KWG set to become significant nickel producer — Company will share laterite project with Cuba

A nickel deal signed with the government of Cuba should more than double the value of assets belonging to KWG Resources (KWG-T).

KWG, a 26%-owned affiliate of St. Genevieve Resources (SGV-T), signed a preliminary agreement between Cuban state-owned Commercial Caribbean Nickel (CCN), to share in the ownership, development and operation of the Cupey laterite nickel mine and processing plant. The deal contains the basis of a joint enterprise for the completion and operation of the Cupey project in Cuba and the construction and operation of a refinery in Canada.

The final agreement will be contingent upon KWG’s securing the necessary project funding by November. If KWG’s financing is in place by then, the company’s construction teams will be at Cupey by February and the first ore could be processed there and shipped to Canada by the third quarter of 1999, according to KWG President Peter Miller.

While the timing would appear to be unfavorable, given that the much larger Voisey’s Bay project in Labrador is set to open in the same year, Miller notes that Inco’s project may face serious delays related to native issues.

“We’re of the view that Voisey’s Bay will not be operating until 2002.” The Cupey project is 1,000 km southeast of Havana, near the town of Moa and close to a deep-water port. In its vicinity are three nickel laterite operations. Two of these are state-owned, while the Cuban government shares the third equally with Sherritt International.

The nickel mineralization at Cupey occurs as a roughly 7-Metre-Thick nickeliferous limonite and saprolite blanket formed of residual soils, clays and partially decomposed rock.

The Cupey deposits contain 107 million tonnes of laterite and serpentine material at a grade of 1.32% nickel and 0.12% cobalt based on a cutoff grade of 1% nickel. To date, 22 million tonnes at Cupey have been classified as proven and 85 million tonnes as probable reserves.

By comparison, the original Ovoid deposit at Voisey’s Bay contains 31.7 million tonnes grading 2.83% nickel, 1.68% copper and 0.12% cobalt. The Eastern Deeps and other deposits at Voisey’s Bay contain well over 150 million tonnes at grades similar to those found at Cupey.

In a report commissioned by KWG as part of its due diligence inquiry, the consulting engineering firm of Watts, Griffis & McOuat (WGM) concludes that “the process to be used in the Cupey plant is well-proven, and little difficulty should be encountered in producing nickel.” Metallurgical test work on bulk samples taken from the sample pits indicated nickel and cobalt recoveries of 84 to 87% and 41 to 47%, respectively.

Assuming a cobalt credit of US$10 per lb. (prices are currently US$20 per lb.), the cash operating costs of producing nickel are forecast to be approximately US$1.40 per lb.

The KWG-CCN joint venture will be operated on a 50-50 basis, with both parties ultimately receiving half of Cupey’s free cash flow after KWG has recovered all costs from 80% of free cash flow. KWG has committed to arrange, over the next few months, sufficient financing to complete the Cupey project, bring it quickly into production and ensure its long-Term viability.

KWG and CCN have stated that they do not expect the Cupey project to be subject to any third-party claims relating to confiscation of property that occurred after President Fidel Castro came to power in 1959.

The Cupey project is expected to produce more than 30,000 tonnes of nickel and 1,400 tonnes of cobalt annually (KWG’s share would be 15,000 tonnes of nickel and 700 tonnes of cobalt) for a minimum of 25 years. By comparison, Falconbridge produced 53,200 tonnes of nickel and 2,800 tonnes of cobalt in 1995.

To expand reserves, KWG is planning to initiate an exploration program “at an early stage” on known areas of mineralization within the Cupey property.

Should this program prove successful, a study will be undertaken to examine the feasibility of increasing annual nickel production to more than 42,000 tonnes.

Soviet pullout

The Cupey plant was already well on its way to completion in 1991, when the breakup of the Soviet Union signalled an abrupt end to once-generous government funding and assistance for the project. Work on the plant slowed to a crawl until 1995, when the Cuban government optioned a half-interest in Cupey to Gencor of South Africa. However, Gencor never really committed to the project, says Miller, and the Cubans became frustrated.

“I think they had the impression that Gencor would stall,” he says, adding that the sticking point eventually became the location of the refinery. The Cuban officials wanted it built in what they considered to be a stable, First World country, thus disqualifying South Africa, Gencor’s proposed site.

Engineering of the nickel processing plant at Cupey is nearly complete, and three-fourths of the overall project construction is finished. KWG is now left with the task of finishing it off and building a dedicated refinery in Canada, the combined cost of which is estimated at US$300 million.

The refinery will be built in Canada, most likely on the shore of the St.

Lawrence River in Quebec, because of financial incentives and the availability of cheap electricity.

In its report, WGM estimates that operations could begin within 18 months, following a production decision and subsequent completion of financing.

KWG had always been strictly a gold and diamond exploration company, and thus, the concept of creating a new nickel company was considered but was dropped in favor of rewarding KWG’s shareholders with a major new asset, Miller says.

“I know a lot of big companies want this project, because it’s a great project. There’s not 107 million tonnes of ore here, there’s 200 and something. We just haven’t proven it yet. This is a 50-year project. It is transforming us as a company, and we will be generating very serious cash flow.”