The nickel market is so grim right now that three-quarters of global production is likely underwater on a cash margin basis, according to the chief executive of Sherritt International Corp.
“Nobody’s making a lot of money at this price level, by the time you factor in your sustaining capital and your financing costs,” David Pathe said in an interview.
Nickel prices briefly sunk below US$3.70 a pound on Wednesday, the lowest since 2003. By comparison, prices reached a peak of more than US$23 in 2007. They were above US$9 as recently as mid-2014, but have been crushed due to weakening global demand and stubbornly high supply and inventories.
Low prices are taking a toll on Toronto-based Sherritt, which is ramping up production at the new Ambatovy mine in Madagascar at the worst possible time. Sherritt and its joint venture partners spent US$5.3 billion to get the project into production.
On Wednesday, Sherritt said it expects the mine to be written down by a whopping US$2.4 billion. Sherritt owns 40 per cent of Ambatovy and expects to record an impairment of $1.6 billion (Canadian) in its year-end earnings.
If anything, that writedown understates how ugly the nickel market is right now. The US$2.4-billion impairment assumes a long-term nickel price of US$8.50 a pound, or more than double the current level.
Cash costs at Ambatovy were US$4.24 a pound in the third quarter, but Pathe said he is confident they will move closer to US$3 as production rises.
However, the crash in nickel prices has created liquidity issues. Right now, the mine is not generating enough cash flow to service upcoming repayments due to lenders. And Sherritt has an additional problem over the short term, because its returns from the mine are limited until certain loans are repaid. Pathe said he is optimistic these issues will be resolved soon, but he could not put a date on it.
In the meantime, concerns about Sherritt’s debt and the overall nickel market continue to take a toll on the stock price. It dropped 12.5 per cent on Wednesday to just 56 cents, giving the company a market value of just $165 million. Sherritt held more than $2 billion of debt at the end of September.
Just two years ago, there was a great deal of optimism around nickel prices because Indonesia implemented an export ban on unprocessed nickel. Some insiders thought that could remove close to a quarter of global output from the market.
However, inventories have remained high. The decline in Indonesian exports was not as large as many expected, and was partially offset by rising production from the Philippines. China also stockpiled a great deal of ore ahead of the ban.
