No wonder Norilsk Nickel and Xstrata are fighting over LionOre Mining International; according to the international investment bank, Credit Suisse, world nickel prices could continue to rally and even reach $US65,000 a tonne this year.
World nickel prices have jumped 155 per cent over the past 12 months as stocks have fallen 75 per cent to equal around two days of global consumption.
There are 11 nickel mining projects being built around the world but only three including BHP Billiton’s late and over budget Ravensthorpe project in Western Australia, will start production before 2010.
The world price, which is essentially the LME price, closed Thursday at $US46,800 a tonne for three months metal, while the cash price ended at $US50,300, with stocks of the metal down to perhaps two days supply and not much more.
Nickel for immediate delivery rose to a record $US54,050 a metric ton in London on May 15.
That makes the price drop around 8 to 9 per cent on fears of de-stocking by stainless steel producers. But that’s not deterring the rival bidders for LionOre.
Norilsk Nickel raised its bid for LionOre Wednesday night to $C27.50 ($A30.76) per share, valuing the Canadian miner at around $C6.8 billion ($A7.6 billion).
The Russian company’s revised bid is 10 per cent above a revised second offer from Xstrata, which last week made a bid of $C25.00 per share, valuing LionOre at $C6.2 billion.
According to reports Jeremy Gray, head of mining research that Credit Suisse in London, believes the recent sharp downturn in the price of the metal (from more than $US50,000 a tonne for three months metal on Monday of this week to Wednesday’s close) was an over reaction.
He believes the market seems to anticipating a severe correction in the nickel price, because of fears that stainless steel producers will cut the amount of nickel used in their steel products and sell surplus stocks to take advantage of the near record prices.
Gray believes the bigger problem is the lack of new investment in downstream smelting capacity, which could cause a bottleneck for the industry and push prices higher. Demand this year is likely to grow around 5 per cent and production of nickel metal by just over 4.5 per cent.
He said there seems to be a lack of enough new capacity to meet continuing strong demand from the stainless steel industry over the next two years.
China is increasing output of low grade Ferro-nickel, but that won’t be enough to meet demand for high grade material. A surplus in nickel is likely by 2010 but between then and now the supply/demand equation is going to be very tight.
And while the stainless steel industry cuts its consumption of nickel for the moment, they will have to rebuild stocks later this year, which will put upward pressure on prices.
Meanwhile LionOre told the market yesterday it would examine the higher offer from Norilsk and its agreement with Xstrata and report back to shareholders as soon as possible.
It told the market this morning the new offer was ‘superior’ to Xstrata which would be informed. Xstrata’s bid is due to close later today and will have to be extended if it wants to stay in the bidding war.
A complication is that the Xstrata offer of May 15 includes a C$305 million break fee – which would be paid to Xstrata should LionOre accept a rival bid.
Norilsk says its new offer has been discounted to take into account the additional costs arising from the excessive C$305 million break fee payable to Xstrata. That means it price would have been closer to C$8 billion.
LionOre says it expects to produce 40,000 tonnes of nickel this year and double that by 2012.
Xstrata’s original offer for LionOre was valued at C$4.6 billion in late March, and then countered earlier this month by a C$5.3 billion counter bid from Norilsk.
LionOre shares closed up $1.01 in Australia yesterday at $31.51.
