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Ground Breakers: WA’s nickel sector remains on a knife edge after BHP results
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There is little indication the Australian and WA Government’s decisions to prostrate themselves in an attempt to salvage the local nickel industry will keep it in business, with BHP (ASX:BHP) CEO Mike Henry playing his cards close to his chest a week on from an announcement that it could place the Nickel West operations on care and maintenance.
One of the world’s largest nickel sulphide businesses turning over 80,000t of nickel metal per annum fell heavily into the red in the December half, eating a US$200 million loss as a flood of supply from Indonesia — up 3.6x since 2019 on BHP’s numbers — saw prices fall deep into the cost curve.
BHP thinks 50% of the nickel market is now lossmaking. Most of those in the green appear to be Chinese backed players in Indonesia, a country producing what Aussie mining billionaire and of late climate campaigner Andrew Forrest has described as ‘dirty nickel’.
Regardless of the impression such epithets have left on western automakers they still see the value in using Indonesian sourced battery nickel for their vehicles. There is no Western ‘green premium’ to speak of at this point, something the Aussie Government is pushing to see.
The Australian Government made a bid to keep nickel miners in operation and spending to extend the life of their assets — BHP has to make a decision on whether to invest in a US$750m-1b rebuild of its 52-year-old Kalgoorlie smelter this year — by placing the commodity on the critical minerals list.
The WA State Government will provide an 18-month royalty discount for nickel producers. Already BHP suppliers Wyloo Metals and IGO have announced plans to head into care and maintenance at their Kambalda and Cosmos mines, with separated closures or production curbs announced by Panoramic Resources (Savannah), First Quantum (Ravensthorpe) and Mallee Resources (Avebury). The companies behind the former and latter were already in administration.
Studies ahead
BHP has flagged that there are studies ahead to see how it will transition into care and maintenance and if it decides to do so.
It has an integrated network of assets including a series of mines, three nickel concentrators, the smelter — which produces nickel matte — and a refinery in Kwinana producing nickel powder, briquettes and sulphate.
All up that amounts to around 3000 jobs, but also a serious number when it comes to environmental liabilities. BHP’s CFO David Lamont said a US$900m closure provision which pushed its nickel accounts to a US$300m liability after a US$2.5b post-tax write-off last week was a new number.
But rehab is rarely if ever completed successfully and in line with best estimates. Look at the escalating budget for Rio Tinto’s clean up of the Ranger uranium mine for instance.
Those are all things that will need to be studied. But what Mike Henry did tell media in a conference call was that even the promise of government support mechanisms like production tax credits could still not be enough to keep the loss-making division in action.
Its boffins think oversupply of nickel metal in global markets — equal to around 5% of annual demand — could be in place until late this decade.
“We’ve been very clear as well however that the oversupply in the global nickel market … is so stressed at the moment and it’s likely to remain so for years ahead, that it could be that even policies like a production tax credit won’t be enough to alter course for those players who move their operations into care and maintenance already, or potentially for BHP,” Henry said.
“But we have flagged that we still have some studies ahead of us to look at the various options available to us, keeping in mind that this business has been lossmaking for some time, and that situation has worsened in recent months with the excess supply that’s made its way into the market and a few other market market factors.
“Our business is different than the other nickel players who’ve already moved their assets into care and maintenance in that we have a smelter and refinery.
“It’s a much more complex decision to look at how you move those into a period of care and maintenance and preserve the realistic ability to move them out of care and maintenance in due course. So … we’ll be investing in that effort and considering those alternatives in the months ahead.”
BHP’s profit copped an 86% hit on the back of the Nickel West impairment and a more than US$3 billion increase in the provision for the Samarco dam disaster, falling to US$927 million.
But it still beat analyst estimates on dividend payments, issuing a US72c per share payout equivalent to US$3.6b ($5.5b) on the back of strong iron ore and copper earnings that powered the miner to an unchanged underlying EBITDA result of US$6.6b.
However, net debt rose from US$11.2b to US$12.6b on the back of dividend payments and a capex spend lifting 57% to US$4.7b for the half year to December 31.
BHP (ASX:BHP) share price today
Coronado, Ramelius down as miners plug away in BHP’s shadow
BHP cast a long shadow over the ASX materials sector today, as Rio Tinto (ASX:RIO) and Fortescue (ASX:FMG) will in the days ahead.
The materials sector outpaced losses in the broader market, falling 0.74% this morning after BHP’s results announcement.
But a few other stocks quietly put their numbers out to the market in its shadow.
Met coal miner Coronado (ASX:CRN) fell 6.25% after seeing its profit (net income) slide 79.8% from US$771.7m in 2022 to US$156.1m in 2023.
That came after revenue fell 19.1% to US$2.89b while sales volumes from its Curragh mine in Queensland and Buchanan in the USA fell 1.1% to 15.8Mt and costs rose 21.7% to US$107.6/t.
It offered a standard US$8.4m fixed payout of US0.5c per share, with met coal prices well above long-term levels but down 18.5% over the year to US$296.3/t.
They see Indian met coal demand however leading to long term growth for the sector, projecting seaborne met coal demand will lift from 358Mt to 613Mt by 2050, largely underpinned by the rise of India’s steel producers from a capacity of 141Mt in 2023 to 531Mt in 2050.
Coronado expects to produce 16.4-17.2Mt in 2024 at a cost of $95-99/t, with capex in a range of US$220-250m — potentially higher than 2023’s spend of US$227.8m.
Also reporting today was mid-tier gold miner Ramelius Resources (ASX:RMS), which decided not to declare an interim dividend despite a 42% lift in NPAT to $41.2m.
It saw EBITDA rise 39% to $140.2m after a beat on gold production and near record gold prices, churning out 124,047oz at $1899/oz in the first half.
RMS expects to produce 265,000-280,000oz for FY24 at $1750-1850/oz, with higher output from the more costly Edna May gold mine and repairs to a conveyor belt pushing its all in sustaining cost guidance up from $1550-1750/oz.
But the gold digger sees higher ounces from the super-high grade Penny mine at its Mt Magnet operations bringing costs down in the second half.
