Shares digital

With nickel in short supply, Albidon’s jump to producer could not be better timed

by Dan Coatsworth

Albidon (ALD:AIM) 186p STOP LOSS 149p

Shares summary

About to leave the junior resource sector and become a full-blown producer. Significant exploration projects will drive its share price up, aided by steady income stream and major change on the shareholder register expected.

Business:

Soon-to-be nickel producer, backed by uranium, copper and zinc exploration.

Vital stats:

Market value: £305 million

Historic PE: n/a

Prospective PE 2008: n/a

Prospective PE 2009: n/a

Sector PE: 11.9

1-month relative strength: 7.3%

1-year relative strength: 101.4%

Yield for 2008: n/a

NMS: 3,000

Spread: 1.6%

Africa-based mining group Albidon will next week be promoted to the ranks of producer as it generates the first batch of nickel concentrate in Zambia. Cash will start to roll in from May from China’s biggest nickel group, Jinchuan, which is buying the entire production over the life of the Munali mine.

Albidon will have increased annual production rates to around 10,500 tonnes of nickel sulphide concentrate by the end of 2008. Jinchuan buys the concentrate directly from the mine for transportation to China where it is put through a smelter and refined.

The concentrate may eventually be treated in Africa, which would reduce Jinchuan’s transportation costs. Managing director Dale Rogers says the two companies are considering a joint venture to build a smelter in Zambia, potentially costing $200 million.

Albidon’s share price has risen by 132% in the past eight months to 186p as Munali neared completion. Despite this substantial gain, momentum in the stock should continue as revenue starts to pour in and exploration advances on other interests in Africa.

Half of the company’s $6.5 million exploration budget for 2008 will be spent in Botswana and Tanzania, the latter including several joint venture agreements with the likes of BHP Billiton and Goldstream. The remainder of the budget will go towards exploration to expand Munali and advance Chirundu, a uranium joint venture in Zambia.

Albidon has hedged around 20% of the first five year’s production from Munali, starting next January at $14 per pound, but averaging $10.71 over the hedge agreement. Nickel is currently trading around $13.60 per pound. ‘Companies are producing every pound they can at the moment,’ says Rogers, adding that the slightest incident can influence the nickel price. ‘When BHP’s South American mine was hit by a strike, the nickel price went up $2 overnight. Even if mines can operate without any problems and get the supplies out, there is still a net deficit of metal. The world needs seven or eight new projects like ours each year to meet the nickel demand, and we’re the only new nickel sulphide mine to come on stream in the first half of 2008.’

There could be a major change to the company’s shareholder register. Its largest investor, Lion Selection with 20.5%, wants to transform from being a fund manager to mining house. The 70% of the Queensland-based Cracow gold mine it doesn’t own has been put on the market by Newcrest Mining for A$200 million. Lion has the pre-emptive right to buy this stake and has indicated it will sell investments to fund the purchase. Albidon has spoken to Lion about speculation that its shares would be involved in this transaction but has yet to receive a definitive answer.

Lion stands to make over A$50 million profit on its investment in Albidon and will no doubt have a long queue of parties interested in the shares. It paid a 25% premium on the share price last November to increase its stake, giving some indication of the levels people will go to get stock.