IGO shelves its Cosmos nickel project – but why is the stock clawing back losses?

IGO's (ASX: IGO) Cosmos Project is the latest WA nickel mine to shut down due to spiraling costs and depressed prices for the key steelmaking and battery material.

A review of the Cosmos Project, which seeks to optimise its operations and costs, flagged further delays in getting the mine to full capacity as well as further increases in already elevated operating and capital costs.

"We still believe there is value in Cosmos, however in this nickel environment we need to be disciplined with our allocation of capital, while retaining our optionality to restart if market conditions improve," said Chief Executive Ivan Vella.

"The transition, which is expected to be concluded by 31 May 2024, will prioritise the safe preservation of the Cosmos assets and the completion of select key workstreams," the company said in a statement.

Not just an IGO problem

Cosmos' move into care and maintenance might come as no surprise given the state of the WA nickel scene. Here's a summary of recent developments among key players:

• 17 Jul 2023: IGO slashes value of new nickel mines by 75% (AFR)

• 14 Dec 2023: Panoramic Resources enters voluntary administration (AFR)

• 22 Jan 2024: Andrew Forrest's Wyloo Metals shuts down (SMH)

• 22 Jan 2024: Wyloo Metals closure forces BHP to shut WA processing plant (SMH)

Late last year, IGO slashed the value of its Cosmos and Forrestania nickel mines by almost $1 billion to reflect unforeseen operational challenges as well as capital and cost escalation. The two projects were purchased as part of the company's $1.3 billion acquisition of Western Areas back in 2022.

Priced in bad news might be good news

IGO shares opened -8.2% lower as the market opened on Wednesday. Within the first ten or so minutes of trade, the stock was down just -2.2%. A Citi note dated 28 January might provide some perspective as to why the mine closure is a good thing.

"We think the market would react favourably to a cessation of downstream nickel ambitions, and a smaller or curtailed Cosmos," the analysts said.

"At the end of the day IGO is the only ASX-exposure to the lowest cost hard rock mine globally and the bulk of the asset EBITDA downgrades are done for the FY, in our view."

This share price strength (or rather reversal) reminds me of a similar scenario involving Alumina (ASX: AWC).

On 9 January, Alumina announced the curtailment of its Kwinana Alumina Refinery, which had an annual nameplate production capacity of 2.2 million tonnes. The aging refinery had high costs and weighed on Group economics.

"When excluding the high-cost Kwinana refinery, average cash costs of production for the remaining two refineries in WA, Pinjarra and Wagerup, were ~$250/t in 4Q23. Both these refineries are first quartile on the global alumina refining cost curve and emissions curve," the company said in a statement.

Alumina shares finished the session up 7.7% and rallied another 17.4% the next day (Wednesday, 10 January 2024).

Putting it all together: The WA nickel scene has been driven to the ground amid a double whammy of downward spiraling nickel prices and soaring costs. The uneconomic state of IGO's Cosmos project has been well-documented and the market is well aware that the project is effectively worthless (given the write down announcement in July 2023). IGO has today made the decision to pull the plug on Cosmos – which was more so perceived as shelving a loss-making project. The company has cut the fat and can now focus on better things.