The Inco boys are back!
Three years after the venerable Canadian nickel mining giant was swallowed by Vale SA (NYSE: VALE, Stock Forum) of Brazil, a group of former Inco executives are working to cash in on rising commodity prices by developing the Dumont nickel deposit in Quebec, at a projected cost of around $2 billion.
This effort is being led by Scott Hand, the 68-year-old ex Inco chief executive officer, who two years ago agreed to become executive chairman of Royal Nickel Corp.(TSX: T.RNX, Stock Forum), the Toronto company that owns 100% of the project.
He is working with a management team that includes former Inco marketing vice-president Peter Goudie, and Tyler Michelson, who was a vice-president and business strategist at Inco.
Mitchelson is now President and chief executive officer at Royal Nickel, which recently raised $45 million from an initial public offering that will be used to finance metallurgical test work and mine feasibility studies.
On December 24, 2010, the stock was trading at $2.09, giving Royal Nickel a market cap of 175.5 million based on 84 million shares outstanding.
"We do have a couple of former Falconbridge people there too," said Hand, referring to the fact that Alger St-Jean, a former senior geologist at Falconbridge, is now vice-president of exploration at Royal Nickel. Falconbridge was Canada's second largest nickel miner, behind Inco, before it was acquired by Xstrata PLC in 2006.
Having such an experienced team at the helm is expected to prove valuable as Royal Nickel works to develop the Dumont project over the next few years.
Located in the Abitibi mining camp about 25 kilometres northwest of Amos, Que., it is expected to operate as a large scale open pit, with production starting as early as 2015.
Nickel resources
According to a technical report, the project is estimated to contain seven billion pounds of nickel in the measured and indicated category, at a grade of 0.27% nickel, with another 3.2 billion pounds of nickel resources that are classified in the inferred category, at a grade of 0.25% nickel.
Studies suggest that it would cost just over $2 billion to develop an 80,000 tonne-per-day operation capable of producing 114.6 million pounds of nickel in concentrate at an average cost of US$3.96 per pound over a projected lifespan of 31 years.
At those rates, Dumont would rank among the world's largest nickel mines.
By spending roughly another $300 million, the company has indicated that it could raise the production rate to 142.2 million pounds of nickel in concentrates at an average annual cost of US$3.87 per during a projected mine life of 25 years.
The economics of the project are based on a long term nickel price of $7.50 a pound, one that is based on the consensus view of analysts who follow the nickel price, the company said.
Port of Montreal
"Our view is that that is probably too low," said Hand, who was referring to the fact that the price of nickel averaged US$8.53 a pound between January 2008 and September 30, 2010.
The mine will produce nickel in a concentrate form that can be shipped either to Sudbury, Ont., or through the Port of Montreal to markets in Europe and Asia, he said.
As 65% of the world's nickel output is used in the production of stainless steel, Royal Nickel is betting that demand for its production will be fueled in the future by a rapidly growing stainless steel sector as well as the development of nuclear power plants in China.
China's largest nickel trader Ningbo Sunhu Chemical Products Co. Ltd., invested $21.8 million in Royal Nickel before the company's recent IPO. Sunhu is a private company that trades and distributes nickel and other commodities in China. It also has an office in London, England.
Hand says it is possible that Chinese entities will figure prominently in the Dumont development story both as buyers of the product and as company financiers.
Prior to Royal Nickel's involvement, other major mining companies had looked at the Dumont project. But due to the complex nature of the ore and the fact that it is a relatively high cost project, it remained on the shelf.
However, Hand said the successful development of similar nickel sulfide deposits such as the ones at Mount Keith in Western Australia proves that it can be done. "In developing the Mount Keith mine, they had to get certain things out of the ore, which made it very difficult to use conventional concentrating techniques," he said. "But they figured it out."
"It is one of the reasons why Dumont hadn't been developed before and will be developed now," he said.
The other reason is that long term pricing forecasts in the nickel sector were much more conservative than they are today. "In the old days, we used to look at a long term nickel price of $3 to $3.50 a pound," said Hand. "The world has changed and we are now looking at long term prices of $8.50 to $9 a pound."
Similar changes have occurred on the cost side. "In the old days we thought you had to have a cost of $1 or $1.50 a pound in order to be competitive. Today it's $4 a pound," said Hand. "That opens up a lot of deposits that were not economic before."
Scott Hand Bio
Scott Hand is executive Chairman of Royal Nickel Mines Corp. A native of San Francisco, he was previously Chairman and chief executive officer of Inco Ltd., when the company was acquired by Vale SA in 2007. He joined Inco in 1973 and held positions in strategic planning, business development and law.