First Quantum picks up Ravensthorpe from BHP

BHP Billiton (BHP-N) suspended operations at its Ravensthorpe nickel project in Western Australia in January after nickel prices plunged in late 2008 and it encountered a series of operating and commissioning problems at the plant.

Now First Quantum Minerals (FM-T, FQM-L) wants to take a crack at the operation, which it expects to produce an average of 39,000 tonnes of nickel annually in the first five years and an average annual production of 28,000 tonnes of nickel over the mine’s expected lifespan of 32 years.

In a binding agreement with BHP, First Quantum will acquire Ravensthorpe, about 550 km southeast of Perth, for the sum of US$340 million.

“When Ravensthorpe became available we were wary of it in the same way that the investment public would have been because of the story of its closure by BHP,” Philip Pascall, chairman and chief executive of First Quantum, told analysts and investors on a conference call. “But what we found was in fact that it is an excellent plant that was built for ten times the US$340 million that we’ve agreed to buy it for…The plant is probably one of the best mothballed plants we’ve ever seen.”

The project consists of an open-cut mine and a hydrometallurgical process plant that recovers nickel and cobalt to produce a mixed nickel cobalt hydroxide intermediate product.

Pascal said Ravensthorpe will pay its way down to US$5.70 per lb. nickel and “makes a huge – absolutely enormous” return at US$8 per lb. nickel.

“We’re reasonably comfortable that the reserves as they are defined are good for more than 20 years and there are additional resources and additional ground that could take us out past thirty years,” Pascal told analysts and investors, but noted he did not envision the operation would last for more than 40 years.

The acquisition will be paid for with internal resources. Capital costs are estimated to total US$146 million, US$20million of which are contingency costs. The lion’s share of the capital costs will go into new crushing plants, the modification of screens and storage ponds, and an additional leach tank.

Once the acquisition is completed, First Quantum anticipates a 12-month work period followed by six months of ramp up, at which point the company will reach break-even cash flow. First Quantum’s cost target is US$5 per lb.

Pascal explained that after BHP completed the development of Ravensthorpe in 2007, it started to encounter operational and commissioning problems in the ensuing 15 months. Primarily the problems were associated with the front-end of the plant, but also included issues with unsuitable equipment used in the dewatering process.

Higher sulphur costs, which surged twelvefold in 2008, and the employment of too many people including contractors, accentuated BHP’s difficulties, Pascal added. “The main beneficiation plant only received feed at full or nearly full design rate for about three weeks,” he said.

Pascal asserted that with First Quantum’s experience and expertise he was confident the company would make Ravensthorpe a success. “We’re a different sort of firm than BHP and we aren’t constrained by some of the things that make it harder for them to bring such projects on line,” he said.

“It appears they spent about US$100 milion in capital but only US$6 million of that was spent on the plant, the other US$94 million went elsewhere, on things like finishing housing [etc.] and not on the plant. But clearly it was necessary to spend some of the money on the plant.”

First Quantum’s decision to acquire Ravensthorpe — and the company’s recent commitment to build the Kevitsa project in Finland — are part of a move to diversify assets geographically and by commodity, Pascal added.

And while returns on investment would probably be higher in the countries in Africa where First Quantum operates, namely the Congo, Zambia and Mauritania, he said, diversification in first-world countries was equally important.

“We are the biggest mining taxpayers in all three [African] countries … and that means we have a very prominent position in dealing with the government,” Pascal elaborated.

“If we expand there it leaves us fairly exposed…fortunately for First Quantum we’re more diversified than that. Further large investment there is, first of all, difficult to find, and secondly some of the infrastructure constraints are always something you have to be mindful of so diversification has to be on our agenda if we want to keep growing and there is considerable upside in having growth in some first world countries.”

The Australian Foreign Investment Review Board and the West Australian Minister for Mines and Petroleum must approve the transaction. Once approved, the acquisition is likely to be finalized during the first quarter of 2010.

At presstime First Quantum was trading at $74.07 per share. The company has a 52-week trading range of $14.54-$85.25 per share and 78.53 shares outstanding.