Glencore, Vale discuss merger of nickel operations in Ontario – by Eric Reguly and Marta Lillo (Globe and Mail – October 12, 2013)

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Glencore Xstrata PLC and Vale SA have convened “exploratory” talks aimed at combining their respective nickel operations in Sudbury, Ont., in a move aimed at cutting costs, sources close to Glencore said.

Declining nickel prices have forced the companies to consider the move, the source said. Prices for nickel traded on the London Metal Exchange have fallen by more than a quarter from this year’s high of nearly $19,000 (U.S.) a tonne in February to less than $14,000 a tonne now.

Vale has controlled its share of nickel operations in the Sudbury Basin, several hundred kilometres north of Toronto, since the Brazilian company bought Inco Ltd. for $20.3-billion in 2006. Xstrata, which was bought by Glencore earlier this year, paid $18.2-billion for Falconbridge Ltd. the same year, in order to bolster nickel holdings as the metal was hitting record highs.

Vale’s nickel operations generated $983-million out of a total $11.3-billion in operating revenue in the three months ended June 30, according to the company’s most recent earnings report. The nickel revenue fell from $1.08-billion in the last quarter of 2012.

Baar, Switzerland-based Glencore Xstrata’s nickel revenue fell to $1.7-billion in the six months ended June 30, down from $1.6-billion in the year-earlier period, according to the company’s most recent earnings report.

“The consolidation of Sudbury is way overdue,” Terrence Ortslan, managing director at TSO & Associates, said in an interview. “The time has come to look for how the negatives can be avoided,” he added, referring to nickel mining costs relative to prices.

Efforts to merge Sudbury nickel operations date back decades, the most recent of which started in 2003, when Inco and Falconbridge started talks to merge the two companies. Those talks led to a failed attempt to combine the two after Xstrata and Vale began bidding for the two Canadian companies.

Many of the Sudbury nickel mines are so close to each other that some operate side-by-side, with shared shafts and elevators.

“Nickel has become a financial catastrophe for Vale in Canada,” said John Tumazos, research analyst at Very Independent Research LLC. “Also, the CAD has strengthened since Vale acquired Inco, making it more expensive to pay wages. Meanwhile, nickel prices have fallen about 75 per cent since 2007.”

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