Minara, Australian Nickel Miner Shares May Gain on China Demand

Shares of nickel miners in Australia, the world’s second-largest producer of the metal, may keep rising even as the stocks sell by one measure for twice as much as those of integrated mining companies.

China’s demand for cutlery, microwaves and skyscrapers is straining supplies of the metal used to make stainless steel, sending prices on the London Metal Exchange to at least a 19- year high on Dec. 5. A shortage of nickel will persist until 2009, according to analysts at Goldman Sachs JBWere Pty.

Shares of Minara Resources Ltd., Mincor Resources NL, Sally Malay Mining Ltd. and Mirabela Nickel Ltd. have soared 189 percent or more this year, while nickel is up 154 percent. Shares will keep climbing on nickel demand even as China tries to cool business investment and deter wasteful factory expansion, said investor Paul Xiradis.

“The view in the market is that nickel prices will come back substantially, but prices are firming and rising,” said Xiradis, who manages A$7.5 billion ($5.9 billion) at Ausbil Dexia Ltd. and owns shares of Minara. “The stock has performed very well, and it could move higher if earnings better expectations, and all indications suggest it will be the case.”

Minara’s 2007 profit may be 30 percent higher than analysts predict, he said. The shares have surged 237 percent this year, Mincor has gained 247 percent, Sally Malay is up 227 percent and Mirabela is 189 percent higher. The companies are based in Perth. The S&P/Australian Stock Exchange 200 Resources Index, which tracks 41 mining companies, has gained 16 percent.

Not Cheap

As measured by net present value, nickel stocks are expensive compared with metals companies such as BHP Billiton Ltd. and Rio Tinto Group, the world’s largest and third-largest miners, said Alex Passmore, head of research at Patersons Securities Ltd., in Perth.

Nickel stocks trade for at least double their net present value, said Passmore, who recommends investors sell Minara shares on expectations it won’t meet production targets. Net present value is a calculation of the current value of expected cash flows based on, among other things, long-term forecasts of metals prices. Minara’s share price of A$6.39 exceeds its base net present value of A$1.86, and Jubilee Mines NL’s A$14.20 stock is double its base value of A$7.24, he said.

BHP and Rio are trading at between 3 percent and 4 percent higher than their net present value, said Mark Pervan, head of research at Daiwa Securities SMBC, in Melbourne.

“Some of the pure plays, like Jubilee, they’re good companies, but they have had very strong share price runs compared with, say, BHP Billiton,” said Shaun Giacomo, who helps manage $1 billion at SG Asset Management Pte. in Singapore.

China’s Role

Shares of BHP Billiton and Rio Tinto are up 17 percent and 13 percent this year, respectively.

Still, China’s nickel consumption has almost tripled in five years, analysts led by Malcolm Southwood at Goldman Sachs JBWere wrote in a report Oct. 31. The world’s fastest-growing major economy may produce a third more stainless steel next year, the Melbourne-based analysts wrote. Makers of stainless steel, which resists corrosion, consume two-thirds of the world’s nickel.

Mincor and Sally Malay may rise by as much as 30 percent over the next 12 months, said Peter Arden, an analyst at Intersuisse Ltd., in Melbourne. Jubilee, the country’s fifth- largest nickel producer, might rise another 20 percent, said Gavin Wendt, an analyst at Fat Prophets in Sydney.

Companies that are starting new mines, such as Mirabela, may see the greatest stock gains, said Darko Kuzmanovi, who manages $38 million at David W. Tice & Associates LLC in Vancouver. Mirabela is developing a project near Salvador, Brazil, and may produce 17,000 tons a year of nickel beginning in late 2008, the company said Oct. 31.

Further Gains

“It’s a situation where opportunities present themselves that could see companies’ share prices jump multiple-fold” even if nickel prices rise more slowly, said Kuzmanovi. He bought Mirabela at between 75 cents to 90 cents this year and expects more gains. The stock closed yesterday at A$2.17.

Minara, Australia’s second-biggest nickel producer after BHP, is spending A$25 million to add 2,000 tons of nickel production in 2007. Jubilee is increasing output by 78 percent beginning in fiscal 2009.

Australia produced 210,000 metric tons of nickel in 2005, second to Russia’s 315,000 tons, according to the U.S. Geological Survey.

Nickel prices may fall to an average $22,777 a ton ($10.33 a pound), in the first quarter of 2007, and average $20,528 a ton for the year, according to the median forecast of nine analysts surveyed by Bloomberg News. Nickel prices have averaged $32,511 a ton in the past two months.

Mine Delays

Those price estimates will have to be increased, given the delays of new mines announced by Cia. Vale do Rio Doce and BHP Billiton on Nov. 24 and Nov. 30, said Arden.

Vale said production at its Goro mine in New Caledonia, the world’s largest nickel mine, would be pushed back by as much as a year to 2008. BHP Billiton said its Ravensthorpe nickel project in Australia also would be delayed by a year to 2008.

“We’ve had supply disruptions, delays in new projects, and the main growth consumer is a country, China, that hasn’t got a lot of scrap to recycle,” said Peter Harold, managing director of Sally Malay. “Barring an economic slowdown in China, there will be a shortage of nickel.”