Opinion: Is Sudbury running out of luck?

With Inco subsumed into the larger Vale, and iron ore more valuable than nickel, Sudbury is now just an outpost.

Its deep ore veins are touted as among the world’s richest, the fortuitous result of a meteor strike, geologists reckon, thousands of years ago. So, when Brazilian miner Vale bought Inco and its fabled Sudbury mines for $19 billion in 2006, some thought the price a bargain. The Sudbury Basin’s reserves, some said, are easily worth $1 trillion. Why then, with a strike at Vale Inco entering its seventh month, does no one seem to care?

Vale’s share price has headed due north since July, the month its more than 3,000 unionized workers in Sudbury downed their tools to protest proposed changes to pensions and bonuses. With the company’s Voisey’s Bay workers striking in solidarity in August, some 160,000 tonnes in annual nickel mining production has been idled. And yet Vale’s stock hit a 52-week high in the first week of January, surpassing the US$30 mark – a 93% gain in six months.

Now some will argue – and rightly so – that nickel has suffered from serious overcapacity and the strike was a well-timed blessing in disguise. Sudbury alone represents some 8% to 10% of the world’s supply, and the strike provided a nice boost to flagging nickel prices. But if you believe, like some striking miners seem to, that Sudbury’s sheer mineral wealth makes it impossible to ignore, I also have a cheap condo to sell you in Florida.

For one thing, nickel ain’t what it used to be. Since reaching a high of $25 a pound in 2007, the price has plummeted back to earth, where it is expected to remain anchored for the foreseeable future. Cheap Chinese nickel pig iron has established a “new normal” for nickel thatanalysts expect will cap the price around the current $8.

Not surprisingly, nickel’s dull lustre pales in comparison to what really has Vale investors all hot and bothered: iron ore. Sure, Vale’s acquisition of Inco is what catapulted it into the major leagues of global diversified miners, but it is the company’s position as the world’s largest iron ore producer that has earned it a Buy rating from analysts and a market cap of US$150 billion.

And that is the crux of Sudbury’s dilemma: it just doesn’t matter that much. When Inco was running the show, Sudbury was the jewel in the crown, representing more than half the company’s production. Now subsumed within the Vale empire, it is more of an outpost. While there is no exact breakdown, observers estimate the Sudbury operations add no more than 18% to the company’s bottom line. According to Vale, the strike cost it US$319 million in the third quarter of 2009, on operating revenue of US$6.8 billion.

And with iron ore getting a boost from booming Chinese steel production, Vale could see its benchmark contract price with the Chinese jump by 40% in 2010, says Luis Felipe Magon, a mining analyst with Bank New York Mellon in Rio de Janeiro. “The short-term dynamics are very good. Even though (overall) production is lower, the revenue growth is enough to justify an investment position in Vale.”

Added to new, lower-cost nickel projects being brought online in Brazil and New Caledonia, that is perhaps why Vale can afford to stare down the union. In January, the company restarted its smelter operation, processing its large nickel stockpiles using non-unionized staff – somethingInco never dared to do in its 100-year history. (Vale is doing the same at Voisey’s Bay after negotiations broke down at the end of January.)

The United Steel Workers union has countered with an international campaign, sending Canadian politicians to Brazil, lobbying Vale’s European customers and holding protests in Washington. But union officials say they can’t get the company to even return their calls.

The fear among non-union Vale employees is that the Brazilians could eventually shut down Sudbury’s smelter complex, much like Xstrata has announced plans to shutter its Kidd Creek metallurgical complex in Timmins. Vale is spending $200 million to reduce pollution emissions at the complex and will have to make a “massive” investment by 2015, say those familiar with the situation, to meet stricter environmental standards. “The question is, how much is Vale going to keep investing when you don’t get a lot of return?” said one individual.

According to the company, Sudbury is Vale’s highest-cost operation. Industry watchers don’t believe Vale wants to wind down its value-added nickel operations and whittle Sudbury down to a mining asset. If anything, they say, the Brazilians want to grow the nickel division, which they see as an important diversification to their heavy reliance on iron ore. But the Brazilians aren’t going to wait around, either.

Unless a new understanding can be reached between the union and the company, Sudbury’s millennia-long string of luck may finally run out.

Andrea Mandel-Campbell is an author and host on Business News Network.