buyers say yes

Spare a Nickel for Vale?

Bidders want a slice of Vale's high-cost and money-losing New Caledonia business.
Photographer: Fred Payet/AFP/Getty Images
At Closing, February 23rd
46.08 BRL

Here's a sign that 2017's nickel boom is in full swing: Vale SA is looking to sell a slice of its New Caledonian unit, and seems to be attracting bidders.

The interest in Vale New Caledonia, or VNC, is surprising because the division -- on a French-ruled island in the Pacific that's due to hold a vote on independence next year -- is one of the highest-cost mines in an industry that's spent years losing money. The existence of willing buyers is as strong a signal as you could want that the prospect of fresh demand from electric vehicle batteries is leading many to bet on a recovery from nickel's three-year slump.

Wild Ride

Nickel has faced dramatic swings up and down as expectations of shortages have been confounded

Source: Bloomberg

More than any other major metal, nickel's story over the past few decades has been roiled by technological advances. Most of the world's deposits consist of low-grade rocks known as laterites, but the difficulty of extracting metal meant that most production until recently came from sulfide ores. These are most abundant in Canada, Russia and northern Scandinavia, and tend to be cheaper to produce because of other metals in the ores that can be sold as by-product.

That advantage dwindled as sulfide deposits started to run out 1  and improvements in chemical extraction lowered the cost of producing nickel from laterites, opening up a new group of mines and smelters in Brazil, Madagascar and New Caledonia. Then in the past decade Chinese metallurgists discovered they could make stainless steel -- the main end-use of nickel -- from semi-processed ores, in the form of so-called nickel pig iron. That development cut out the refining step and caused a surge in production from parts of Indonesia and the Philippines that had missed out on the original laterite boom.

Curve Ball

Vale's VNC nickel mine has some of the highest costs in the global nickel industry

Source: Company reports, Gadfly calculations

Note: Based on reported C1 cash cost figures. Does not include costs of capex, exploration, remediation, and administration. Companies that don't report cash costs aren't included, including Norilsk, BHP, Jinchuan, and major Philippines miners.

The result has been the cost curve illustrated above. Sulfide ores are still the lowest-cost source of nickel, and many laterite mines -- including Vale's VNC -- have struggled to cover their costs as booming production of nickel pig iron from Southeast Asia forced them to lower their output.

While nickel forwards on the London Metal Exchange are currently trading as high as $12,655 a metric ton, once you factor in all the additional expenses that aren't included in a typical mine cost curve VNC still managed to lose $7 million of Ebitda in the September quarter.

Pacific Power

New Caledonia has some of the world's biggest nickel reserves

Source: U.S. Geological Survey

That's a good reason to doubt that bidding for VNC will be too fierce. For all that nickel has done well recently -- up 26 percent year-to-date -- a tried and tested rule in mining is never to make bets about where prices are heading.

The best way to protect against swings in commodity markets isn't to have perfect foresight about prices, but to invest in assets at the bottom of the cost curve and allow the higher-cost deposits to act as a buffer zone when metals take a swing lower.

In the light of higher nickel prices, VNC doesn't look quite as bad as it once did. But it'll take more than a dab or two of lipstick to turn this pig into a princess.


This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
  1. Sulfide resources can be hard to replenish: Canada's main nickel deposits only made it to the earth's crust thanks to a 1.8 billion-year-old meteorite impact.

To contact the author of this story:
David Fickling in Sydney at

To contact the editor responsible for this story:
Matthew Brooker at

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