Independent Nickel mulls its options

Hoping to expand its nickel holdings in Manitoba, Victory Nickel (NI-T, VNCKF-O) has made an unsolicited, all-share takeover bid for Sudbury, Ont.-based Independent Nickel (INI-T, INIFF-O).

Independent Nickel owns 100% of the past-producing Lynn Lake nickel mine, which has been dormant since 1976, when Sherritt-Gordon, now Sherritt International (S-T, SHERF-O), abandoned the mine due to low nickel prices.

Under the proposed deal, Independent Nickel shareholders would receive one Victory Nickel share for each Independent Nickel share they hold. The offer represents a 32% premium over the closing price of Independent Nickel shares on Aug. 18, and a 38% premium over the company’s 20-day volume-weighted average trading price.

But the offer is conditional upon Independent Nickel’s shareholders rejecting Hunter Dickinson’s recent attempt to acquire between 40% and 57% of the company.

The Vancouver-based mining development company agreed on July 31 to purchase 40 million shares in Independent Nickel for $14 million (35 per share.) Hunter Dickinson would also have the option of buying 40 million more shares over the following two years at a price of 45 a share in the first year and 50 in the second. The deal has yet to be approved by Independent Nickel’s shareholders and the Toronto Stock Exchange.

“When they agreed to do the Dickinson deal, they established the price,” Ren Galipeau, Victory Nickel’s president and chief executive said in an interview. “It does put cash into the kitty, which is good these days. But it doesn’t give the shareholders the opportunity to realize on their premium today. I can only assume the market didn’t like the transaction because their stock went down and we are giving them an alternative.”

Galipeau noted that Victory’s offer would eliminate Independent Nickel’s royalty interest in Victory Nickel’s Minago nickel project in Manitoba’s Thompson nickel belt. Independent Nickel owns a net smelter return (NSR) royalty on the Minago property. The NSR pays Independent 3% of the mineral product value when nickel prices exceed US$6 per lb.

“From our point of view, there are a lot of good projects that have been ruined by net smelter royalties, so this is a natural first step for us,” Galipeau adds. “It’s time for consolidation. . . It’s a logical step for us right now. If we’re going to grow this company, we need to rationalize our assets and this is what the offer is doing.”

At the same time, Independent Nickel’s shareholders will have the opportunity to benefit from 100% of Minago’s nickel production in addition to the potential for near-term cash flow through the sale of frac sand to the oil and gas industry and three additional sulphide nickel projects, Galipeau noted.

Frac sand, used to enhance recoveries in the oil and gas industry, forms part of the overburden that has to be removed before mining nickel from the Minago open pit.

As part of the definitive feasibility study on Minago, Wardrop Engineering concluded earlier this year that Victory Nickel could sell 824,000 tonnes of sand a year to markets in North America for potential annual revenue, net of freight, of about $44 million.

Independent Nickel’s board of directors said in a statement it expects to make a formal recommendation to shareholders regarding the offer on or before Sept. 3.

“With respect to the previous offer of cash and technical assistance we received from Hunter Dickinson, we did have a lot of time on that one and our board did unanimously endorse it,” says Richard Murphy, Independent Nickel’s president and chief executive. “But with this newer bid, we just need a bit more time. We really have to analyze this in every detail.”

Murphy said the Victory Nickel bid “came right out of the blue” and the company has struck a special committee and engaged legal and financial advisers to “weigh the pros and cons” of the offer.

As for Lynn Lake, Independent Nickel has been working hard on the project for the last three years and some analysts wonder whether it would take a backseat to Victory Nickel’s own Minago and Mel projects on the Thompson belt if a merger went ahead.

Says Murphy: “It’s important to see that advancement continue.”

During the 23 years Sherritt operated the mine, it produced 22.2 million tonnes of nickel-copper ore at a grade of 1% nickel and 0.5% copper, making it the third-largest nickel producer in North America, after only the Sudbury and Thompson mining camps.

While Lynn Lake has much lower grades than deposits in other magmatic nickel camps in Canada, such as Sudbury and Thompson, where grades average 1.8-2% nickel, Independent Nickel — and Victory Nickel — obviously believe there’s still much money to be made.

A prefeasibility study released in late 2007 on Lynn Lake forecast a pretax net present value (NPV) of $131 million using an 8% discount rate. Pretax profits over an initial 11-year mine life would be in the neighbourhood of $296 million with preproduction capital costs estimated at $148 million and a payback on mine costs at three years. The study also estimated a production rate of 3,000 tonnes per day with average annual nickel production of 11.2 million lbs.

