nickel's continued rally. Back then, I cited Mike Dragostis, a senior market strategist at TD Securities, stating that nickel demand ex-China was weak while the global inventory level was adequate.
Any weakness in the nickel market would be bad news for BHP Billiton as it would have a negative impact on valuations. However, the company can take heart from two important factors that could help it fetch a higher price for Nickel West.
Faster-than-expected depletion due to export ban
Earlier this week, Citigroup forecasted that global nickel supplies could deplete this year at a faster-than-expected rate. As a result, the nickel market, which was forecasted to end in a surplus this year, is now expected to fall into a deficit, the report says. Moreover, the nickel market is slated to go through a huge deficit in 2015, according to Citigroup.
As I mentioned in an article back in May, Macquarie Bank forecasted that global nickel supplies would be reduced by 25% or 482,000 tons due to Indonesia's decision to ban mineral ore exports.
Morgan Stanley estimated that the ban would bring down the nickel surplus to 70,000 tons in 2014 from last year's 173,000 tons. The bank also forecasted that the nickel market would fall into a deficit of 60,000 tons in 2015.
In its previous forecast, Citigroup expected a surplus of 30,100 tons in 2014 and a deficit of 132,200 tons in 2015.
But the supply squeeze of nickel ore caused by Indonesia's export ban has substantially reduced China's imports. Indeed, according to Citigroup, China's nickel ore imports from Indonesia plunged 99% in May, year-on-year.
Citigroup now expects that the nickel market will fall into a deficit of 3,000 tons this year while the deficit will widen to 134,000 tons, next year. The bank now estimates average nickel prices will climb by 12% to $18,550 a ton.
Moreover, the ban on ore exports is likely to continue. According to Australia & New Zealand Banking Group Ltd, expectations that Indonesia may relax its export ban should business-friendly candidate Joko Widodo defeat his rival Prabowo Subianto, is misplaced as none of the candidates have given any indication on removing export ban.
A deal with Sirius could boost interest in Nickel West
Australian miner, Sirius Resources NL, has seen its stock skyrocket after it found a high-purity nickel mine in Western Australia two years ago. The production is expected to begin in 2016, and the company can provide up to 26,000 tons of nickel ore annually. Earlier on Monday, Sirius revealed that its high-grade Nova deposit could produce nickel at $2.09 per pound, which is way below today's market price of $8.79 per pound. Thus sourcing nickel concentrates from Sirius could substantially bolster a smelter's margins. Sirius is in late-stage talks with many major nickel smelters.
This high-quality mine is not far away from BHP Billiton's Nickel West assets. It is believed that BHP Billiton does not have a steady supply of high-quality feed for its smelting facility located at Kalgoorlie. Although, BHP Billiton has declined to comment over the matter, it is believed that should the miner enter in a deal with Sirius, it could generate more buying interests for Nickel West as steady source of high-quality concentrates would offer economies of scale.