Sunday, January 31, 2010

Norilsk Nickel Metals Production Projection for 2010

Russia's Norilsk Nickel Mine (NILSY.PK) is the world's largest nickel mine, with its by-product palladium account for 45% of the world’s mine production.

Recent termination of Russian government palladium stockpile sale, due to depletion of the stockpile, is just one of the reasons why palladium has extremely bullish supply/demand fundamentals, and why palladium performed the best among all four precious metals in 2009.

Reduction of palladium production from Norilsk Mine could further restraint the supply, and may prompt major industry users to panic hoard like in 2000/2001.

One must correctly project Norilsk Nickel's 2010 metals production, to have an accurate picture of global platinum and palladium supply/demand outlook for 2010.

Norilsk's Russian operation has two divisions, the Polar Division, which produces platinum and palladium as by-products, and the Kola Division, which contains only nickel and copper.

The Polar Division proven reserve mineral ore contents are as following:


































Ore TypeNi (%)Cu (%)Pt (g/ton)Pd (g/ton)Cu/Ni Ratio
Rich2.86%3.98%1.497.041.392
Cuprous1.13%4.58%2.5710.804.053
Disseminated0.49%0.89%1.453.971.816


There are mainly two types of ores, as disseminated is insignificant:


  1. Rich type, which is rich in nickel but poor in copper, platinum and palladium content.

  2. Cuprous type, the opposite, poor in nickel, but rich in copper, platinum and palladium.


In the past I pointed out that Norilsk was switching to the rich nickel ore to cut cost and increase nickel revenue, or simply due to the geology structure of the ore body being mined.

The effect of the production switch is that for the same amount of nickel, much less copper, platinum and palladium will be produced, as I predicted.

The data in the past two years and Norilsk’s own projection for 2010 have confirmed my prediction. The ore type switch can be closely monitored by looking at the Copper/Nickel production ratio and see how it changes over time.

Here are the Norilsk Nickel Russian production (Polar + Kola Divisions) over the years, plus 2010 projections:









































































YearNi (tons)Cu (tons)Pt (troy oz)±%Pd (troy oz)±%Cu/Ni
2005243,000427,000751,0003,133,0001.757
2006244,000425,000752,000+0.13%3,164,000+0.99%1.742
2007234,454404,465727,000-3.32%3,049,000-3.63%1.725
2008232,302400,338632,000-13.1%2,702,000-11.4%1,723
2009232,813382,443636,000+0.63%2,676,000-0.96%1.643
2010*234,000363,000655,000+2.99%2,715,000+1.46%1.551


(* Based on Norilsk Nickel projection for 2010)

We are interested in palladium, so we want to see only the productions of the Polar Division. After subtracting the Kola Division, here are the numbers for the Polar Division:








































































YearNi (tons)Cu (tons)Pt (troy oz)±%Pd (troy oz)±%Cu/Ni
2005123,000361,000751,0003,133,0002.935
2006122,000351,000752,000+0.13%3,164,000+0.99%2.877
2007119,000338,000727,000-3.32%3,049,000-3.63%2.840
2008122,000339,000632,000-13.1%2,702,000-11.4%2.779
2009122,813321,443636,000+0.63%2,676,000-0.96%2.617
2010*124,000302,000655,000+2.99%2,715,000+1.46%2.435


(* Based on Norilsk Nickel projection for 2010)

As shown in the chart, nickel production is maintained pretty flat over the years. However the copper/nickel ratio consistently dropped. The drop of the Cu/Ni ratio accelerated since 2008 and continues to go significantly down in 2010 projections.

As a result, I predict Norilsk’s palladium production in 2010 will not raise slightly as projected by Norilsk Nickel itself, but rather should continue to drop significantly from 2009 level, commensurate with the drop of copper/nickel production ratio.

I am predicting a palladium production level at 2.55M ounces for 2010, and platinum at 600K ounces level.

Is it ridiculous that people should believe my prediction, rather than Norilsk’s own prediction? From early 2008 on, based on my observation of the ore type switch, I insisted on my prediction of Norilsk palladium production at 2.7M level for 2008.

But Norilsk re-iterated, in its Q1 production release, that it’s on target to reach 2008 palladium production level at 3.02M to 3.07M ounces. In the Q2, 2008 report they still insisted that previous full year projections were unchanged. In Q3 they did not revise annual guidance either. When the final result of 2008 came out to be 2.7M ounces, I was right, Norilsk Nickel was wrong. Why would they insist on a wrong and overly optimistic guidance, is beyond me.

The bullish case of the global palladium market now looks even better.

Investors in the world’s only primary palladium producers, Stillwater Mining (SWC) and North American Palladium (PAL), will stands to profit from the expected palladium price surge in 2010.

After falling for a continuous 8 days for a healthy correction from recent high, it’s now time to buy back these two stocks, SWC and PAL.

Data sources:
Norilsk Nickel Company Web Page
Norilsk Nickel Production Result Releases
Norilsk Nickel 2009 Production and Projection for 2010
Norilsk Nickel Mineral Reserves and Resources Statement
Norilsk Nickel Mining Operations

Full Disclosure: The author hoards physical precious metal palladium, and hold large positions in SWC and PAL. 95% of my 401K account is in SWC and PAL.

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