There is an interesting game being played up at Vale’s Sudbury operations. The management and unions are in a standoff over proposed changes to pension arrangements, a nickel bonus (paid if the nickel price exceeds a certain level) and other issues according to Reuters. The union has called the 3,300 workforce out on strike from the end of this month when the plant was planned to resume production following a 2 month shut-down in June and July. The management is now countering with suggestions that Sudbury is Vale’s highest-cost operation and it’s not sustainable, Mr. Agnelli, Vale’s CEO, is reported to have said last week in Rio de Janeiro to reporters. Vale paid $19bn for Inco, of which the Sudbury mine was the jewel in the crown, back in 2007 at the high of the market. The nickel price has since dropped from $25/lb to $7/lb while costs at the mine have risen alongside increased global mining costs. Nevertheless, to suggest the mine is uneconomical is probably disingenuous of Mr Agnelli. The operation was making money earlier in the decade when nickel prices were half current levels, however add in $19bn of debt financing and it may not be looking so pretty now.
The issue is probably more about negotiating positions. Vale needs to reduce its operating costs at Sudbury for both the mine and the processing plant if they are to have a viable long term future. The mine is underground and 100 years old. Comparatively speaking it is higher cost. Vale is busy building a $2.2bn nickel processing plant in Newfoundland and Labrador at Long Harbour to process ore from Vale’s Voisey Bay mine. That processing plant will have the latest technology and process 50,000 tons per annum with just 450 staff. Sudbury processed 85,300 tons last year according to Reuters but employs many more highly paid unionized workers. Long Harbour will almost certainly be unionized too but with a clean sheet of paper the company and union can agree on a reasonable set of terms.
In a world with too much nickel, mining and refining capacity Vale has to tailor its investments to the likely demand. They are clearly taking the view that they are willing to sacrifice their most expensive operation ” currently profitable or not ” in the interests of the long term continued viability of their nickel business worldwide.