Shortly after it acquired the mining operation Talvivaara last August, the state-owned company Terrafame said that it would be basing its business plans on “conservative nickel price forecasts” issued by the World Bank.
“Our business plan is based on it [nickel prices] rising to about 16,000 dollars [per ton] by 2020, which it the World Bank’s forecast. If we stick to this framework, then we will be able to achieve a positive cash flow by the end of 2017 into 2018,” Terrafame board chair Lauri Ratia said in mid-August.
Last summer the World Bank projected that in 2020 nickel would fetch a price of 16,125 dollars per ton. However in its latest forecast issued in January, the international institution estimated that the price in 2020 would be 13,600 dollars per ton. The difference in price is 2,500 dollars or 15 percent lower than its previous forecast.
“We considered other forecasts”
Speaking on Yle’s Aamu-tv breakfast programme last Friday, Lauri Ratia said that the mining operation was still targeting a positive cash flow by 2017 – 2018, in spite of the World Bank’s revised forecast.
Yle then asked the board chairman how the change in the forecast would affect the mine’s business plan. Ratia said that the company based its financing needs on a business model that could simulate different price scenarios. He said that last autumn the company also reviewed other “consensus forecasts” that were considerably more optimistic than the Bank’s.
“After the World Bank’s latest estimate the situation has not changed with respect to different [other] forecasts,” Ratia commented via email.
He added that the company had held discussions with experts about the price outlook and decided to maintain the original target.
Equity strategist: Complete nonsense
Nordnet equity strategist Jukka Oksaharju described Terrafame’s comments as inexplicable.
“That is complete nonsense. If the average price forecast falls, then of course it should affect either the production requirement or the cost side, in order to achieve profitability,” Oksaharju said.
In practice this would mean that the company would either have to produce more nickel than planned or to operate with lower costs, to reach its targets based on the new price forecasts.
The analyst also questioned Ratia’s talk of experts.
“The markets are full of all the experts in the world trying to make money, and they see the current as well as future prices. This shows that the target is based on faith and not on solid calculations.”
“Positive cash flow a misleading term”
Terrafame chairman Ratia also clarified his definition of positive cash flow in his response.
“I must point out that it means the point at which Terrafame achieves its first positive cash flow. It is very difficult to specify a precise time frame, because it is very sensitive to the price of nickel (and zinc) and impacts on the total need for financing,” Ratia explained.
However Oksaharju said that in his view the entire “positive cash flow” terminology is misleading.
“If revenues are larger than expenses in a single month it doesn’t yet mean profitability or profitable operations. Of course it could give decision makers the illusion of profitability,” the analyst said.
Last August the government set up Terrafame to purchase the Stokamo mine previously owned by the beleaguered Talvivaara mining company. Some 209 million euros in public funds were used for the effective bailout. The principles of the loss-making operation have been on trial in a court in Kainuu, eastern Finland for a series of environmental crimes.