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By the end of 2008, Finnish mining company Talvivaara hopes to make history as the first company to begin commercially extracting nickel from ore using a technique known as bioheap leaching. This process uses bacteria that occur naturally in some rocks and which excrete valuable minerals as compounds, but it speeds up their action by adding chemicals – which are the largest single outlay for the process – and careful use of irrigation and aeration.
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The process is new for nickel, but is used for other minerals, such as gold and copper, and Talvivaara has considerably reduced the technical risks by operating a pilot bioheap. The commercial project will replicate the pilot but on a much larger scale, to produce annually 33,000 tonnes of nickel, plus zinc, copper and cobalt as by-products, over a 24-year life of the company's mines in eastern Finland.
A great advantage of bioheap leaching is its low capital cost compared with other nickel-extraction methods. This should ensure that Talvivaara will be among the world's lowest-cost nickel producers. But the company's position on the cost curve is also helped by the fact that the two deposits in the current project will be developed as open-pit mines with a remarkably low waste-to-ore ratio, and by the Finnish government's enthusiastic funding of upgrades to the infrastructure that serves the project.
Meanwhile, the cost of nickel production elsewhere is heading upwards as producers are increasingly forced to turn to so-called nickel laterite deposits. It is more expensive to extract metal from these than from the nickel sulphide deposits that are usually tapped. In the long run, this should ensure upward pressure on nickel prices, further enhancing prospects for low-cost Talvivaara.
Laterite deposits are becoming more important because the supply of sulphide deposits offering economically-recoverable metal using conventional techniques is drying up. Even so, there remain some sulphide orebodies too low-grade for conventional techniques but possibly amenable to Talvivaara's bioheap process. Indeed, the company's chief executive, Pekka Pera, thinks that in due course his company could attempt to exploit some of these prospects.
He may not get the chance as Talvivaara's boss simply because the company looks like a prime acquisition target. Last month, management confirmed that the company is on track to meet its development timetable, while a $320m loan agreed with banks in May means it has the funds to pay its contractors. And management is already talking about the potential to expand the project beyond the initial two deposits. Despite this, Talvivaara's shares remain lowly-rated for a miner, trading on just 7 times likely earnings for 2009.
We can even name a likely suitor – Russian giant Norilsk Nickel, which is already linked to the project as the long-term contracted nickel buyer. Via its acquisiton of LionOre in xxxx, Norilsk has already demonstrated that it sees value both in acquiring smaller nickel producers and in taking on the risk of unconventional extraction methods (in LionOre’s case, its proprietary Activox smelting process).
Obviously, Talvivaara's shares come with risks. Apart from the risks of the bioheap process, the biggest is that the nickel price drops. Since the shares were listed in June, the price has spiralled down. That said, the profit forecasts in our table are based on lower nickel prices than those currently prevailing - $8 per pound for 2009 compared with around $12.50 that the futures market currently demands for nickel delivered that year.
So the share price decline looks like a good buying opportunity. Talvivaara's prospects have not changed since the flotation, but now investors can buy them for 20 per cent less than they cost after the first day's trading. Buy.
BULL POINTS:
• Innovative low-cost mining method
• Supplies of some nickel ores dwindling
• Has the funds to complete its projects
• Attractive acquisition target
BEAR POINTS:
• Mining technique not commercially proven for nickel
• Nickel price falling lately
TALVIVAARA (TALV) |
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|---|---|---|---|---|
| ORD PRICE: | 214p | MARKET VALUE: | £ 477m | |
| TOUCH: | 212p-216p | 12M HIGH: | 269p | LOW: 200p |
| DIVIDEND YIELD: | nil | PE RATIO: | 7 | |
| NET ASSET VALUE: | 93p | NET FUNDS: | €286m | |
| Year to 31 Dec | Turnover (€m) | Pre-tax profit (€m) | Earnings per share (€) | Dividend per share (€) |
|---|---|---|---|---|
| 2005 † | nil | -2.3 | -0.03 | nil |
| 2006 † | nil | -37.8 | -0.42 | nil |
| 2007 * | nil | -21.0 | -0.08 | nil |
| 2008 * | 46 | 16.0 | 0.04 | nil |
| 2009 * | 274 | 160.0 | 0.43 | nil |
| % change | +496 | +900 | +975 | - |
NMS:10,000 £1=€1.478 Matched bargain trading * Cazenove estimates † Pre-flotation |
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-IC-1.5.4a-prod - 31/10/2008 13:11:34 - carlos.princz
