MINING MARKETS & INVESTMENT NEWS — INVESTMENT COMMENTARY — European analysts monitor Aussie upstarts

These are tough times for the nickel business, and some analysts contend that a crisis is looming in the years ahead as a new crop of nickel projects comes on stream, including some high-profile Australian laterite deposits.

In a recent research report, mining analysts Rhona O’Connell and Roger Chaplin of T. Hoare & Co. note that, by the year 2003, these new sources of nickel production may raise total western supplies by roughly 40% over 1997 levels. The impact of these new low-cost projects — which are expected to drop average costs to around US$1.30 per lb. from US$1.60 per lb. — will far outweigh the forecast 15% growth in nickel demand over the same period.

“With this massive supply/demand imbalance, something has to give,” the authors conclude.

While the report features overviews of major producers such as Inco and Falconbridge (both rated a “hold”), it also includes an interesting summary of four companies developing laterite deposits in Australia, including Anaconda Nickel, 60% owner of the Murrin Murrin project, which is expected to be commissioned this fall.

The authors estimate that cash costs at Murrin Murrin, after byproduct credits, will be just over US$1 per lb., “so this project should be profitable.” Production will be roughly 45,000 tonnes nickel in the first year, but could readily be pushed to around 65,000 tonnes. Moreover, a longer-term expansion to 115,000 tonnes per year is being considered on the back of increased reserves.

“The capital costs of US$600 million should have a pay-back of just over four years at the current nickel price, without the major expansion,” the report states.

The report describes Australian-listed Anaconda as “the strongest performing nickel share over the past year,” though the analysts note that its current price is not quite at the peak seen in late 1996 (A$4.50), yet remains above its trading range for most of 1997. Despite its recent strong performance, Anaconda Nickel was rated as a hold.

Canadian-listed LionOre Mining International (LIM-C) was also rated as a hold, as its nickel projects were viewed as having relatively high costs.

This company has, over the past few years, acquired a small operating nickel mine, plus two development projects in joint venture with a South African company. Chaplin notes that the company’s one gold mine, which produces about 100,000 oz. per year, “generates more revenues than the nickel business at the moment.”

Although LionOre’s 42%-owned Tati nickel mine in Botswana produces about 7,000 tonnes of the metal per year, the report suggests that the company’s future hinges on the development of its two Australain joint ventures: the 37.5%-owned Emily Ann project and the 50%-owned Maggie Hays.

The most advanced of the two is Emily Ann, which is expected to produce about 15,000 tonnes nickel per year at a cash cost of US$1.66 per lb.

Startup is expected in late 1999. Maggie Hays, meanwhile, is expected to have costs of around US$2.55 per lb. The analysts predict that it will only be developed if the nickel price improves considerably. They also note that the company’s share price has dropped about 80% from its early 1997 high of more than $4.50.

The analysts also wonder if Calliope Metals (CYO-V) will build its planned nickel-cobalt pressure acid-leach plant in Australia. “This [speculation] has been reflected in the share price, which has fallen by about two-thirds from its peak six months ago,” the report states. “In the current nickel market, we recommend that investors avoid Calliope.”

Only Centaur Mining, described as “the most advanced of the new Australians,” was rated a “speculative buy.” The company is building the Cawse project, which is expected to begin production this summer. Output is small, at about 8,500 tonnes nickel per year (plus 2,000 tonnes cobalt), but the cash costs, net of byproducts, are expected to be low, at US36 cents per lb.

“This should ensure that the project is profitable even at the current low nickel price, with a payback period on the capital cost (US$169 million) of less than five years,” the analysts conclude. “Centaur’s share price has fallen by more than 50% in the past year; if the project works, it will be the first acid-leach nickel operation in Australia and the publicity should see a good performance from the shares.”