Ground Breakers: The new nickel reality is coming, miners tank and Rio Tinto opens wallet for Oyu Tolgoi takeover
We’re a little over a day away from finding out what the new nickel reality has in store.
The London Metals Exchange will reopen with its three month contract at US$48,033/t, just a few thousand dollars short of historic closing highs of US$54,000/t hit in 2007, with strict trading limits.
That came after the world’s largest producer Tsingshan and its bankers broke the market a week ago, sending prices briefly to US$100,000/t on the back of a crazy short squeeze prompted by billions in wrong way bets held by the Chinese nickel company.
Not only will nickel prices be capped at daily up and down limits of at least 5%, other base metals will be capped at 15%.
That move will limit volatility after nickel’s stunning price run, initially prompted by fears Russian supply would be locked out of the market, left traders facing sudden margin calls.
The run up in prices has already played havoc for some producers, who are taking a cautious approach to the “unrealistic” prices hit last week.
IGO (ASX:IGO) has seen the timeline for its $1.1 billion cash purchase of fellow WA nickel producers Western Areas (ASX:WSA) blow out from April to June after WSA said it was getting new advice from its independent expert KPMG on what impact higher nickel prices had on the fair value of the company.
It could mean IGO may have to pay more, despite having the support of WSA’s board and key shareholders like billionaire Andrew Forrest.
China’s largest Covid outbreak and lockdowns in two years have tanked iron ore and base metals, with iron ore prices sliding more than 12 bucks to US$145.50/t overnight.
Palladium prices, strong since the outbreak of war between Russia and Ukraine thanks to Russia’s outsized share of the market, also retraced 15% yesterday to under US$2400/oz on a belief supply issues would not be as large as first assumed.
They were trading at record levels of around US$3500/oz less than a fortnight ago.
Chalice Mining (ASX:CHN), owner of the palladium rich Julimar discovery near Perth, was the biggest loser in the big resources stocks.
It lost around 13% of its value this morning.
Rio Tinto made its biggest ever profit last year, and it is putting some of that financial muscle to work.
Rio has launched its first major corporate splash, announcing a US$2.7 billion deal to take out the minority shareholders in its Canadian subsidiary Turquoise Hill.
That would up Rio’s stake in Oyu Tolgoi to 66%, alongside the Mongolian Government, not long after announcing plans to develop a long delayed underground expansion of the giant copper and gold mine.
The project has been mired for years in disputes between Rio and Mongolia over delays to the project.
Rio, which owns 51% of Turqouise Hill already, will offer minority holders C$34 per share to exit their stakes.
“Rio Tinto strongly believes in the long-term success of Oyu Tolgoi and Mongolia, and delivering for all stakeholders over the long-term,” Rio CEO Jakob Stausholm said.
“That is why we want to increase our interest in Oyu Tolgoi, simplify the ownership structure, and further strengthen Rio Tinto’s copper portfolio.
“We believe the terms of proposal are compelling for Turquoise Hill shareholders.
“The Proposed Transaction would enable Rio Tinto to work directly with the Government of Mongolia to move the Oyu Tolgoi project forward with a simpler and more efficient ownership and governance structure.
“With our relationship reset and the underground operations commenced, this transaction demonstrates our clear and unequivocal long-term commitment to Mongolia.”
Rio reached a deal with Mongolia in January to sign off on the US$7b underground expansion.
The mine is predicted to be one of the largest copper producing operations in the world, churning out 500,000tpa at its peak between 2028 and 2036 and 350,000tpa for another five years after that.
The open pit alone produces just 163,000tpa currently.
The other bonus of the underground development is its 1.52% copper grade and 0.31g/t gold reserve. The copper grade is three times the current open pit, putting Oyu Tolgoi in the lowest quartile of WoodMac’s global copper cash curve.