It’s no secret that nickel prices aren’t doing as well as they could be — the International Nickel Study Group recently revealed that the global nickel market recorded a surplus of 108,200 tonnes in the first eight months of 2013, and some analysts believe that it will take a year or two for a turnaround to occur.
However, for the most part, nickel companies aren’t taking the news lying down. Case in point: news surfaced on October 11 that in order to cut costs, major miners Glencore Xstrata (LSE:GLEN) and Vale (NYSE:VALE) are once again talking about combining their nickel-mining operations in Canada‘s Sudbury Basin.
Though neither company has yet confirmed the talks are taking place, Reuters notes that according to “sources familiar with the situation,” discussions have been going on since Glencore finished up its acquisition of Xstrata earlier this year.
Details remain sparse — as yet, all that has been revealed is that the mining heavyweights are ”considering a number of options for their mining and processing operations in the area,” with “substantial savings” at stake. More specifically, industry sources are pointing to savings of several hundred million dollars per year.
Third time’s the charm?
The idea of a united front in the Sudbury Basin is not a new one. The current talks follow 2005 negotiations between Falconbridge and Inco — which were ultimately taken over by Xstrata and Vale, respectively — as well as later discussions between Vale and Xstrata.
So what exactly is different this time around?
Thus far, the consensus seems to be that the tough nickel market, along with “pressure on Vale over nickel difficulties at its Goro nickel-cobalt mine in New Caledonia and elsewhere” make a deal more likely than it was in the past, as per Reuters. Some also believe that a 2011 deal that saw Xstrata and Vale cooperate on copper ore extraction may help spur further collaboration.
Just don’t expect a merger, CBC News quotes Jean Charles Cachon, a professor of business strategy at Laurentian University, as saying. “They have separate systems. A merger of the two firms is very unlikely due to anti-trust regulations in North America and Europe,” he told the news outlet. More plausible outcomes include the creation of a third company that would exclusively handle operations at Sudbury, or a formal agreement that would see “the companies pool some resources … but remain autonomous.”
One of Reuters’ sources said the companies hope to come to an agreement “over the coming months,” while another said it is not likely to happen before January.
As illustrated above, a deal between Glencore Xstrata and Vale would have obvious benefits for the two companies. However, if a report released yesterday by the British Columbia Securities Commission (BCSC) is to be believed, it might also help junior miners.
The report, which was prepared by KPMG, was commissioned by the BCSC with the aim of getting a better understanding of why BC’s junior mining sector is currently seeing such a significant downturn. It offers a number of answers to that question, also looking at how a turnaround might be elicited — one key finding was that junior miners are not likely to recover before “senior mining companies … clean up their balance sheets and so that investors can gain confidence in the mining sector again.”
While of the course the report was put together with BC in mind, it seems reasonable to expect that the actions of major miners across the country, and indeed, across the globe, will affect juniors. As such, those interested in nickel juniors might do well to hope that the talks between Glencore Xstrata and Vale come to fruition.
Securities Disclosure: I, Charlotte McLeod, hold no direct investment interest in any company mentioned in this article.