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Sep 2006 - WMC

Did WMC sell one of the jewels in its crown ?

It is well known that the sale of WMC’s Kambalda nickel division (encompassing the Kambalda and Widgiemooltha regions, Lanfranchi and Carnilya) has been very lucrative for WMC (now BHPB’s Nickel West). However, with the market caps of the small companies operating those mines now totalling ~A$1bn (and rising), a spate of new and ongoing discoveries by them and reputed problems in the Nickel West’s remaining nickel division, did WMC in fact sell the jewel in its nickel crown ?

WMC/BHPB sold their Kambalda nickel division for ~A$150m to A$200m and is making at least A$200m per year (based on our estimates in last years’ September 2005 Goode News column of Paydirt ). Apart from the private sale of Goldfields Mine Management for Otter Juan etc, the other orebodies are held by the ASX listed companies of : Independence Group (IGO’s Long/Victor plus the WMC exploration database), Mincor (MCR’s most of the Widgiemooltha Dome and the recent JV with View over Carnilya), Consolidated Minerals (CSM’s Beta Hunt and the Titan assets covering the remainder of the Widgiemooltha Dome), and Sally Malay (SMY’s Lanfranchi).

The sale was a master stroke : receiving ~35% of the mined nickel essentially for free (apart from refining costs); the small nickel companies pay for 100% of the ore’s transport to the nickel concentrator, its treatment through the concentrator, the metal royalties to the WA Government, and receive recoveries depending on the grade delivered, not all of the credits, and incur penalties for any off spec material such as relatively high MgO.

Added to which is the fact that the treatment costs at the concentrator rise with cpi and are well above actual (rumoured in some cases to exceed double the actual) treatment cost per tonne. It is possible that the treatment costs may be reduced for CSM’s Beta Hunt regional operations because the mines were bought from Gold Fields and hence do not fall under a WMR (WMC) agreement.

CSM elected to use a WMR – type agreement until August 2009, by which time it can establish the potential size of its Beta Hunt operations and the production rate achievable if they had their own concentrator. Should Nickel West reduce its treatment cost for CSM’s ore, they could reach a level where it would be marginally economic for CSM not to go ahead with their own concentrator.

While the sale had been good news to date, the rumoured failure of the sub-level cave at Leinster (at least 3 months’ ago) in which it caved through the waste at the top of the cave (and isolated the ore) above it, the delayed major cut-back at Mt Keith (reputedly on the basis that the nickel price was expected to fall), and slow progress of Ravensthorpe’s Nickel Laterite operation, has meant that the old WMC nickel division is now apparently reliant on the Kambalda nickel division that it does not own.

Although we cannot substantiate the amount, it has been estimated that the production could be 30,000t nickel lower than expected over the coming year as Leinster apparently needs at least 3 years to bring in another orebody (we have never visited the mine) or 2 years to put in a significant crown pillar under the floor of the cave and start conventional stoping operation there, and only a minor offset is expected from Nickel West’s request to the small nickel producers for any ore above 1%Ni.

The strength in the nickel price has hence been attributed to a number of issues such as the dwindling LME stockpile, BHPB reputedly buying on market to satisfy contractual obligations, Falconbridge buying on market, Posco having sold some short (because the nickel price was expected by some to fall) and hence scrabbling to cover, Voiseys Bay on strike (apparently now settled) and the new wave of nickel laterites becoming increasingly capital expensive (>US$2bn) with higher operating costs (>$4/lb ?) than anticipated.

Then to rub salt into the wound, the small nickel sulphide producers in the Kambalda region are making spectacular discoveries and generating growing profits from their ~65% holdings.

IGO’s discovery at McLeay is clearly (so far) the highest grade nickel orebody in Australia, with current development averaging ~7%Ni when we visited it at Diggers in early August 2006, with the banded pyrrhotite/pentlandite nickel sulphide in the face averaging ~20%Ni, and values of ~16%Ni and ~36%Ni in each corner on either side of it as shown in Figure 1. Apparently the banded nickel in the face is common at Kambalda – just usually not at such high tenor (grade).

McLeay could become significant for IGO as it could extend southwards parallel to East Alpha under the salt lake of Lake Lefroy, applying a revised interpretation of the lava channels abutting the basalt on the Boulder-Lefroy fault further east. The previous interpretation of the profile of the southern half of the Kambalda Dome appears to be changing.

When MCR bought Miitel as part of its Widgiemooltha package from WMC, Miitel was an unmined orebody, in that development stopped a few cuts away from the orebody. Miitel has now developed into (so far) the longest orebody in the Kambalda division at over 3.5km long, it remains open north and south, and has grown into two channels or surfaces on the southern side.

Recently MCR entered into a JV with View over Carnilya and observed that Carnilya had not been drilled below 300m and it was possible to overlay Miitel South over Carnilya. Subsequent drilling resulted in a major hit of 10.7m @ 7%Ni and extension of the Carnilya mineralisation to the west with decline development possibly only 200m away – potentially another new mine for MCR.

MCR also reported encouraging results from drilling a higher resolution mag anomaly between Mariners and Redross under their new exploration programme focusing on 45km of fertile basal contact that can be tested – more potential new mines are expected to be delineated.

CSM recently took over Titan’s nickel prospects at Widgiemooltha which include the old Mt Edwards underground mine that bears an uncanny resemblance to MCR’s Wannaway, plus a number of prospects that require further interpretation including the Munda gold/nickel orebody.

CSM also has Beta Hunt and earlier this year (2006) developed across to East Alpha. We visited East Alpha and saw the golden coloured 17%Ni in the development face (it had earlier passed through a specimen of 33%Ni). The East Alpha development is in fact a hangingwall surface, there is still the contact surface to be mined. While on the western side, there are contact surfaces extending south, hangingwall surfaces and the new Beta West discovery.

CSM have taken the visionary step of sinking a $14m shaft for ventilation and plan to develop twin declines inside the spine of the anticline heading south with a targeted prize of 200,000t of nickel and a 20-year life mine.

While SMY’s Lanfranchi has gradually increased its production and extended Helmut south, and is making progress on the Schmitz extension further south, with plans to box-cut and decline down to Winner.

Aside from extensions to the existing orebodies at Lanfranchi, SMY have trialled the geoferret along the northern edge of the dome and received an encouraging response that was expected to be drilled in the current SQ06. The response appears to be in line with Edwin, however, at the time of writing this column, no results have yet been announced by SMY.

It can be seen that almost each individual orebody in the old WMC Kambalda nickel division has been and/or is currently being enhanced through further discoveries with potentially significantly more to come. In hindsight it would appear that WMC did sell the jewel in its nickel crown, to the benefit of a number of small WA nickel producers who are reaping the rewards.

Disclosure and Disclaimer : This article has been written by Keith Goode, the Managing Director of Eagle Research Advisory Pty Ltd, (ERA, an independent research company) who is an Authorised Representative with Taylor Collison Ltd, and with his associates, may hold interests in some of the stocks mentioned in this article. The opinions expressed in this article should not be taken as investment advice, but are based on observations by the author. The author does not warrant the accuracy or completeness of any information and is not liable for any loss or damage suffered through any reliance on its contents.

Figure 1. Independence Group (IGO’s) McLeay No 1 Drive North at Long/VictorGDNsep06

  • Written by: Keith Goode
  • Friday, 01 September 2006