Mirabela and Votorantim face off

Mirabela Nickel (TSX: MNB; ASX: MBN) has run into trouble with one of its two customers, sending its shares plunging.

Shares in the Perth-based junior miner have lost 54% of their value since Brazil’s Votorantim Metais announced it would suspend its smelting operations in Brazil in November owing to the weak nickel market, as well as terminate a concentrate sales agreement with Mirabela that same month.

The announcement was made on Sept. 26 — a day after Mirabela said it would apply for a voluntary delisting from the Toronto Stock Exchange due to its limited trading volume. Mirabela shares closed Sept. 27 at 3¢ on heavy trading.

Votorantim signed a deal in 2008 to buy 50% of the nickel sulphide concentrate from Mirabela’s Santa Rita open-pit mine in Brazil’s Bahia state. Mirabela says the contract would run until the end of 2014, while Votorantim argues otherwise. Mirabela says it is consulting legal options regarding Votorantim’s decision and its own debt-funding abilities.

Adding to the dismay of investors, Mirabela warned it may not be able to reach the lower end of its 2013 production guidance of 17,000 tonnes, with the mine being out of sequence due to a nitrate supply disruption. It expects to update its full-year guidance for production, cash costs and capital expenditures in late October.

Mirabela intends to increase waste stripping and expand its tailings storage facility next year, noting that capital spending for 2014 should be “materially higher” than 2013.

The company says the conditions in the nickel market are “challenging,” with nickel prices on the London Metal Exchange trading below its break-even cash flow. This may persist in 2014, Mirabela cautions, explaining that analysts are changing their opinions on when nickel prices may recover.

Analysts previously forecasted a possible improvement in nickel prices in early 2014 due to an expected ban on nickel ore exports to China from Indonesia, but are now suggesting that the weak prices will continue in 2014, Mirabela says.  

Given the uncertainty about the nickel price and its nickel sales next year, Mirabela may have problems repaying its debt obligations. However, it says it is assessing avenues for “strategic, financing and off-take alternatives.”

For 2013, Mirabela notes that 100% of its production has been committed to Votorantim and its other customer, Norilsk Nickel, adding it has started discussions with Norilsk and other possible buyers for 2014. But CIBC analyst Tom Meyer warns that Mirabela could have a hard time striking an off-take deal due to the low nickel prices and funding concerns.

“At the end of August, the company had US$79.7 million cash-on-hand. This buys the company time, in our view, but we believe the debt holders may determine the fate of the company and/or the value of residual equity,” he adds in a note.

Meyers has cut his 12- to 18-month price target from 10¢ to 4¢, and maintains a “sector underperform” rating on the stock.