Trouble in Paradise: New Caledonia
August 2017
Just over a decade ago, the tropical island of New Caledonia was seen by many as the key to future finished nickel supply. Blessed with abundant nickel resources and the highest average grades of any nickel laterite producing country, major players in the global nickel industry Inco and Falconbridge invested heavily in new capacity. Fast forward to today, and New Caledonia’s nickel industry is on the ropes, with high hopes yet to be realised. How did it get to this?

Back in the early 2000s, Inco (later acquired by Vale) committed to the construction of the very large 60ktpa Goro HPAL project (now renamed VNC), while Falconbridge (now part of Glencore) approved the development of Koniambo, also with a planned capacity of 60ktpa. These projects were expected to set new benchmarks for low-opex laterite production, and the threat of these two large projects coming on line disincentivised capital investment in projects elsewhere.

The ramp-up of these two projects is compared below against an idealised ramp-up profile, which achieves 60% of design capacity by the end of year one, 90% by the end of year two, and design capacity from the end of year three onwards. Performance to date and our base-case forecast is shown on an annualised basis, and quarterly performance is also shown to highlight significant events that have impacted ramp-up.



  • VNC: Delivery of VNC (the HPAL formerly known as Goro) was long delayed, with major capex over-runs. In 2005, capex was estimated at US$1.8bn with commissioning expected in 2008. Commissioning didn’t commence until 2010, with capital costs now exceeding US$4.6bn at that point. Commissioning of VNC has been troubled to say the least, with the highly intensive and corrosive nature of the process leading to multiple plant failures. In 2016, annual production reached a record of 35.7kt, or just under 60% of nameplate capacity. Vale does not expect production to come close to the original 60ktpa capacity of the plant until around 2019-2020. Newly appointed Vale CEO Fabio Schvartsman recently indicated Vale’s patience with the poor performance of VNC was limited, with the project having cost Vale a reported US$1.3bn over the last three years alone. VNC remains stubbornly in the top decile of AME’s cash cost curve.
  • Koniambo: Glencore’s Koniambo project has fared no better than VNC. Blessed with one of the largest and highest-grade saprolite reserves globally at around 2.5% nickel content, and utilising novel smelting processes, the project promised to have the lowest opex of any laterite project. However, project delays and technical challenges meant first production from Koniambo was several years behind schedule and capital costs bloated to US$6.3bn, compared to an early estimate of US$3.85bn in 2007. Plant commissioning commenced in late 2013, and output grew to 30% of design capacity within one year of operations. However, a hot metal spill in December 2014 significantly set back ramp-up, leading to a redesign and rebuild of the Line 1 furnace which was brought back on line in 2016, with a rebuild of the Line 2 furnace commencing this year and expected to ramp-up in 2018. Production will not reach a now reduced full capacity of 55ktpa until 2021/22. 

New Caledonia’s incumbent producer, Eramet’s SLN business unit, has also faced significant challenges. SLN, which has operated since the 1890s, consists of five mines spread across the island, and the Doniambo smelter located in the capital, Nouméa. SLN has operated at a loss for the last half decade as nickel prices declined below the cost of production. SLN is implementing an aggressive cost-cutting programme aimed at reducing cash costs from around US$6.0/lb in 2015 to US$4.50/lb by the end of 2017, shifting SLN from the fourth to the second quartile of global finished nickel cash costs. This reduction will be achieved in part by the elimination of high-cost matte production at Doniambo, usually destined for downstream processing at Eramet’s Sandouville refinery in France. This will leave Doniambo as a pure 60ktpa ferronickel producer, where previously up to 15kt of this capacity could be directed to matte production. Also, costs are expected to drop as the expensive electricity for the smelter provided by an oil-fired power plant will be replaced by a cheaper gas-fired plant. EU320m has been guaranteed by the French government for the new power plant. 

Several small miners producing laterite ore for export also contribute to New Caledonian mined production. These producers have traditionally sold ore to long-term trading partners in Japan, Korea, and Australia. The Yabulu refinery in Australia was a major customer of these miners. Yabulu’s closure, combined with reducing offtake and low prices for laterite ore over 2015-2016 led to industrial action, with contract ore truckers protesting the inability of miners to export ore to China. Exports to China were limited by a 2009 mining policy designed to maintain exports to traditional customers of New Caledonia. The policy also acted to restrict the flow of high-grade ore to China’s NPI sector, which would undercut nickel production from Doniambo, Koniambo, and VNC. In May of 2016, the New Caledonian administration announced they would allow exports of up to 700kt at up to 1.6% nickel grade by SLN and SMSP to China to offset lost sales and support the territory’s mining industry.

Had these major projects in New Caledonia be delivered as planned, the territory would have been the world’s second largest mined nickel producer in 2016 with a 14% share, rather than number four, and the seventh largest finished nickel producer instead of the ninth largest, as shown in the charts below. 

While a tropical island paradise for holidaymakers, New Caledonia has proven a tough jurisdiction to operate in profitably. The advantage of abundant very high-grade nickel laterite resources has been offset by many challenges, including a remote location leading to high imported consumable costs, a high cost of energy production, high labour rates (operating under French and EU labour laws), combined with the implementation of new, very large scale, high operating intensity HPAL and Ferronickel processes. In addition to these factors, ownership participation by local government in the new projects and local government’s imperative to provide employment and development has complicated decision-making on continued operations of loss-making plants. 

All three major processing operations, SLN, VNC and Koniambo, have outlined paths to improve production and reach profitability over several years. But as recent noises from Vale suggests, patience may be wearing thin.