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BHP faces tough decisions amidst falling nickel prices

The likelihood of BHP (ASX:BHP) being compelled to impair the value of its Nickel West business and potentially consider its closure has increased. This development comes after the mining company confirmed the necessity of placing a crucial plant component on a care and maintenance basis.

BHP’s decision follows Wyloo Metals, led by Andrew Forrest, announcing the placement of its Mincor nickel mining business on care and maintenance. This action aligns with the Savannah mine of Panoramic Resources and the Raventhorpe mine of the struggling Canadian group, First Quantum.

In its December quarter and half-year production and sales report, BHP issued a warning about the uncertain future of Nickel West and revealed that it was exploring options to mitigate the impact of the significant drop in nickel prices.

Wyloo’s decision also affects the nickel ore supply to BHP’s Kambalda processing operations in Western Australia, as it was sourced from its Cassini, Long, and Durkin nickel mines. While Wyloo will face a substantial financial hit after investing $760 million in Mincor last year, BHP anticipates a multi-million dollar write-down due to its inability to operate certain sections of the Kambalda concentrator.

Companies must periodically assess asset viability based on cash flow generation. It is clear that Nickel West will struggle in this regard, compelling BHP to make a crucial decision possibly before releasing its interim results on February 14.

Jessica Farrell, BHP Nickel West asset president, stated, “The decision by Wyloo to suspend its operations means it will no longer be viable to continue operating parts of the Kambalda concentrator from mid-year.” Consequently, BHP will transition specific components of the Kambalda concentrator into care and maintenance by June 2024, leading to the loss of jobs for approximately half of the concentrator’s workforce by mid-year.

However, the Kambalda plant will continue to process concentrate from other miners on a toll basis, according to some reports.

Nickel West is described as a “complex business,” incorporating underground mining operations, third-party supply, on-site smelting, downstream refining, and a multi-stage supply. Farrell emphasized that they are exploring various options to remain globally competitive in a challenging operating environment, where costs are rising while prices are falling due to increased supply.

BHP acknowledged that the nickel industry is undergoing structural changes and facing a cyclical low in realized pricing. They are actively optimizing operations and evaluating options to mitigate the impact of declining nickel prices. Given the market conditions, a carrying value assessment of the group’s nickel assets is ongoing.

BHP is not the only Australian mining company making significant adjustments in response to recent nickel price declines. Core Lithium, administrators of Panoramic, Chalice Mining, First Quantum, and several other companies, are reviewing their operations, with the exception of gold and iron ore, which continue to perform well despite rising costs affecting the entire sector.