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Mining
Nickel’s historically volatile run in March after the Russian war with Ukraine could tear IGO’s (ASX:IGO) $1.1 billion deal to acquire Western Areas (ASX:WSA) to shreds after its independent expert reportedly said the price offered was neither fair nor reasonable.
The stainless steel and battery ingredient was the strongest performing metal out of the major commodities in March, climbing more than 30% to US$32,107/t. It’s currently buying US$33,245/t.
Those are levels not seen since the GFC and 70.5% higher than the US$19,500/t price when IGO announced the recommended all cash takeover at $3.36 a share on December 16 last year.
Hold the goddamn phone though. IGO has revealed Western Areas’ independent expert KPMG now believes its bid is out of the money, after a review prompted by nickel’s wild bull market previously delayed the closing date for the scheme of arrangement from April to June.
Western Areas has entered a trading halt, but IGO, which wants to snare WSA’s Forrestania and Odysseus nickel operations to counter the shortening life of its Nova nickel and copper mine, spilled the beans.
“IGO’s understanding of the primary reason for this trading halt is that the Independent Expert engaged by
Western Areas has concluded in its draft Independent Expert’s Report (IER), which IGO has not sighted, that
the Scheme is neither fair nor reasonable to Western Areas shareholders and is therefore not in the best
interests of Western Areas shareholders and, as a result, the Board of Western Areas intends, based on the
terms of the current Scheme, to adversely change its recommendation to vote in favour of the Scheme and
terminate the Scheme Implementation Deed with IGO,” the company in a sentence as riddled in anxiety as it is unnecessary commas.
To break it down, WSA plans to tell its shareholders not to sell to IGO now. It comes after IGO secured a deal with potentially troublesome WSA shareholder Andrew Forrest to support the deal after the mining billionaire had built a ~10% stake via his private explorer Wyloo Metals.
Unsurprisingly, IGO thinks its $3.36 bid is still a fair call even though at $3.65 WSA was trading well above the IGO offer price ahead of its trading halt.
“As previously stated, IGO’s valuation of Western Areas and the proposed Scheme consideration of $3.36 in
cash per share were based on IGO’s long term view of the nickel market fundamentals and price. Despite
recent volatility in the nickel price, IGO’s long term view on the nickel price has not materially changed,” the company said.
“IGO remains focused on pursuing growth opportunities that deliver value to IGO’s shareholders. While it will
assess all options available with respect to the Scheme, IGO will remain disciplined in the execution of all
merger and acquisition activity.”
The commodity has been remarkably unstable since Russia invaded Ukraine, with a short squeeze prompted by supply fears due to Russia’s status as the world’s number one producer of refined nickel exacerbated by a short position of up to 150,000t held by Chinese stainless steel producer Tsingshan.
As prices tornadoed skyward, short bets on the price falling gave way to billions in margin calls, prompting a liquidity crisis for Tsingshan, its bankers and exchange traders.
That sent prices up more than 100% in a day to over US$100,000/t on March 8, prompting the London Metals Exchange to shut the market for a week and cancel trades above the US$48,033/t closing price from the prior day. It returned with price limits, initially 8% up or down in a day then 15%.
These have restricted trading upwards but also kept prices from falling back to pre-war levels. That created the issue for IGO, which had already seen WSA shareholders buy above its $3.36 bid price in the hope IGO was outmanoeuvred by a new buyer or would be forced to up its offer.
Another nickel miner some analysts feel is undervalued at the moment is Mincor Resources (ASX:MCR), which RBC Capital Markets has named as its sector pick.
RBC’s Paul Wiggers de Vries initiated coverage with a $2.75 price target and outperform rating today, saying Mincor is trading at a discount to its peers at an EV to EBITDA multiple of 5.5x against 9x EV for other miners in its sector.
RBC is conservative on the current nickel price at $8/lb, and says a 30% drop in its forecast LME prices would knock its price target down to $1.40 for the currently $1.17b Mincor, which is already up 35% year to date.
But de Vries thinks the downside risk is limited.
“We believe a drop this extreme is unlikely as 1) the current spot price is >50% higher than our FY22 forecast, 2) class one nickel remains in short supply, and 3) access to nickel has become increasingly harder due to the Ukraine/ Russia conflict,” he said.
“It should be noted that we expect Mincor would remain cash flow positive through the cycle even if nickel prices dropped 30% below our forecast.”
