Our weekly nickel show, now in its 33rd week, has given us insight into the supply demand drivers, Supercycles, pricing, assessments of some of the announcements from companies and what the main influencers have been doing. We've also been lucky enough to talk about some of the technical aspects of not only understanding which deposits are amenable and potentially economic, but how to spot the odd winner or two.
So it was with great interest that I read a tweet and an interview with a fund manager last week talking about low-grade bulk tannage operations being uneconomic. The Fund manager has made a few good calls over the past couple of decades, so clearly someone's opinion who should be considered. However, I thought it might also be worth running through the investment case for low-grade bulk operations and show not only how they work but perhaps look at several that have successfully.
Large scale low-grade ultramafic nickel deposits, such as the one the fund manager mentioned specifically, Crawford (Canada Nickel), and other similar deposits like Dumont (Waterton), FPX (Baptiste) are the only potential multicycle scalable sources of large quantities of nickel required to meet massive new nickel demand from electric vehicles and continued strong growth from stainless steel. The original example of this type of deposit is Mt. Keith - successfully built and operated by BHP’s nickel business for more than 25 years as one of the largest nickel sulphide mines in the world.
BHP has now developed a similar scale sister deposit - Yakabindie, and just earlier this year, acquired the Honeymoon Well deposit. While many investors are familiar with high-grade nickel discoveries in Western Australia, and Sudbury – it is important to note that Mt. Keith has remained open through many nickel cycles while the high grade deposits at Kambalda have been shut for many years – highlighting some insights into the underlying economics. We decided to dig a little deeper to highlight to investors why these deposits are an attractive source of new nickel supply and lucrative investment for those investors prepared to do a little work.
Site operating costs – it's about scale and profit margins
Due to the smaller number, and generally lower profile of low-grade projects, there is generally a misunderstanding when it comes to operating costs, and in turn, what amount of revenue is required per tonne of ore for an attractive project – some people have posted that “$50 per tonne are unfeasible”. This would have left you out of the multi-billion takeover of Inmet (Cobre Panama project) by First Quantum, +$500M acquisitions of companies like Terrane (Mt. Milligan), Augusta (Rosemont) and several other large scale, low-grade copper projects during the prior decade.
By looking at those who already exist in the market, the outlook for operating costs becomes clear. Dumont, which is operating in the same area as Canada Nickel, is currently incurring just CAD$10 per tonne mined.
Other low-grade companies working in base metals such as Taseko’s (TSX: TKO) Gibraltar Mine,Teck Resources' (NYSE: TECK) Highland Valley Mine, or Centerra Gold’s (TSE: CG) Mount Milligan Mine, also have operating costs floating around the CAD$10 per tonne mark.
Not all of the nickel will be recoverable, particularly due to the silicate minerals that some of it is contained in. Canada Nickel estimates that of their higher-grade ore, 90% of the nickel is not in silicate minerals, and for the lower-grade 60% is not in silicates.
However, some of the nickel in silicate minerals is still recoverable.
With costs of CAD$10/tonne, it is then a question of how much revenue can be generated by processing a tonne of ore. Ultramafic nickel deposits always contain a certain amount of nickel that is not recoverable by standard milling flotation circuits, so recoveries are generally much lower than you would see for a low-grade copper or other deposits, so recoveries in the 40-50% range are typical and not a cause for concern.
We have been following the Crawford project so will refer to it as an example, so let’s do the math for that project.
Based on a nickel price of USD$17,000 per tonne, the higher-grade core containing 0.34% nickel at a 50% recovery rate, and average-grade containing 0.26% at a 40% recovery rate, combined with the 90% payability from the roasting process that Dumont's FS is using:
The higher-grade ore would deliver CAD$34 per tonne and the lower-grade ore would deliver CAD$23 per tonne.
Based on the CAD$10 operating costs, the higher-grade ore will result in an operating margin greater than 65% and the average grade operating margins in excess of 50%. For reference, Dumont’s cash costs in their feasibility study are USD$3.20/lb and has a AISC life of mine of USD$3.80/lb.
Downstream processing
Many of these low-grade deposits have high-grade, high nickel concentrates opening up new downstream than traditional smelting/refining.
Traditional nickel smelting and refining results in the concentrate producer only receiving 70%-75% of the contained nickel value, with the balance captured by the smelter/refiner as most nickel mines have few smelting options which result in them capturing a large amount of value.
The low-grade deposits realized long ago that there are much more valuable, lower risk paths to market. FPX’s project creates a product that can be shipped directly to the stainless steel industry. The Dumont nickel project developed a very simple, straightforward process which allows the nickel concentrates to be utilized by any ferronickel or NPI producer vastly increasing the number of downstream options. It utilizes fluid bed roasting as a far more effective and cost-efficient method for processing nickel concentrate, costing just $30 per tonne of feed. With all of the sulphur gone, it can then use the same furnaces as used for NPI/ferronickel which would incur a further $80-90 cost of conversion to Nickel Pig Iron or stainless steel per tonne. Dumont indicates that this approach would yield a payability of 90%-95% versus 70%-75% for traditional smelting
This method isn’t mere theory, it has been successfully employed by Tsingshan Group, now the world’s largest nickel and stainless steel producer, began construction of their first fluid bed roaster in 2014 and have since added an additional roaster, dramatically increasing their output, as proof of the viability of this method.
Tsingshan processed a range of concentrates as a part of an offtake agreement with Western Areas, the company even successfully processed the world’s worst nickel concentrates from South Africa.
Tsingshan Group is proof that this concept is both practical and economic at scale.
So will companies like Canada Nickel Get Into Production?
Canada Nickel firmly believes that they will, by arguing that Dumont Nickel, expected to be at a similar scale to and in the same area as Canada Nickel, has a project which can deliver mid-teens IRR and $1billion NAV.
Note: We have not yet had a comment from any of the other companies mentioned. You can contact us here.
Conclusion
Hopefully, these real world examples highlight that, while not currently “typical” nickel deposits, these large, low-grade deposits can be very profitable even at their low grades and recovery levels, as the revenue generated from each tonne of material is a multiple of the operating costs. The copper industry moved to large low-grade deposits several decades ago and a generation of companies generated hundreds of millions/billion of dollars for shareholders by advancing these projects during the prior past 2 decades. These nickel deposits represent a whole new generation of investment opportunities which could be even more lucrative for those investors prepared to do the work and trapped in investment paradigms that stopped being meaningful 20 years ago. If these type of deposits are good enough for BHP Billiton, they should be good enough for the rest of us.
