In a surprise statement to the ASX on Thursday, Mincor revealed that BHP had refused a request to alter its nickel ore offtake agreement, throwing a big roadblock in the way of the company’s ambitions to grow its nickel business and in doing so seems to have found a way of getting revenge on Twiggy Forrest for beating it in the battle for Canadian nickel explorer Noront in late 2021.
Forrest’s private owned Wyloo group has offered $1.40 cash ($760 million) for each Mincor share and has built a stake of just under 20% via on market purchases and derivatives.
Furthermore, Wyloo said it would make on market purchases at $1.40 per share but since the offer emerged on March 21, the Mincor share price has remained consistently above that level, rising to above $1.55 at one stage.
The shares fell 5.6% to $1.42 yesterday with the market uncertain as to what the statement means for the future of the offer price and the bid itself.
Mincor said BHP had rejected a request to alter “the off-take agreement specifications”, especially on the quality of the ore being supplied.
The background to this decision is to be found in the way it mines and combined its nickel ore.
“Mincor combines ore from its Northern and Southern Operations to deliver a blended product to BHP’s Kambalda Nickel Concentrator. This ore is subject to product specification requirements, including a nickel-to-arsenic ratio.
“During the ramp-up period, Mincor has delivered off-specification product. Whilst BHP has been accepting off-specification product, both parties have been working together to explore and trial methods to better manage off-specification product going forward. This work remains ongoing.
“Mincor recently initiated discussions with BHP regarding potential amendments to the off-take terms to provide ongoing flexibility with respect to product specification requirements and provide Mincor certainty as to its ability to deliver 100% of mined ore to BHP.
“Mincor was notified on Wednesday, 29 March 2023, that BHP would not agree to amend the off-take agreement specifications.
“Given the lack of certainty regarding future acceptance of any off-specification product and the incomplete status of potential solutions, Mincor has decided to withdraw its guidance.”
In that Mincor forecast that it would produce 8,000 to 10,000 tonnes of nickel in concentrate for the financial year to June 30, 2023 and that it would be ‘reaching nameplate mining rates at the end of the 2023 financial year”.
Mincor said on Thursday that it will continue to deliver on-specification ore to BHP and “is conducting work to improve orebody knowledge to enable optimisation of its forward mine plan to consistently deliver on- specification product. “
“Mincor will stockpile any ore that BHP indicates will not be accepted due to product specification requirements, allowing for blending with other Mincor ore sources at a subsequent date.”
No statement has been forthcoming from Wyloo or the Forrest camp but market reports suggest it is reviewing its legal options.
The Forrest camp can’t really blame anyone but themselves because they opted for the on-market offer and not an off-market indicative style of approach with the first objective to negotiate due diligence. That would have picked up the communications between BHP and Mincor on the contract specification problems.
Much of the speculation after the Wyloo offer was announced has been about how Forrest had found another way to frustrate bHP’s nickel ambitions – this time in WA.
Mincor has been an important supplier of nickel concentrates to BHP and analysts thought the company needed that material to maintain its smelter and finery operating.
But clearly BHP doesn’t think like the analysts.
But BHP’s decision means lower revenues and higher costs for Mincor because it says it will continue to mine and stockpile the concentrates that don’t meet the offtake specs. If this continues for a long period of time, it will become uneconomic for Mincor to continue mining and stockpiling sub-spec concentrates.
The working capital costs will rise and the company will be forced to cut output and employment, no matter who owns it.
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Meanwhile, BHP has given a strong hint of its ambitions for its Oak Dam copper, gold, uranium and silver prospect in South Australia, often dubbed a ‘mini Olympic Dam’ because of the similarity of mineralisation and ore types.
Earlier this year in its December quarter production and exploration report BHP said it was continuing next stage resource definition drilling at Oak Dam with six drill rigs with the company still waiting on environmental approval from the South Australian government.
And then in February in its half year release, BHP said “We are seeing ongoing positive exploration results from Oak Dam, which provides growth potential for our copper business in South Australia.”
BHP already has the massive Olympic Dam mine in South Australia and is bidding $9.6 billion for OZ Minerals, which controls two major copper and gold mines in the state, Prominent Hill and Carapateena, and which has several other prospects.
But this week South Australian Premier Peter Malinauskas confirmed in a speech that Oak Dam had been given environmental approval.
The environmental approval will allow for up to 14 drill rigs, associated core processing facilities and an accommodation camp to house up to 150 workers.
“Oak Dam is an exciting prospect and growth option for our copper business in South Australia, and we look forward to undertaking further exploration to better define the resource and inform our future planning,” BHP chief operating officer Edgar Basto in a statement welcoming the approval.
More than 90 kilometres of exploration has already been drilled at Oak Dam, but with the new environmental approval allowing for more than double the amount of drill rigs at the site, exploration is expected to proceed a lot faster.
The Oak Dam site was discovered in 2018, with early sampling recording intercepts of copper of up to 6%. The Oak Dam project is 65km to the southeast of Olympic Dam. The copper, gold, uranium and silver deposit is located 700 to 900 metres below the surface.
When it buys Oz Minerals, BHP will inherit the West Musgrave nickel copper project (valued at more than $1.2 billion) which is in WA, just west of the border of South Australia.
BHP shares rose more than 2% to $46.08 at the close on Thursday.
