Mirabela Nickel (MBN) is a mining company focused on the production and sale of nickel concentrate.
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.
Cash costs soar
MBN capped off a disastrous FY11 with a net loss of $50.8 million. This was slightly more than FY10’s $47.6 million.
Revenue grew just over 40% due primarily to increased production. However MBN’s cost of sales surged 60% in the same period, resulting in a gross loss of $27.8 million (compared to a $7.8 million gross profit a year earlier).
The margin squeeze was most evident in the December quarter. Quarterly cash costs jumped 11% in three months to US$7.42, with the increased output being accompanied by higher plant costs and lower productivity.
Additionally, mining costs rose due to increased expenses relating to drilling activity.
The ramp up in quarterly production was poorly executed due to the company’s own inefficiencies as well as industry cost pressures.
Balance sheet woes
Another area of concern was the almost 50% fall in MBN’s cash holdings between the September and December quarters.
A significant part of that outflow was due to the closing out of the company’s nickel and copper hedges.
The lower cash balance in addition to a new US$50 million debt facility entered into by a Brazilian subsidiary, raises MBN’s risk profile in a period of economic uncertainty.
Indeed, S&P picked up on this fact last week when it downgraded MBN’s credit rating due to concerns over a prolonged period of negative operating cash flow.
The downgrade presents a double whammy for MBN because it not only validates the existing poor cash position, but raises funding costs for the group, which will heap further pressure on its balance sheet.
When MBN released its December quarter production numbers, 2012 production guidance was raised to 20,000 – 22,000 tonnes of nickel output.
As mentioned, greater output is not necessarily a good thing when it is accompanied by higher cash costs.
MBN is aiming to lower cash costs towards US$6/lb by the end of the year. However that is largely dependent on the proper implementation of its cost reduction program.
Having recently closed out of its nickel hedges, MBN is now fully exposed to the movement in commodity prices.
Unfortunately MBN has chosen the wrong time to become an unhedged producer, with London Metals Exchange nickel inventories having risen just over 10%, and prices having fallen around 7%, in 2012.
This would be of concern to high cost producers like MBN, as lower selling prices can harm profitability and potentially force them to cut back output.
The group’s deteriorating financial position has been picked by the one of the world’s major ratings agencies in S&P.
Unless there is a sudden turnaround in the price of nickel (which helps alleviate profitability and cash flow issues), we cannot rule out a capital restructure down the track.
We at Australian Stock Report believe these headwinds are likely to weigh on MBN’s share price for a while yet.