iNVEZZ.com Monday, October 14th: Glencore’s share price (LON:GLEN) on Friday last week surged 9.25p or 2.83 percent to 335.9p after Reuters reported that the company had resumed discussions with Vale (NYSE:VALE) over a potential combination of their nickel operations in Canada’s Sudbury basin. On the same day Vale’s share price closed 0.71 percent higher at $15.51.
The talks are still at an early stage but have revived investors’ hopes that the long-debated Sudbury tie-up would finally materialise. Prices for nickel traded on the London Metal Exchange have dropped by more than a quarter from this year’s high of $19,000 a tonne in February to less than $14,000 now. Norilsk Nickel, the world’s largest producer of the metal, has said that roughly 30 percent of the producers were losing money, with costs in some cases topping $18,000 per tonne. Some analysts have estimated that over half of the players in the industry are operating at a loss to produce.
Vale, the world’s largest mining company, assumed control of its nickel operations in the Sudbury Basin, close to Toronto, since it acquired Inco for $20.3 billion (₤12.7 billion) seven years ago. The company is operating six mines, a mill, a smelter and a refinery.
Xstrata, which was bought by Glencore earlier this year, shed $18.2 billion (₤11.4 billion) for Falconbridge in 2006 as to increase its nickel holdings at a time when the price of the metal was soaring. Glencore owns the Nickel Rim South Mine and the Fraser Mine, as well as a mill and smelter in the area.
Inco and Falconbridge have been in talks over a possible tie-up even before being acquired by their
current owners. Analysts have long argued that a joint operation would make sense for the two companies mining the Sudbury basin. “The consolidation of Sudbury is way overdue,” Terrence Ortslan, managing director at TSO & Associates, said in an interview. “The time has come to look for how the negatives can be avoided,” he added, referring to nickel mining costs relative to prices.
In 2006 it was estimated that if Inco and Falconbridge joined their operations they would save about $550 million (₤344 million) an year. That number is likely to have gone down over the years as both Vale and
Glencore Xstrata have already made some progress to lower costs and bring in improvements.
!m[Falling prices for the metal push mining giants into collaboration](/uploads/story/6044/thumbs/pic1_inline.png)
Vale’s nickel operations delivered a profit of $983 million (₤615 million) on $11.3 billion (₤7.07 billion) operating revenue in the three months ended June 30. The nickel revenue was down by $1.08 billion (₤676 million) in the last quarter of 2012. “Nickel has become a financial catastrophe for Vale in Canada,” said John Tumazos, research analyst at Very Independent Research LLC. “Also, the CAD has strengthened since Vale acquired Inco, making it more expensive to pay wages. Meanwhile, nickel prices have fallen about 75 per cent since 2007.”
**As of Friday, 11.10, buy Glencore shares at 338.00p.**
**As of Friday, 11.10, sell Glencore shares at 325.00p.**
**As of Friday, 11.10, buy Vale shares at 15.53p.**
**As of Friday, 11.10, sell Vale shares at 15.39p.**