As part of the prefeasibility study, 10.7 million tonnes of ore have been classified as a probable reserve at a diluted grade of 0.65% nickel and 0.36% copper.

Victory Nickel already has more than 660 million lbs. of in situ nickel in National Instrument 43- 101-compliant measured (154 million lbs.) and indicated (511 million lbs.) resources in three sulphide nickel projects. Its Minago and Mel projects are on Manitoba’s Thompson nickel belt, while its Lac Rocher deposit sits in northwestern Quebec.

The Toronto-based company, which was created from the nickel assets of Nuinsco Resources (NWI-T), also holds an additional 530 million lbs. of in situ nickel in inferred resources.

News of the offer failed to make a big splash in the market. Victory Nickel’s shares remained unchanged at 35 apiece. The company has a 52-week trading range of 26.5-74 with 194.9 million shares outstanding.

As for Independent Nickel, 6,000 shares traded hands and the stock moved up 4.5 a share to close at 29.5. The stock has a 52-week trading range of 20-64 with 60.6 million shares outstanding.

Sample 1A weighed 100 kg and returned 44 diamonds larger than the 0.075-mm sieve size, including two diamonds larger than the 0.6-mm sieve size.

“I don’t think anyone else has reported numbers like this in a very long time,” Friedland says. “For a first step, to have such a small sample return so many coarse diamonds is very unusual and bodes very well for this project.”

In a prepared statement, Peregrine president Brooke Clements noted that 12 diamonds larger than the 0.6-mm sieve size in a cumulative sample of only 195 kg suggests a coarse diamond size distribution at CH-1 — “normally an indication that a population of commercial-sized diamonds will be identified in larger samples.”

CH-1 and CH-2 are exposed at surface, which indicates there may be less overburden cover to contend with in the area, which will in turn lower exploration and bulk-sampling costs.

SRC described the two largest diamonds from sample 1B as a colourless/ white macle and a colourless/ white fragment measuring 2.2 by 2.06 by 0.66 mm and 3.28 by 2.42 by 0.56 mm, respectively. Thirtyone of the 34 diamonds from samples 1A and 1B larger than the 0.3- mm sieve size were classified as having a colourless or white colour.

“If you look at the diamond size and distribution and compare it with other projects, I think it holds up as well or better to anything else that has been found,” Friedland notes.

“These may not be the best pipes on the property — it’s fairly unlikely that we found the best so quickly. They occur in clusters so we have a high level of confidence that we’re going to find more on the property.”

The next step is to
ship out more samples to the SRC. Friedland said Peregrine is taking a 1-tonne sample from CH-1 and at least 300 kg from CH-2 and shipping it to SRC as soon as possible — likely at the end of August or in the first week of September. mineral trains haven’t been tested yet, so I think there are a lot of legs left on this project. We’re just getting started.”

Chidliak is one of six properties in the Baffin Island region of Nunavut on which Peregrine holds prospecting permits. The properties add up to more than 27,000 sq. km.

The diamonds found at Chidliak are about 700 km from the nearest known kimberlite occurrence.

Peregrine collected 970 till samples at Chidliak in 2006 and 2007, of which 286 samples or 29% contained kimberlitic indicator minerals. These included p-type pyrope garnet, eclogitic garnet, chrome diopside, picroilmenite, chromite and forsteritic olivine. A significant number of the kimberlitic indicator minerals were over 1 mm in size.

Kimberlite mineral grains larger than 1 mm are not common and are often a strong indication of a proximal kimberlite source. Ten percent of the 2,284 p-type pyrope garnets that were analyzed by electron microprobe are classified as high-chrome, low-calcium G10 garnets. G10 garnets are commonly associated with diamond mines throughout the world.

Of the 970 samples collected, 220 contained at least one grain of either sperrylite (a platinum-bearing mineral that is often associated with rocks containing platinum, palladium and nickel), gahnite (a primary indicator mineral for metamorphosed massive sulphide lead-zinc-silver-copper deposits), or chalcopyrite (common in copper deposits).

In addition, about 350 of the 970 samples contained at least one gold grain with two samples containing over 100 gold grains.

In Toronto at presstime, Peregrine’s shares traded at about 23.5 apiece.

The Canadian junior has a 52- week trading range of 16.5-$1.50 per share. With about 64.6 million shares outstanding, the company’s market capitalization is about $16.2 million.