De Vries says RBC’s price target would value Mincor at a similar EV to Western Areas.
“By comparison our A$2.75/sh price target for Mincor, implies a similar EV for WSA. However, Mincor has a strong FCF yield, return on equity/capital, higher quality Nickel resources (Cassini vs Odysseus) and exploration upside, but currently a lower mine life,” he said.
Mincor has delivered first ore to the BHP Kambalda Concentrator from its north Kambalda operations and recently hit development ore at the new Cassini mine near Widgiemooltha.
It expects the resumption of concentrate production from its ore at BHP’s Kambalda nickel concentrator to take place in the June quarter. According to de Vries, Mincor will have a 12% free cash flow yield in 2022-23 at a forecast price of US$9.81/lb.
But at the March quarter average of US$12.95/lb that becomes 22%.
“MCR offers exposure to low risk, nickel sulphide production growth from its mining assets (Durkin North, Cassini, Miitel and Long). Being historic Mincor mines (except Cassini), the geology is well-understood and key mining infrastructure is in place,” de Vries said. “Ore will be processed at Nickel West’s Kambalda concentrator, which is designed to, and historically has, processed ores from Durkin North and Long. We forecast MCR to produce 15ktpa of Nickel at AISC of ~A$4.41/ lb over five years for initial capex of only A$68m.”
IGO’s motivation for the WSA deal is to deal with mine life concerns and revive plans to go further downstream into the production of nickel sulphate for the battery market.
While lithium ion batteries for EVs accounted for just 12% of nickel sales in 2021, that is a rapid rise on the fraction of sales that went into that market a few years ago.
EV sales hit a record 6.5m globally last year with expectations they could hit ~10m in 2022.
By 2030 an additional 1Mt of nickel demand could come from batteries, compared to the 320,000t last year.
Supplies are short and nickel sulphides like those produced by IGO, WSA, BHP (ASX:BHP) and Mincor are currently the main product used in the market.
Indonesia’s large scale laterite mines mainly supplying nickel pig iron to stainless steel producers, despite early attempts to produce nickel matte and HPAL nickel hydroxide for lithium ion batteries.
But RBC’s Kaan Peker in a separate note warned the risks may outweigh the benefits for miners looking to head further downstream.
He says BHP’s Nickel West division, which recently opened a nickel sulphate plant in Kwinana, remains best placed to capture this market.
“Given the positive sentiment towards nickel demand from the battery sector, and the plans outlined by WSA and IGO to head downstream (and OZ Minerals and Wyloo), both companies could be opting out of future off-take with NiWest (IGO and WSA provide ~25kt of nickel concentrate to NiWest),” Peker said.
“The upside is increased realisation of the LME nickel price and the nickel sulphate “premium”. The trade-off and risks are plenty – processing capex on new technology, accreditation of nickel sulphate produced to high quality specifications, marketing/distributing of specialised products, with an uncertain sulphate “premium” and no market of last resort (like the LME for nickel metal).
“We see this trade-off balanced under an off-take with payability term of 78-80% (US$8/lb nickel long-term and US$2000/t sulphate premium), which are where payabilities are set,” Peker said.
“In our view, NiWest is best placed to produce nickel sulphate, given it is vertically integrated, produces key cost inputs, has the infrastructure and a simpler sulphate process.”
The premium for nickel sulphate has waxed and waned in recent years (and at this exact moment is hard to quantify given the wild swings in the LME nickel price).
RBC thinks that value will likely be found by the miners higher up the chain given supply tightness and not processing capacity is the biggest bottleneck.
“Moving to 2023, supply tightness is likely to ease as these projects continue to ramp up and lower-cost HPAL projects in Indonesia are expected to commission first sulphate production (likes of PT HPL),” Peker said.
“The availability of suitable feedstock rather than processing capacity is the biggest bottleneck in the nickel sulphate supply chain, in our view.”
“This leads us to believe that economic rent across the nickel value chain will most likely accrue upstream. We don’t necessarily consider the recent motivation to develop downstream processing the solution to margin expansion, especially if elevated payabilities are contracted.”
Peker says BHP is planning to be more self-sufficient in its nickel supply as it ramps up from a current production level of 85-95,000tpa to 105,000tpa, something that could improve Nickel West’s margins.
In other nickel news today, Poseidon Nickel (ASX:POS) has placed a September 2022 date on the release of a BFS on its Black Swan nickel project near Kalgoorlie, with a final investment decision likely to come around the same time.
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