Mincor Looks Well Set To Ride Out The Current Weakness In The Nickel Price
By Our Man in Oz
minesite.com
It’s awfully hard to get excited about a nickel mining company at a time when the metal itself is in the doghouse. With Mincor, however, it’s just about possible to make an exception. Not because the Australian miner has a surprise profit in its back pocket, or even because it’s made an exciting discovery. It’s more that Mincor is sticking to its knitting in this downturn, and doing it well. Costs have been cut, but not to the point of hurting the core business: cash is being carefully husbanded, exploration trimmed, but not stopped, possible acquisitions analysed, but without any need to rush things. In other words, Mincor is ticking over and getting set for the inevitable upturn in nickel demand and in the nickel price, at which time it will be one of mining sector’s big winners.
“We’ve warned the market that we’ll not be making a profit in this half”, David Moore, Mincor’s chief executive, says during a chat to Minesite’s Man in Oz that took place earlier this week. It’s a statement that he’s almost keen to make - as if emphasising how tough business conditions are. “The key to everything we’re doing is managing the downturn so that we’re well placed when conditions improve. Key parts of our strategy are to protect operating margins and to protect our balance sheet. We have set a goal of expanding our resource base so we can lift production into the next upturn at a re-set cost base.”
After a serious decline in the company’s share price during 2008 investors are starting to understand Moore’s plan. Since the shares hit a 12 month low of A45.5 cents in late November, they’ve been on the move back up. Last week, the shares hit the A$1.00 mark, before retreating back to around A76 cents, a price which values the company at a lazy A$151 million, half of which can be accounted for simply by the cash in Mincor’s bank account. The other half of the valuation is represented by some of the world’s best nickel deposits, located as they are around the Kambalda Dome in central Western Australia. These are the same mines which once made Western Mining Corporation a household name in mining.
Over the past eight years, and, if you care to go back that far you’ll recall conditions remarkably similar to those prevailing at the current time, Mincor has carefully pulled together a portfolio of assets stretching right around the Kambalda Dome. For the record, the Kambalda Dome is a geological structure surrounded by ancient volcanic lava channels which contain high-grade nickel. And plans for production from a suite of mines was moving towards a steady-state 20,000 tonnes of metal a year before the global financial crisis struck. The current plan is to produce between 16,000 and 19,000 tonnes of metal a year. The cutback has been largely achieved by mothballing the Miitel mine, in favour of drawing up a new mine plan, and by mining more carefully at other mines.
The most important result of trimming Mincor to fit tougher times is that all the operations are cash positive, even if they’re not profitable in a strict accounting sense. The cash cost per pound of nickel has been reduced to around US$2.80, which, at the current price for the metal means the company is still generating positive cashflows of between A$2 million and A$5 million a month. “There’s no denying how tough conditions have been,” Moore says. “But we have also been able to maintain a very robust financial position in the depths of a downturn, which means we are exceptionally well placed for any upturn. Right now, we’re in a very solid position.”
Moore says the early-January increase in the nickel price, when it rose to more than US$5.80 a pound did help, while the latest retreat to US$4.62 per pound will hurt. However, offsetting the price fall in US dollar terms has been a corresponding decline in the value of the Australian dollar. In the local currency, which has retreated to around US65 cents to the dollar, Mincor is still getting more than A$7.00 per pound. Helping further is a modest hedging program, which covers about 15 per cent of production, and which has a positive value of close to A$40 million.
One of the best ways of looking at Mincor is to consider not the operations it still has in production, but rather the one mine that it has actually mothballed. Miitel was closed for the best of reasons, to allow the company to stand back and take a closer look at how best to mine the expanding resource there. “Miitel has got a lot of good years ahead of it”, Moore says. “When the nickel price fell sharply we found that we could continue mining at a cash margin, but not at a profit.” But, with the mine crews out of the way, Mincor is now able to better analyse an exciting discovery called the Burnett Shoot which has revealed very high grade assays of up to 13.15% nickel. The discovery is rated one of the most significant in several years.
Moore says that when nickel dropped as low as US$4.20 per pound in early December, every nickel miner in the world was under pressure. “But, even at that price our operations were still cashflow positive. That’s good, but not really where you want to be, when you think of the all the other things you want to do such as keeping reserves up”. He adds: “We’re going along fairly comfortably but it would be nice to see a return to US$8.00 per pound, because that’s when the party starts. At US$10.00 you can have a lot fun.”
Exploration, critical to the successful operation of the geologically-complex type of mine found in the Kambalda region, is continuing, Moore says. “We’ve cut back on the early-stage generative work,” he explains. “The key work of expanding resources and converting resources into reserves is continuing.”
If the geology is under control, then the financial structure of Mincor is even more impressive. The company has a large cash resource, generated during the boom, a prudently hedged portion of production, and costs trimmed to fit the nickel price. But, more important than those assets is the management philosophy behind the day-to-day operations. “Our mindset is to not use our cash reserves to subsidise existing operations,” says Moore. “That’s why we mothballed Miitel. We will not operate mines which are not cash-flow positive at the very least.”
As for future growth options, Moore sees plenty of opportunities in the company’s extensive land package around Kambalda, as well as the potential for acquisitions. “We are interested in seeing what opportunities are thrown up in this market,” he says. “We’re getting plenty of knocks on the door for potential deals.” Are they attractive knocks? asks Minesite. “Getting more attractive,” says Moore. |
