The miner’s key asset is the Santa Rita nickel operation in Bahia, Brazil.
MBN has faced a number of headwinds in recent times, ranging from lower nickel prices, higher cash costs and a deteriorating cash position.
Sentiment towards MBN has nosedived since it announced an 11% surge in December quarter cash cost to US$7.42/lb.
Although cash costs fell slightly to US$7.37/lb in the March quarter, investors are still questioning whether the group can fulfil its aim of getting cash costs down to US$6/lb by year end.
Cost reductions are expected to come from higher nickel production volumes (through improved grades and increased plant throughput), as well as lower staff costs and rationalisation of contractor costs.
MBN therefore has little margin for error in its attempt to bring costs down, and we would expect a harsh reaction from investors if the group falls short on this aim.
Cash problems despite capital raising
MBN’s problems led to a very low cash balance of US$41 million as at May 9. At the end of March, cash on hand totalled US$60 million.
In less than two months cash reserves slid ~33% due to the rapid deterioration in the nickel market.
Ratings agency, S&P, picked up on this in late March when it downgraded MBN’s credit rating due to concerns over a prolonged period of negative operating cash flow.
It therefore came as no surprise when MBN announced a $120 million capital raising in mid-May. The group said the funds would be used to strengthen its balance sheet.
Whilst the raising may have alleviated short-term funding pressures, the group is still likely to face cash flow problems given its operational issues and the dire outlook for nickel prices.
As an unhedged producer, MBN is particularly sensitive to the recent weakness in nickel prices.
Lower selling prices compound the problems for higher cost miners. In MBN’s case, we have seen just how severely cash reserves can get depleted from a weaker nickel market.
The group’s deteriorating financial position necessitated a capital raising, but we are of the view that its cash flow problems are likely to persist unless nickel prices stage an unexpected recovery in the near-term.
We at Australian Stock Report believe these headwinds are likely to weigh on MBN’s share price for a while yet.