TIP OF THE YEAR 2009: Talvivaara (TALV)

The collapse in the price of nickel since the summer has left miners reeling. Despite significant capacity closures around the world already, prices are not yet recovering from current levels around $9,500 per tonne - levels at which City analysts estimate that four out of every 10 nickel mines still producing are operating at a loss.

Happily, Talvivaara should not be among this unlucky bunch. It is increasing production from its open-pit mine in eastern Finland. Once it reaches full capacity, of around 33,000 tonnes per year of nickel in 2010, it should be profitable even if metal prices remain stuck where they are today.

Thanks to its innovative bio-heap-leaching approach to metal extraction - whereby metal sulphide is extracted from ore by stimulating bacteria already present in the rock with controlled acidulation, irrigation and aeration - Talvivaara is an extremely low-cost producer. The recent nickel price low around $9,500 is equivalent to some $4 per lb and, in contrast, Talvivaara estimates its cash cost of nickel production by 2010 will be around $2.60 per lb, dropping to $2.10 in 2011. Of course, the company will not be realising all the economies of scale through the ramp-up period from now to early 2010, so it thinks its cash cost per pound of nickel for 2009 will actually be around $5.10.

Does this mean the company will therefore be haemorrhaging cash this year? No, because, thanks to conditions attached to a $320m project financing loan, Talvivaara has already hedged some 16,000 tonnes of near-term nickel output at an average price of $23,588 per tonne, or around $10.70 per lb. That's usefully above both current market prices and Talvivaara's cash cost of production for 2009.

Seymour Pierce is forecasting an average market price for nickel in 2009 of $4.93 per lb. That's actually significantly below the current price of $6.09 per lb, however the market is now enjoying a very brief buying spree as commodity index funds re-weight their holdings, something that happens every January. But even if nickel falls back to the $4-$5 range within a week or two, thanks to its hedged output Talvivaara has a significant cushion of guaranteed very profitable sales to help lessen the loss on unhedged production in 2009. And its gross cash of €70m-plus should enable it to comfortably ride out this transient hit.

More share tips and updates...

Meanwhile, on the ground, the Talvivaara project just keeps getting better. Now that the ore heap is being run at a commercial rather than a pilot scale, far less sulphuric acid, which is a major cost, is needed than previously expected. However, the really exciting development is that exploration drilling now indicates that the size of the mineable deposit is considerably greater than stated, even though a significant increase in mineral resources was declared in 2008. Moreover, in addition to the metals that the mine is expected to produce, which include zinc, copper and cobalt as well as nickel, manganese could also be extracted, another potentially valuable revenue stream.

These factors make Talvivaara a sought-after project. So, it would not be surprising if, once the residual technical risk on reaching full capacity is out of the way by, say, 2010, a larger mining group came in with a bid. Russian giant Norilsk Nickel, already contracted to buy Talvivaara's nickel sulphide for 10 years, is an obvious suitor.

Of course, it won't all be plain sailing. Teething problems with ore crushing machinery, now being resolved, have trimmed 2009’s production by 10 per cent or so. And, with the credit markets gummed up, the need to conserve cash is paramount. So, plans to expand the project, either in scale or in range of metals mined, are on hold.