BHP finally confronts its nickel demons

BHP will take a heavy loss on its Australian nickel operations. Picture: AFP

BHP is fast approaching the point of no return for its deeply-pressured West Australian nickel business, and the likely medium-term closure of the division is just delaying its inevitable exit from the metal.

Thousands of mining jobs are up in the air as BHP considers mothballing its broader Nickel West mines, and downgrading construction currently underway for the West Musgrave mine it inherited from OZ Minerals. This comes on the impending closure – through care and maintenance – of the Kambalda concentrator near Kalgoorlie.

This represents the biggest domino to fall for nickel mining in Australia. BHP will take a $US2.5bn ($3.9bn) charge on Nickel West in a messy December half result to be released next week.

The book value of the nickel business is minus $US300m, including remediation. Essentially BHP will be prepared to pay someone to take it away when it comes to that moment. For BHP there would have to be a structural shift in the nickel market for it to be a long-term player in the heavy metal again. There is nothing on the horizon to suggest that is coming.

BHP’s Mike Henry has been warning for months the nickel crisis was coming. And it is here. Some five mines have closed in Australia since last September (including Kambalda’s main customer Wyloo Metals), taking a third of production offline. BHP’s moves to care and maintenance could see that loss jump to two-thirds.

Nickel prices have halved in the past two years with the surge in supply from Indonesia. However, the additional pain comes from Australia’s miners facing a substantial cost disadvantage – from labour, remoteness to market and grades, combining to put them a long way behind.

BHP’s nickel operations in Western Australia are likely to be mothballed.

Even the promise of Australian nickel qualifying for US tax credits under Joe Biden’s massive IRA hasn’t been enough to save it.

Nickel West was seriously being considered to be included in the portfolio of second-tier assets that BHP spun off into South32 nearly a decade ago.

However, they couldn’t make the exit or investment needed work and ultimately nickel stayed with the parent. But that has also been its undoing as the commodity struggled to meet the high return hurdles set by BHP’s star commodities like iron ore and copper.

Last year BHP’s nickel was returning earnings margins of just 8 per cent. This compares to the 50 per cent returns for copper and 67 per cent for iron ore. In the December half average prices BHP received for nickel fell another 24 per cent, pushing it into a $US200m loss. Marginal returns make it increasingly hard to mount an argument to spend a dollar of new capital in a falling market. The nickel wind-down comes as BHP is spending more than $10bn building out its potash business in Canada.

Wesfarmers boss Rob Scott, who is still holding a $1bn bet on his own lithium mine and local processing plant, says the BHP moves should be a wake-up call about the challenges in moving into downstream production.

“It’s a reminder for everyone that a lot of Australian industries operate in highly competitive international markets. And that’s why we need to work so hard to ensure that we can be as competitive as possible,” Scott told The Australian.

South32’s Graham Kerr in recent years has done a commendable job giving his disperse collection of mines a sharper strategic narrative. And on the same day BHP was spilling billions of red ink on nickel, Kerr signed off on a $US2.2bn investment to get the Hermosa zinc project in Arizona up and running. Hermosa qualifies for fast-tracking under Joe Biden’s critical minerals initiative and is expected to get future support under the mega-green energy minerals program. Meanwhile BHP is left holding the heavy metal.

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