Largest nickel sulphide mine since Voisey's Bay nearing production - a positive nickel story

ASX and TSX listed Mirabela Nickel is bringing its Santa Rita mine in Brazil into production and MD, Nick Poll is extremely confident about the economics despite the current woes affecting the global nickel sector.

LONDON - 

Despite all the doom and gloom surrounding the nickel sector, described by my colleague Barry Sergeant as "one of the world's most trashed up commodity subsectors" - see When will the nickel killing let up?  - there is one seeming success story developing in the construction, by Mirabela Nickel (ASX: MBN, TSX:MNB ), of what Managing Director Nick Poll describes as the largest nickel sulphide mine to be developed since the giant Voisey's Bay.  Indeed construction at the Santa Rita project in Brazil's Bahia State is well under way with preliminary concentrates expected to be produced by late September, although it will take another 6-8 months to build up to the full production target of 26,000 tpa contained nickel in concentrates.

Given elsewhere nickel projects seem to be dropping like flies or being delayed perhaps indefinitely one might ask if the developers of Santa Rita are looking at the market through rose tinted spectacles?  No, says Poll talking to Mineweb today, the big advantage of Santa Rita is that most importantly the mine will have the economies of scale of a major nickel laterite operation, with the much lower base costs associated with the processing of nickel sulphide ores.  It is also located in an area of great infrastructure, with excellent transportation and power  links, which can supply a readily available workforce and is only a couple of hundred km from an important seaport in a mining-friendly country with a decent mining law and a reasonable tax structure!

Indeed on current calculations the mine's cash operating cost to produce a pound of nickel when it reaches its target production rate is only $2.88 (taking into account byproduct credits for copper, platinum and cobalt), compared with a current nickel price of over $7 and, even more importantly, with a substantial amount of nickel product hedged at $8/pound over the next 4.5 years, which is the time it should take the project to pay back its capital costs.  (The $2.88/pound also takes into account the sustaining capex costs). 

Overall the company's hedge position is that it has forward contracts to sell 17,000 tonnes of nickel at an average of US$8/pound from July 2010 to March 2014 and 9,000 tonnes of copper at an average of $2.73/pound from April 2011 to March 2015.  It had also hedged currency of the Brazilian real against the dollar of $120 million at a rate of 2.08:1 from Jan 2101 to March 2013 to protect itself from adverse exchange movements through the final construction and start-up phases.

Mirabela also has offtake agreements negotiated with Votorantim and Norilsk for the sale of its full production over the next five years based on LME nickel prices

Construction of the 6.4 mtpa concentrator started in November 2007 and is now over 90% complete with the SAG mill and the first ball mill - the critical lead time items - on site and installation is well under way.  There had been a time setback due to a delay in organising final construction finance, but this was successfully negotiated with the completion of a senior loan agreement and equity financing earlier this year at a time when finance was still hard to come by for the mining sector.

Mine life from the preliminary open cut project is put at in excess of 19 years.  Reserves are 15.1 million tonnes at 0.65% nickel and 0.16% copper with a further probable reserve of 105.9 million tonnes grading 0.59% nickel and 0.16% copper.  However Mirabela expects to extend the total reserve for open pit mining to 170-180 million tonnes.  The strip ratio is put at 7.2:1 and the amount of contained nickel in the current reserve is estimated at 1.6 billion pounds.

Looking longer term there is a potential underground inferred resource of 87.5 million tonnes at a higher 0.79% nickel and 0.23% copper (which Mirabela reckons should be around doubled as more drilling is undertaken).  However studies on a subsequent underground mine are currently on the back burner with financial resources being focused on bringing the open pit to production.

Assuming the project's basic economics are anywhere near the currently calculated figures, which will put the operation amongst the world's lowest cost nickel miners, Mirabela's Santa Rita mine is promising to be highly successful large scale miner in a sector where most other major developments - admittedly on expensive to process lateritic ores - are seeing cancellations or delays.  Short of a catastrophic collapse in the nickel price, against which it is insured anyway for the next 4-5 years through its hedging programme, or a huge scale natural disaster, the company looks like becoming one of the world's most profitable nickel miners in the long term.

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