Nickel Gain Enables BHP to Anglo to Sell Mines: Real M&A

The 37 percent surge in nickel this year means some of the world’s biggest metals companies may finally be able to sell as much as $14 billion in unwanted mines they’ve held for years.

Diversified mining companies such as BHP Billiton Ltd. (BHP) and Anglo American Plc (AAL) don’t see the metal as strategic because it generates less cash than other commodities and requires more investment. With nickel prices improving and companies looking to cut costs, OAO GMK Norilsk Nickel, the largest producer, last month agreed to sell two mines in Australia. BHP, valued at $174 billion, said May 14 that it’s holding talks to sell its Australian nickel unit, while London-based Anglo said it may consider shedding its mine in Brazil.

Private-equity firms and smaller companies such as $12 billion First Quantum Minerals Ltd. (FM) could be potential buyers, according to Sanford C. Bernstein & Co. Should nickel prices continue to rise, BHP’s assets could be valued at as much as $9 billion and Anglo’s at $5 billion, Macquarie Group Ltd. said.

“Deals chase a rising commodity,” Lee Downham, global mining transaction chief at Ernst & Young LLP in London, said by e-mail. When prices climb, those companies “with a strategy to divest look to capture positive market sentiment in order to generate a higher valuation.”

Photographer: Sergio Dionisio/Bloomberg

Mark Cutifani, chief executive officer of AngloAmerican Plc. Cutifani started a review of worldwide assets after joining the company a year ago and told Bloomberg News last month that nickel is among the “least optimistic” commodities in the company’s portfolio in the long term. Close

Mark Cutifani, chief executive officer of AngloAmerican Plc. Cutifani started a review... Read More

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Photographer: Sergio Dionisio/Bloomberg

Mark Cutifani, chief executive officer of AngloAmerican Plc. Cutifani started a review of worldwide assets after joining the company a year ago and told Bloomberg News last month that nickel is among the “least optimistic” commodities in the company’s portfolio in the long term.

China Substitute

Nickel is rebounding from three straight years of declines as Indonesia, the biggest nickel ore miner, banned ore exports in January in an effort to boost domestic processing. China depends on the ore for its low-grade nickel used in stainless steel and, with the ban disrupting supplies, Macquarie estimates China’s output will fall 25 percent this year, tipping the global market into deficit.

Analysts are divided on how long the rally will run. Nickel for three-month delivery at the London Metal Exchange rose to $21,000 a ton May 13, the highest since February 2012, and settled at $19,025 today. While Goldman Sachs Group Inc. sees prices dropping in the next 12 months as the Chinese build up processing capacity in Indonesia to skirt around the ban, Macquarie forecasts rising prices for years.

“The Indonesian ore export ban is a game-changer,” both for the nickel markets and for asset disposal, Jeffrey Largey, an analyst at Macquarie in London, said in a phone interview. “We have a very compelling price profile, it ramps pretty aggressively. That’s mainly because we start to see a meaningful structural deficit emerging in the commodity.”

Buyer List

At current prices, Bernstein estimates the BHP nickel assets would be valued at $3 billion to $4 billion and Anglo’s Barro Alto nickel project at $1 billion to $2 billion. Surging prices would mean the estimates more than double, with BHP’s assets valued $9 billion and Anglo’s at $5 billion in a sale, based on a long-term price of $24,000 per ton, Macquarie said.

Among the potential buyers are private-equity funds, such as X2 Resources, and smaller mining companies, such as First Quantum, which has bought struggling assets and turned them into producing ones in the past, according to Bernstein.

“High prices create a perfect opportunity for the large miners that see little value in nickel assets to find buyers,” Paul Gait, an analyst for Bernstein, said in an interview.

Representatives for BHP and Anglo declined to comment.

Russia’s Norilsk agreed May 21 to sell its Australian Avalon and Cawse nickel deposits and processing plants, which have both stopped operations, to Wingstar Investments Pty Ltd. The company hired Citigroup Inc. last year to help it sell its Australian portfolio, which includes two other mines.

BHP Assets

“These assets are getting more interest,” Chief Executive Officer Vladimir Potanin said in an April 23 interview. “That’s why the company will try to maximize what it can get from them in terms of timing and conditions.”

Analysts have been speculating BHP would sell its Nickel West operations in Australia since at least 2012. The company said last month that it’s reviewing the unit for a sale as a way to simplify its portfolio and focus on iron ore, copper, coal and petroleum. BHP’s profit margin from its nickel, aluminum and manganese unit has been shrinking, reaching 1.8 percent in the 12 months ended June 2013. That compares with 41 percent in 2007, according to filings.

Low metal prices also led the world’s largest mining company to book impairment charges of almost $1.6 billion on the Nickel West assets in the past two fiscal years. The unit includes three mines, concentrators, a refinery and a smelter.

BHP also controls the Cerro Matoso nickel mine and ferronickel smelter in Colombia, which RBC Capital Markets, a unit of Royal Bank of Canada, estimates is valued at $3 billion and may be sold together with Nickel West.

Good Time

One possible buyer for BHP’s assets is First Quantum, Gait said. The Vancouver-based company bought the Ravensthorpe nickel project from BHP in 2010 for $340 million and developed it to start production two years later. In China, closely held Jinchuan Group Co. and China Minmetals Corp. may be looking at BHP’s Nickel West project, according to the Australian Financial Review.

“It’s a good time to buy the assets when the majors think it’s not strategic and into a rising price environment that generates the cash you’ll need to invest in the project,” Bernstein’s Gait said. “You then turn it around operationally and a couple of years later, having taken about 30 percent out of the cost base, you create billions of dollars of value.”

X2 Resources, a private-equity fund set up by former Xstrata Plc CEO Mick Davis, is considering a bid for BHP’s thermal coal and nickel assets after raising as much as $3.75 billion from investors, a person with knowledge of the matter said in April.

Nickel Pessimism

Glencore Plc, the global commodities trading and mining group, also said it was assessing a bid for BHP’s nickel assets. Nickel is among key metals it plans to focus on, the company said May 20.

Anglo American CEO Mark Cutifani started a review of worldwide assets after joining the company a year ago and told Bloomberg News last month that nickel is among the “least optimistic” commodities in the company’s portfolio in the long term. Anglo American wrote $700 million off the value of its Barro Alto nickel unit in February, and Cutifani said he may consider selling it.

Vale SA, which is also undertaking similar rebuilding program at its Onca Puma nickel project, could buy Barro Alto, Deutsche Bank AG said.

A Norilsk representative declined to comment beyond the CEO statements. Representatives for X2, First Quantum and Glencore also declined to comment.

Former Glory

Even as rising prices make sales easier, the estimated values are a fraction of those during nickel’s peak in 2007, when Norilsk paid more than $6 billion for LionOre Mining International Ltd. BHP spent $2.2 billion to build the Ravensthorpe mine and sold it for $340 million.

While Norilsk’s Potanin says he won’t rush to sell overseas mines as higher prices make them more valuable, Morgan Stanley says now’s the time to sell.

“We are in the midst of a perfect storm for nickel: good demand combined with impending supply imbalance and very little information on how or when that will change,” said Joel Crane, a metals analyst at Morgan Stanley in Melbourne. “Of course, all things come to an end. High prices have a tendency to incentivize new production, and that is exactly what’s going to happen in Indonesia.”

To contact the reporters on this story: Maria Kolesnikova in London at mkolesnikova@bloomberg.net; Firat Kayakiran in London at fkayakiran@bloomberg.net

To contact the editors responsible for this story: Beth Williams at bewilliams@bloomberg.net; John Viljoen at jviljoen@bloomberg.net Whitney Kisling

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