Bargain hunting Down Under

Reading the daily newspaper can sometimes bring big rewards.

Just ask Julian Hanna.

The managing director and chief executive of Western Areas (WSA-T, WSA-A) followed up on an advertisement in a Perth, Australia newspaper offering a large swath of permitted land where Finland’s Outokumpu once ran a nickel mine.

Tellingly, the advertiser tried to mask the land’s history as a nickel property and chose instead to play up its gold potential — nickel prices were in the doldrums at the time — but Hanna, a geologist with 25 years’ experience, knew exactly what he was looking for and he didn’t have to fight off a crowd to see it.

Hanna was one of only three people who answered the ad — and just one other prospective buyer even bothered to visit the property.

“There was a known deposit on the property called New Morning. We just wanted that one permit for the deposit. We thought we’d make twenty-million on it and move on,” Hanna says. “But they told us we had to buy all thirty-seven permits.”

The permits became available after Outokumpu packed up and left in 2003 following a corporate decision to focus on metals processing rather than mining.

After much hesitation, Hanna signed a deal for all 37 permits. He didn’t have to wait long before a single drill result kilometres away from New Morning made him glad that he did.

While drilling at the New Morning deposit, Kevin “Frosty” Frost, a geologist who once worked for Outokumpu but had since moved over to Western Areas, told Hanna of an electromagnetic anomaly below a massive granite intrusion, situated beneath the old Outokumpu pit.

“We thought, alright, we’ll sink another hole over there,” Hanna says with a smile.

That single hole — the results of which were announced in October 2003 — returned 21.4 metres grading 7.8% nickel. The Flying Fox deposit had been discovered and, almost overnight, Western Areas stock went from trading in the 40 range to about $2.00.

“Frosty was shaking when he called to tell us of the results,” remembers Hanna. “He said, ‘We just hit 20 metres of massive sulphide.'”

The favourable results happened to coincide with the upswing in nickel prices. And Western Areas soon had the capital needed to drill more holes.

As the drills went down through the granite base beneath the old pit they hit ore. And then they hit it again, and again.

Western Areas now believes there are three high-grade nickel deposits beneath the pit.

That first drill hole struck what is now known as the T1 deposit; further drilling hit T4; and yet another, roughly 900 metres below surface, was discovered and dubbed T5.

T1 hosts a probable reserve of 314,5000 tonnes grading 4.8% nickel for 15,000 tonnes. Attached and below T1 is T2, which has an inferred resource of 30,000 tonnes running 5.7% nickel for 1,700 tonnes.

T4 requires more drilling to determine a resource but one intersection returned 13.7 metres averaging 4.7% nickel.

T5 has an indicated resource of 860,000 tonnes at 6.8% nickel for 59,000 tonnes of nickel and an inferred resource of 164,000 tonnes at 6.8% nickel for 11,200 tonnes. All of the deposits are part of the Forrestania nickel project.

The orebodies formed in pods within ultramafic rock — where lava channels containing nickel settled along the bottom. A huge granite sheet intrusion cooked up the sulphides, re-melted and squeezed them into larger volumes and higher grades — high enough to make Flying Fox one of the world’s higher grade nickel deposits.

Western Areas owns 100% of Flying Fox but the T5 body appears to continue beyond the southern boundary of the property and onto a concession that Kagara Zinc (KZL-A) now owns, after it outbid Western Areas for the property.

Thus far, the company says it has seven years’ worth of reserves drilled off and Hanna would like to make that 10. But given that it is an underground mine, the need for future reserves isn’t quite so pressing. The company now has only two drills on-site.

As for exploration potential, Hanna says drills will test beneath T5 to see if there is any further mineralization.

In the meantime, mining at the project got under way in the latter part of 2006 as high-grade ore from the shallowest body — T Zero — is being shipped to LionOre Mining’s (LIM-T, LIM-A, LOR-L) flotation mill for processing.

Western Areas plans to build its own nickel concentrate plant in September, with startup slated for early 2008.

The A$25-million plant is expected to produce nickel concentrate grading 14-16%. The facility will have a capacity of 250,000 tonnes per year.

Using a nickel price of US$5.50 per lb., cash costs at Flying Fox are estimated at US$2 per lb.

The company is also in the middle of a prefeasibility study at Diggers South, located 40 km south of Flying Fox. The Diggers South deposit has a resource of 1.45 million tonnes grading 1.56% nickel and an inferred resource of 530,000 tonnes averaging 1.49% nickel. But Western Areas says those numbers could become more robust as recent drilling has hit mineralization 200 metres below the current resource. The prefeasibility study should be finished in April.

Counting Flying Fox, Diggers South, New Morning — which has 117,000 tonnes grading 3.6% of indicated and 37,000 tonnes grading 4.4% in the inferred category — and two other smaller deposits known as Daybreak and Cosmic Bay, the 37 permits bought by Hanna in 2003, have yielded a total resource (including probable reserves, indicated and inferred resources) of 3.8 million tonnes averaging 3.3% for 126,300 tonnes nickel.

Considering the vendors were only asking for A$100,000 up front and an additional A$2 million to be paid later, Hanna happened upon a company builder at a bargain.

The purchase was lucrative enough that Western Areas now has its eyes on becoming an international nickel producer. It currently holds nearly 20% interest of Mustang Minerals (MUM-V) and its Maskwa nickel deposit in eastern Manitoba (see “Study says Maskwa has the stuff”).