An old and very dark joke which, for some reason, keeps going around and around inside Dryblower’ tiny brain.
Now why would this be? For the past few months the subject Dryblower has been trying to focus on is nickel, especially the way in which Australia’s three new laterite nickel mines seem to have finally scored a few wins.
Metal is tumbling out of the Cawse, Bulong and Murrin Murrin mines. Corporate deals are being done. Spring is upon us, and all is well in the outback.
Perhaps.
The issue which seems to be surfacing now is whether the growing signs of technical success can be translated into financial success, which, after all, is what these projects are supposed to do – make money for the shareholders.
Critics of the laterites, who have been largely silenced by the increasing production levels, are hard to find, except for one rather well placed observer of the nickel scene.
Peter Johnston, executive general manager of WMC’s nickel division, had a few harsh words to say this week. First to a group of brokers and then to the Reuters wire service.
“We said they would work technically, and they are,” Johnston said. “Things seem to be getting a bit better, but certainly the numbers still don’t stack up, particularly if you look at the massive cost overruns. Their maintenance costs are also very high, and what’s now emerging is that their mining costs are much higher than originally planned.”
Strong stuff, but Pete wasn’t finished there.
“A third significant factor emerging is that they’re high-grading like hell.”
Oh dear. Pete obviously has some strong views on laterite nickel in Australia – and he doesn’t like it.
In response, the laterite boys (and girls) could say that Pete’s words are sour grapes. WMC had a chance to join the party and opted out.
In fact, WMC is going one step further than opting out. It has earmarked $300 million for a 25,000 tonne a year expansion of its flagship nickel mine, Mt Keith.
Johnson says for that money, subject to feasibility studies, WMC gets a pound of nickel for US$4.50 in capital outlay. The equivalent capex cost per pound in the laterite industry is US$10 – more than double.
He also says WMC is now at the bottom of the world cost curve with a C1 cost structure of US$1.12/lb and a C3 cost of US$1.96/lb – with another $100 million to come out of costs by the end of 2002.
Rather than follow the laterites, WMC is leading them on capex, operating costs and expansion.
Johnson lists five reasons why the laterites are having trouble.
1. The original capex budgets have been blown apart and each requires more capital to achieve efficient production levels. Collectively, the three mines need another $150 million, he says.
2. Mining costs are far higher than planned because ore is being hauled from a wide variety of pits, blended and, in some cases, tripled handled.
3. The tough chemical environment in the laterite autoclaves has forced much higher maintenance budgets.
4. Water is becoming a critical issue with Johnston alleging that the saline water in the eastern Goldfields of WA will not be good enough for the laterite projects, even after desalination.
5. He says all of the projects are high-grading their orebodies to maximise cash flow in the early years, a habit which will cause problems within two years as grades drop and the plants require a fresh round of adjustments to handle the changed ore mix.
Meanwhile, back at dear old WMC the nickel walks out the door, the cash flows in, there is spare loot for a $300 million expansion, and Mt Keith retains its position as the production and cost leader.
If Johnston is right, and there is no reason to doubt a man of his expertise, the scenario he has painted in the laterite industry points to one outcome, massive corporate upheaval, rationalisation and a very hard-nosed attack by major shareholders on the financial aspect of the business.
A time of change may not be far away.
