Mirabela Nickel (ASX: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 achieved its production ramp up goals in 2011, successfully upgrading the Santa Rita’s plant capacity to 7.2Mtpa of ore milled, from 4.6Mtpa in 2010.
However the ramp up was also accompanied by rising cash costs, which detracted significantly from an otherwise solid set of December 2011 quarter production numbers.
Costly cash
Mirabela Nickel announced its December quarter production report today.
Nickel output climbed 9% from the previous quarter, helping MBN to meet its 2011 production target of 15,854 tonnes.
However the production numbers were overshadowed by a disappointing rise in cash costs.
Cash costs jumped 11% on the quarter to US$7.42, as the higher output was accompanied by higher plant costs and lower productivity.
Additionally, mining costs rose amid increased expenses relating to drilling activity.
The ramp up in quarterly production was thus poorly executed due to the company’s own efficiencies as well as industry cost pressures.
Risk on
Another concerning aspect of the production release was the almost 50% fall in MBN’s cash holdings from the prior quarter.
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.
Outlook
MBN has raised its 2012 production guidance, targeting 20,000 – 22,000 tonnes of nickel output.
As mentioned, however, greater output is not necessarily a good thing when it is accompanied by higher cash costs.
Mirabela Nickel has commenced a cost reduction program, which aims to lower cash costs towards US$6/lb by the end of the year. However that is largely dependent on the proper implementation of the program.
Although a return to steady state production may help, cost reductions will also be linked to the favourable renegotiation of MBN’s major contracts.
Having recently closed out of its nickel hedges, MBN is now fully exposed to the movement in commodity prices.
Unfortunately, there is also considerable uncertainty surrounding nickel prices, with brokers Morgan Stanley and Goldman Sachs recently downgrading their forecasts amid concerns about oversupply.
We at Australian Stock Report believe these headwinds are likely to weigh on MBN’s share price for a while yet.
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