It’s been a long haul for Toronto-based developer First Nickel (FNI-T) as it strives to revive commercial production at its Lockerby nickel-copper mine outside of Sudbury, Ont.
First Nickel acquired the project from Falconbridge in June 2005. It extracted 364,000 tonnes of ore during operations that were suspended in 2008, when Lockerby was put on care and maintenance after base metal prices tanked.
Initial steps towards restarting operations at the mine took the company through 2011. An updated feasibility study was filed, and First Nickel raised the capital necessary to refurbish its mine infrastructure and kick-start production.
According to a feasibility study put together in November 2010, Lockerby’s depth extension, which adds 6.5 years onto the mine’s life, has an internal rate of return of 50% with a US$37-million net present value at a 10% discount rate. The mine-revival project carries an initial capital price tag of US$37.6 million. Current mineral reserves total 1.44 million tonnes grading 2.23% nickel and 1.36% copper at a 1.5% nickel-equivalent cut-off.
Development activities at Lockerby over the past 18 months have included replacing the haulage fleet, optimizing the mining sequence, improving ore handling and the ventilation system, and recalling the mine’s unionized workforce.
First Nickel restarted ore extraction at Lockerby’s depth zone last September, and shipped 23,924 tonnes of ore during 2011 to Xstrata’s (XTA-L) Strathcona mill in Sudbury — where First Nickel maintains a life-of-mine offtake agreement.
First Nickel expects to be ramping up over the course of this year, starting the first quarter running at about 400 tonnes per day, and are aiming to end the year running at 800 tonnes per day.
“It’s on schedule, and has no problems,” president and CEO Thomas Boehlert explains during an interview. “We put out our guidance in January, and we’re still confident in those numbers. There is no reason to believe we won’t meet those expectations.”
Lockerby production is expected to hit a steady state by year-end, with annual output equalling 10 million lbs. nickel and 7 million lbs. copper, at average cash costs of US$6 per lb. nickel equivalent.
“We’ve got that cost margin we’re comfortable with,” Boehlert says. “There is always going to be that volatility, but I think nickel has a very firm underpinning in stainless steel, and I think stainless steel growth is just going to continue.”
According to Boehlert, the company aims to take advantage of rising costs in China’s nickel pig-iron industry, which produces 15% of global annual nickel output at an average cost range of US$8 to US$9 per lb.
“The good thing from our perspective is that the costs are only going up for that sort of production because they are energy intensive,” he explains. “In business generally, you have to be somehow involved in China for the short and long term. I think commodities are the easiest way to participate in that growth, with the least amount of friction.”
First Nickel intends to use Lockerby as a launching pad, with the company looking to expand the mine’s life and acquire additional base-metal assets to help it grow.
“We know we have to deliver that to ensure our credibility, and I think we look at Lockerby as a starting point. There is a lot of exploration potential there,” Boehlert says. “In parallel to the Lockerby project, we are looking at other ways to grow the company. Our objective here is to emerge out of the pile of junior miners and become a mid-tier, base-metal producer.”
In order to expand Lockerby’s mine life and meet a corporate goal of developing a second producing asset within three years, First Nickel is running a US$3.4-million exploration program in 2012. The company has 11,000 metres of drilling planned covering three targets in northern and eastern Ontario.
First Nickel’s primary target will be the Link zone, which lies between the higher-grade Lockerby East deposit with an indicated resource of 180,000 tonnes of 2.3% nickel, and the lower-grade Conwest zone, with an indicated resource of 8.5 million tonnes grading 0.5% nickel. Link was most recently drilled in 2009, when the company cut 11 metres carrying 1.3% nickel. First Nickel has scheduled 5,000 metres of drilling on the target this year.
“We’re going to be drilling at Link, fleshing it out a bit, and seeing how extensive the zone is, with the intention of adding to Lockerby’s reserves and resources,” vice-president of exploration Paul Davis says. “We’re drilling in there from surface because firstly, it won’t impact any of our underground operations as we proceed to ramp-up Lockerby at depth, and secondly, it is something we can test where we have that previously established mineralization.”
The remaining 6,000 metres of surface drilling will be split evenly between the Raglan Hills and Belmont projects in the Bancroft area, roughly halfway between Toronto and Ottawa.
“Those are more grassroots, project-generative options,” Davis says. “We’re looking for mineralization similar to Vale’s (VALE-N) Voisey’s Bay deposit — so, big-layered intrusions — as well as Rio Tinto’s (RIO-N) Kennecott Eagle deposit in northern Michigan. Same-age rocks, good sulphur source, alternating intrusions in the area and forty known-nickel-copper occurrences. Southeastern Ontario is a sleeper.”
First Nickel finished the year with US$26 million cash-in-hand, though the company does not expect to see revenue streams from Lockerby until the mine moves towards commercial production in the second half of the year.
Last year’s revenues stemmed from a liquidated hedging option worth US$35 million that First Nickel retained, owing to a debt facility contract.
“We said to the banks: ‘We don’t need the loan anymore, thanks very much,’ and we ended the year with that cash and no bank debt with the project ramping up,” Boehlert says. “We wanted to get out from under that project financing as soon as possible, because there were all sorts of covenants in the agreement that restricted what the company could do without going back to the banks.”
First Nickel leaned on equity financing during development at Lockerby, and as a result has 508 million shares outstanding and a presstime market capitalization of US$48 million.
Much of the share dilution came last year when First Nickel arranged financings with Resource Capital Fund and Westface Capital, issuing US$33 million worth of shares at placement values ranging from 12¢ to 16¢ per unit.
“We would like to open up the interest from the investment community further, and have a broader following there,” Boehlert says. “We probably need to deal with the fact that we have so many shares outstanding, but we will get around to dealing with that at the appropriate time, when it would make sense to look at the capital structure based on an acquisition, or some sort of significant change.”
First Nickel has traded in a 52-week range of 4¢ to 19¢ at an average volume of 352,300 shares per day. The company had a presstime close of 9¢ on the back of a 571,300-unit trade volume.
The next steps for First Nickel will involve tracking guidance at Lockerby, expanding its exploration portfolio and achieving share traction in the face of relatively heavy dilution.
“Lockerby gives us the opportunity to develop our operating capabilities, prove our credibility and generate cash flow,” Boehlert says. “We can then take those operating capabilities and expertise and apply that to other mining operations, which are definitely our objective.”
First Nickel anticipates capital expenditures this year totalling US$16.2 million, including US$9.7 million relating to ongoing development work. With the added US$3.4-million exploration program, and various administrative overheads, the company should remain comfortably financed through Lockerby’s ramp-up this year.
First Nickel also has 130 million warrants outstanding at a 17¢ strike price, and a US$10-million convertible bond that matures at the end of 2013, which could result in 107 million more shares hitting the market.
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