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Independence Bets on Gold for Profit as Nickel Prices Tumble

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By Soraya Permatasari

Independence Group NL (IGO), an Australian nickel producer, is seeking gold assets to turn profitable and generate more than half its earnings in 2014 after nickel prices fell to the lowest in almost six months.

A 30 percent stake in AngloGold Ashanti Ltd. (ANG)’s Tropicana gold mine in Western Australia will probably generate earnings before interest, depreciation and amortization of as much as A$140 million ($137 million) in the first full year of production after the mine starts in October next year, Managing Director Chris Bonwick said. Nickel and other base metals may fetch A$80 million, he said.

“We’d like some more gold in our portfolio,” Bonwick said in the May 22 phone interview from Perth, where Independence is based. “Having diverse commodities when prices of base metals are weak and gold is really good gives diversity of cash flow.”

Independence is joining BHP Billiton Ltd., the world’s fourth-largest nickel producer, and other miners shifting focus from nickel after prices of the metal used to harden steel fell and costs rose. Gold, up almost 5 percent in the past year, has “a long way to go” with central banks buying bullion as a store of value, Bonwick said.

Shares of Independence fell 2.8 percent to A$3.50 in Sydney yesterday. The stock has tumbled 41 percent in the past year, compared with a 12 percent drop in the key S&P/ASX 200 Index.

Falling Nickel

Nickel prices declined 25 percent in the past year to $16,790 a metric ton, or $7.6 a pound, on the London Metal Exchange as of 6:15 p.m. local time in Melbourne yesterday, reflecting lower demand in Europe and China. Nickel may not rebound substantially from current levels with additional capacity flooding the market, and prices will probably hover between $8 and $10 a pound this year, Bonwick said.

The company will spend A$230 million to build Tropicana, in which AngloGold Ashanti owns the remaining 70 percent stake. The mine is estimated to produce between 470,000 and 490,000 ounces of gold annually in its first three years.

The Ebitda estimates for the calendar year 2014 are Independence’s internal targets and are dependent on changes in metal prices and exchange rates, Bonwick added. The company, which follows a financial year of July to June, is also looking to acquire assets in Argentina, where it owns a stake in a company searching for gold mines, Bonwick said.

Independence reported a net loss of A$144.6 million in the six months ended Dec. 31, compared with a A$22.6 million profit a year earlier.

Gold Outlook

Gold will probably climb to $1,840 an ounce in the next six months as the U.S. central bank embarks on a third round of stimulus in June, Goldman Sachs Group Inc. said in a May 10 report. Gold for immediate delivery fell 0.9 percent to $1,554.95 as of 6:15 p.m. local time in Melbourne yesterday.

Independence’s Long nickel mine in Western Australia accounts for about two-thirds of its annual revenue, Bonwick said. Long has about five years of production remaining and while efforts are on to extend the life of the mine, the company doesn’t expect output for “many years into the future,” Bonwick said.

The cost of producing nickel increased to A$5.14 a pound in the three months ended March 31, exceeding a forecast of between A$4.8 and A$5, because of higher labor expenses and an operational issue at the Long mine, Bonwick said. The company resolved the problem and expects to maintain the cost at A$5 a pound or lower for the rest of the year and the next financial year, he said.