Will BHP's Nickel West closure affect the Big Australian's share price?

BHP (ASX: BHP) has finally pulled the plug for its loss-making Nickel West operations in Western Australia after sinking US$3 billion into the venture over the past four years.

Downward spiraling nickel prices have caused a major crisis among WA-based miners and developers. In the past year alone, we have witnessed:

• IGO (ASX: IGO) report a billion-dollar impairment of its Western Areas assets (acquired in December 2021 for $1.26 billion)

• Panoramic Resources (ASX: PAN) was put into administration in late 2023 amid rising costs, machine failures and bad weather

• Poseidon Nickel (ASX: POS) continued to defer the restart of its Black Swan project

Nickel prices have plummeted nearly 20% over the past year, hitting near three-year lows due to surging supply from Indonesia. In the March quarter of 2024, global nickel production increased by 6.9% year-on-year, driven almost exclusively by Indonesia's ongoing expansion. According to Australia's Office of the Chief Economist, this trend is expected to persist, likely keeping the nickel market oversupplied well into the latter half of this decade.

Nickel 5-year price chart (Source: TradingEconomics)

Key takeaways

• BHP to temporarily suspend the Nickel West operations and West Musgrave by 2027

• Shift to care and maintenance will cut approximately 3,000 jobs but approximately half will be redeployed to other projects

• BHP will reinvest approximately US$300 million per annum following the transition period to support a potential re-start

• Transition period will commence from July 2024 and suspend operations by October 2024

• BHP expects to recognise a further non-cash impairment charge of US$0.3 billion in FY24 (Note: This is in addition to previously announced impairments of US$3.5 billion for WA nickel)

• Any redundancy payments and other contractual costs relating to WA nickel will be recognised as part of the Group's half-year FY25 earnings

'No option but to suspend'

"Against increasing costs and continually more CAPEX for asset health, WA nickel has lost its competitive position in a (yet again) oversupplied market," Macquarie analysts said in a note on Friday.

"The decision to continually invest in a supply challenged commodity highlights capital allocation risks in geologically abundant commodities, one which BHP wasn't prepared to keep taking."

Since FY20, BHP has invested over US$3 billion to sustain its nickel division, with very little to show from an earnings perspective. The company's nickel-related assets have generated the following EBITDA since FY20:

• FY20: -US$37 million

• FY21: US$259 million

• FY22: US$0.4 billion

• FY23: US$0.2 billion

Interestingly, BHP sold West Musgrave back in 2014 to Cassini Resources for $250,000. Two years later, Oz Minerals began building up a significant stake in Cassini. By 2020, Oz Minerals acquired the whole company, valuing it at approximately $76 million.

When BHP acquired Oz Minerals, the West Musgrave assets were valued between US$1.15 billion to US$1.3 billion. Now, it's effectively worthless.

Earnings and ratings impact

"Suspending WA nickel hardly impacts our forecasts given our previous FY25 asset closure assumption," says Macquarie, adding that "the removal of loss-making Nickel West increased FY25 EPS by 3%."

The EPS forecast for FY26 was pushed 1% higher while FY27-28 remain unchanged.

Macquarie retained a NEUTRAL rating on the stock and kept its target price unchanged at $43.00 a piece.