Nickel

Nickel

Walter De Simoni

Walter De Simoni
CEO

$57m

operating profit
(2010: $96 m)

1%

share of group operating profit
(2010: 1%)

$84m

EBITDA
(2010: $122 m)

Group strategy actions

Investing – in world class assets in the most attractive commodities

Our Jacaré project in Brazil, with mineral resources of 3.9 Mt (of which 2.6 Mt are Inferred Resources) of contained nickel, will enter the pre-feasibility phase in 2012, and has the potential to significantly strengthen our position in the global nickel market.

Organising – efficiently and effectively

A new marketing strategy has been implemented to leverage Group expertise and to maximise returns on Barro Alto's ferronickel products.

Operating – safely, sustainably and responsibly

In total, 37.4 million man hours were expended on the Barro Alto project, which was completed without a single fatality.

Employing – the best people

Our Nickel business, with a management team that is 100% Brazilian and a record of growing productivity, is determined to increase its contribution to the Group's operating profits.

Financial highlights

US$ million (unless otherwise stated) 2011 2010
Operating profit 57 96
EBITDA 84 122
Net operating assets 2,535 2,334
Capital expenditure 398 525
Share of Group operating profit 1% 1%
Share of Group net operating assets 6% 5%

Business overview

Nickel has three ferronickel operations: Codemin and Barro Alto in Brazil and Loma de Níquel in Venezuela. Within the business unit's portfolio there are also two promising unapproved projects, Jacaré and Morro Sem Boné, both in Brazil, and exploration projects in Finland, Canada and Australia.

Industry overview

Nickel's main use is as an alloying metal, along with chromium and other metals, in the production of stainless and heat resistant steel. Approximately two-thirds of nickel is used to manufacture stainless steel and just over 20% in other steel and non-ferrous alloys. Ferronickel's main use is in the manufacturing of stainless steel, with more than 95% used for this purpose.

There are two main types of nickel deposits: sulphides and laterites. Sulphide ore contains a significant number of by-products such as gold, silver, copper and platinum group metals, which generate processing credits, but the cost of mining this type of ore tends to be higher as underground mining is necessary. Laterites can be mined by open pit methods, with resultant lower mining costs, however, processing costs are higher. Sulphide nickel production has been decreasing in the last two decades; in 2011 almost 50% of global production came from sulphides, down from 70% in 1993. We consider the future of the nickel industry to lie mainly in the economic exploitation of laterite deposits.

In the first half of 2011, the nickel market was in deficit by approximately 33,000 tonnes as demand increased on the back of restocking by the stainless steel industry, while supply remained constrained owing to a series of unexpected mine disruptions and continued delays to new projects. The situation reversed in the second half of the year as supply increased following the ramping-up of several greenfield projects and the reactivation and expansion of existing operations. Uncertainty around the European economic situation and a slowdown in Chinese stainless steel production negatively impacted demand, and the market was broadly in balance for the full year.

Global ferronickel production increased to 378,000 tonnes in 2011 from 336,000 tonnes in 2010 – a 13% increase. Once again, China dominated global nickel demand, accounting for approximately 42%, a 14% increase when compared with the previous year.

Nickel prices fell sufficiently to have a real impact on costly nickel pig iron (NPI) run rates, encouraging stainless steel producers in China to switch back to refined metal and ferronickel. Chinese importers have pushed nickel ore stocks to new historical highs as demand from NPI producers wanes.

Strategy and growth

Nickel's core strategy is to be a major, low cost ferronickel producer by the effective management of existing assets, continued focus on asset optimisation delivery and value maximisation through the development of world class deposits and evaluation of acquisition opportunities.

First metal from the Barro Alto ferronickel operation was produced on schedule in March 2011. Barro Alto has the potential to be one of the top five ferronickel operations in the world and its continued successful ramp-up is a key strategic goal. The new nickel plant will have a competitive cost position and a new marketing strategy has been implemented to leverage Group expertise and take advantage of the increased production.

Nickel's commitment to increasing competitiveness is demonstrated by investment in a research project called ARNi. The project is developing a hydrometallurgical process to treat laterite deposits economically.

