Nickel

Market analyst Macquarie Research Equities have released an Australian nickel sector update: Swiss-based mining powerhouse Xstrata PLC said on Monday it had successfully negotiated a cash bid to buy LionOre Mining in a merger value at C$4.6 billion (AUD$4.9 billion). The proposed deal would further consolidate Xstrata's position in the nickel sector following last year's Falconbridge acquisition, placing it close to the world's third-largest nickel producer. In terms of assessing the potential likelihood of a bid for one of the Australian nickel plays in light of this deal, the market analyst believes two key points must be borne in mind:
(1) There are clear vertical integration synergies between LionOre's mining portfolio and Xstrata's downstream processing facilities; and
(2) By virtue of its production base and reserve/resource size), LionOre presents a meaningful acquisition for a major global nickel producer such as Xstrata.

The analyst believes the two most likely Australian nickel takeover candidates in the short-term are Jubilee (JBM) (effectively uncontracted concentrate and strong growth profile) and Sally Malay (SMY) (strong growth profile and only partially exposed to BHP concentrator off take agreements). The analyst has put an Outperform recommendation for JBM with a 12 month price target of $17.50 pr share. Jubilee Mines is the only major nickel concentrate producer with uncontracted concentrate stream in the medium and longer term (current off take deal with CVRDInco expires in October 2007). Plus, JBM's Cosmos mine produces one of the world's best nickel concentrates that is ideal for blending with lower quality concentrates. The analyst highlights that JBM’s high operating margins, healthy dividend yield and first class exploration track record set it apart from the other producers. While trading multiples remain stretched, this valuation differential is quickly closed with the anticipated discovery of a further 50 thousand plus tonnes of high-grade nickel deposits.