Material Matters: Nickel No Target, Gold Finding Support, BHP Meets Brokers

This story features IGO LIMITED, and other companies. For more info SHARE ANALYSIS: IGO

By Chris Shaw

With base metal prices well down from the highs of three months ago, GSJB Were has taken a look at the nickel market not from an investor perspective but from a corporate point of view. The distinction is while investor focus at present is on short-term economic issues, companies tend to take a medium to longer-term approach.

GSJB Were's analysis suggests there is limited scope on the Australian market for merger and acquisition activity involving the major nickel players, largely because of the small scale of most producers. As the broker notes, in general nickel producers have relatively short mine lives.

The GSJB Were view is the current scale and potential of the underground sulphide producers in Australia, with the possible exception of Western Areas ((WSA)), are just not big enough to attract attention from the large, diversified miners.

The Australian nickel market also has a lack of mid-tier mining companies, which also means less chance of M&A activity in the sector. What also supports this view is GSJB Were remains relatively bearish on the outlook for the nickel price.

There are a few reasons for this, including evidence many stainless steel producers are cutting production and the Vale-Inco strike of the last 12-months appears to be coming to a close. This supports the view the nickel market will return to a surplus in the second half of 2010.

GSJB Were is forecasting an average nickel price of US$8.36 per pound in 2010, which implies an average for the second half of the year of just over US$7.00 per pound. Expectations of growing surpluses in 2011 and 2012 imply little scope for a medium-term recovery in prices.

Looking at the nickel plays from the point of view of what nickel price is being factored into current share prices, as well as scale and mine life for those in the sector, leads GSJB Were to suggest the preferred stocks at present are Independence Group ((IGO)) and Western Areas ((WSA)).

The attraction of Western Areas is the company offers the best growth prospects in the sector, while Independence has the upside of the Tropicana project. Minara Resources ((MRE)) is potentially the most likely M&A target according to GSJB Were, though the broker notes this reflects the fact the company is controlled by Glencore, its joint venture partner in the Murrin Murrin project.

The FNArena database shows Sentiment Indicator readings for Independence Group of 0.5, for Western Areas of 0.6 and for Minara of minus 0.1. Other stocks on the Australian market offering nickel exposure include Mirabela Nickel ((MBN)), Metallica Minerals ((MLM)), Fox Resources ((FXR)), GME Resources ((GME)), Falcon Minerals ((FCN)), Segue Resources ((SEG)), Mincor Resources ((MCR)), Panoramic Resources ((PAN)), Tectonic Resources ((TTR)), Heron Resources ((HRR)) and Poseidon Nickel ((POS)).

Turning to gold, Barclays Capital notes the recent fall below US$1,200 per ounce has been met by rising physical demand. Since the start of the second quarter Barclays notes while consumer interest has been dampened by the high level of prices, inflows into Exchange Traded Products (ETPs) have surged. This trend is expected to continue through the rest of this year.

Standard Bank has come to a similar conclusion, noting when prices were high there was brisk physical and scrap selling in the gold market, but as prices have fallen below US1,200 per ounce the physical market has swung from resistance to strong support.

In the view of Standard Bank, investment demand for gold should remain strong, while seasonal factors indicate stronger jewellery buying is likely in the fourth quarter of this year. In such an environment the bank expects the gold price will head towards US$1,300 per ounce by the last quarter of this year.

Commonwealth Bank notes spot coking coal prices have been trending lower, to the extent current contract prices of around US$225 per tonne are well above spot prices of around US$197 per tonne. The bank suggests the falls could have been even worse had it not been for still tight market fundamentals, especially for premium grade materials coming out of the Queensland market.

Given current market conditions, Commonwealth Bank expects December quarter contract prices will fall to around US$215 per tonne. If spot prices continue to head lower in coming weeks the downside risks to this forecast will increase in the bank's view.

BHP Billiton CEO Marius Kloppers has sat down with broker analysts, covering topics ranging from the company's view on the global economy, the proposed Minerals Resource Rent Tax (MRRT) in Australia and the proposed iron ore joint venture with Rio Tinto ((RIO)).

As Morgan Stanley notes, Kloppers remains cautious on the outlook for the global economy, expecting demand will take some time to recover to pre-Global Financial Crisis levels given the current concerns over sovereign debt issues and the slowdown in the Chinese economy.

This implies ongoing volatility with respect to commodity prices, especially in markets such as iron ore, copper and met coal where spot prices are well above the marginal cost of production.

With respect to the MRRT, BA Merrill Lynch notes Kloppers' view is the proposal is “less bad” than the Resources Super Profits Tax proposal, with potential for the company to pay less tax in the early years given grandfathering clauses for existing mines in many cases.

The previously proposed iron ore joint venture with Rio Tinto is no longer essential in BHP's view, as the new state agreement in Western Australia provides the flexibility for further growth with or without a joint venture. The agreement allows the blending of iron ore and the use of both BHP's and Rio's post and rail assets to achieve economic solutions, so making the joint venture less of a necessity.

With respect to the group's energy assets, BA Merrill Lynch notes Kloppers expects some cost and scheduling issues in the Gulf of Mexico as part of the fallout from the BP oil spill. The company has no intention of leaving the area though, as Morgan Stanley notes Kloppers remains interested in increasing its exposure if the right assets came up at the right price.

The FNArena database shows BHP Billiton is rated as Buy seven times and Hold twice with an average price target of $47.64.

Click to view our Glossary of Financial Terms