A pilot plant was commissioned in January 2011, and two leach pilot campaigns were run using ore from the nickel laterite deposit at Jacaré. These campaigns showed that the leach technology worked better than anticipated, and successfully produced a nickel and cobalt intermediate product with very good recoveries. The pilot also produced high quality design data which will enable us to scale up to demonstration and commercial plants.

The technical success during 2011 has laid the foundation for ARNi as a technically and environmentally viable competitor for nickel laterite leaching. The financial viability of the process will be evaluated during the course of 2012.

Financial overview

Nickel generated an operating profit of $57 million which was net of $31 million project evaluation operating costs. The financial performance of Loma de Níquel and Codemin was similar to that of the previous year.

Markets

Average nickel price (c/lb) 2011 2010
Average market price
(LME, cash)
1,035 989
Average realised price 1,015 986

The average market nickel price was 5% higher than in 2010. During the first half of the year the nickel price was supported by demand growth from the stainless steel industry and a supply gap owing to mine disruptions and delays to a number of projects. The price peaked in February above 1,310c/lb. However, prices softened considerably in the second half, reflecting ongoing concern around uncertainty over the near term outlook for the global economy, softer summer demand in the northern hemisphere, higher supply from new projects (including Barro Alto) and higher NPI production. As a consequence, the nickel price fell to a low of under 770c/lb in November, before closing the year at 829c/lb.

The market was broadly in balance in 2011; global nickel consumption increased by around 7%, while supply increased by around 12%.

China continued to be a key consumer of nickel in 2011, contributing more than 40% of global stainless steel production in the year. Nickel consumption growth in China is expected to outpace other markets in 2012, although the North American market may surprise on the upside, while demand in Europe and the rest of Asia is expected to decrease.

Operating performance

Attributable production
(tonnes)
2011 2010
Nickel 29,100 20,200

Nickel production in 2011 increased by 44% to 29,100 tonnes as a result of delivery of the Barro Alto project and higher output at Loma de Níquel and Codemin. Barro Alto was commissioned in March 2011 and produced 6,200 tonnes.

Loma de Níquel produced 13,400 tonnes, an increase of 15% over the prior year, mainly due to an additional two months of production from the electric furnace 2, which was restarted in March 2010. The loss of production in 2010 from general power rationing did not recur in 2011; power rationing, however, continues to pose a threat and stand-by on-site generators have been installed to mitigate production risks.

Owing to ongoing uncertainty over the renewal of three concessions, which expire in 2012, and over the renewal of 13 concessions that have been cancelled, an accelerated depreciation charge of $84 million (2010: $73 million) has been recorded in relation to Loma de Níquel assets. This has been recognised as an operating special item. Refer to note 5 of the financial statements.

A range of scenarios is being considered in respect of the conditions for renewal of Loma de Níquel's three remaining concessions, due in November 2012, and for access to the cancelled concessions.

Codemin's production of 9,500 tonnes was 12% higher than in 2010, when the operation was impacted by the planned relining of a furnace. The impact of lower grades in 2011 was more than offset by process improvements that increased throughput capacity.

Projects

The Barro Alto project delivered first metal on schedule in March 2011 and is expected to reach full capacity rates at the beginning of 2013.

Our Nickel business' promising unapproved projects in Brazil, Jacaré and Morro Sem Boné, have the potential to increase production by more than 66,000 tpa, with further upside potential, which would leverage the Group's considerable nickel laterite technical expertise. Jacaré, with mineral resources of 3.9 Mt (of which 2.6 Mt are in Inferred Resources) of contained nickel, will enter the pre-feasibility study phase in 2012 and has the potential to significantly strengthen Anglo American's position in the worldwide nickel market.

Outlook

Nickel production from the Nickel business unit is expected to be significantly higher in 2012 as a result of the ramp-up of Barro Alto.

The nickel market is expected to be in surplus in 2012, with increasing supply coming on line from new projects. However, there is a possibility that the surplus could be mitigated by supply falling short of expectations, mainly from projects using new technologies, such as high pressure acid leaching. The nickel price in 2012 is expected to be heavily influenced by the delivery of these new projects and by how the European economic situation develops. High cost NPI supply will continue to support a price ceiling or floor.

The long term outlook for nickel is positive, underpinned by stainless steel demand driven by economic growth and urbanisation in emerging economies.