Site visit: Anfield believes in Guatemalan nickel

EL ESTOR, GUATEMALA — “Our business plan is very simple — we want to do what we did with Lumina,” says David Strang, chairman of Anfield Nickel (ANF-V).

It sounds easy, just repeating something that you already managed once.

The reality is that every explorationist in the world would love to be able to do what Lumina Copper did, but very few succeed. Ross Beaty founded Lumina Copper in 2003, when copper prices and the mining industry in general were going through hard times, and within two years bought 10 copper properties for just $16 million. In 2005, Lumina split into four public companies, each focused on one major project. Three years later all four companies were gone, taken out by majors for a combined price of nearly $1.5 billion.

David Strang was Beaty’s right-hand man through that success, acting as president for several of the Lumina companies. After the last Lumina company sold to Teck Resources (TCK. B-T, TCK-N) in early 2008, the Beaty-Strang team, along with several other key members such as Marshall Koval (now president of Anfield) and Aziz Shariff, sat down to figure out what to do next.

“We did a global commodities overview to determine our path forward and from that we decided nickel was one of the places we wanted to be because we saw significant structural supply-side issues,” says Strang. “So Anfield is looking to implement the successful copper strategy that we used with Lumina, except with nickel.”

The strategy is grounded in the basic principle: “buy low, sell high.” So the first step was to find a promising nickel project for sale at the right price. And they did. They found the Mayaniquel project in Guatemala, owned at the time by BHP Billiton (BHP-N).

Nickel exploration and mining in Guatemala, and specifically in the El Estor area where Mayaniquel is located, has created significant economic and social turmoil over the last 40 years. In addition, not long ago BHP was forced to walk away from a failed $2.2-billion nickel mine in Australia after only a few months of production, so the major was none too pleased with nickel. The result: a steal of a deal for Anfield, which scooped up Mayaniquel for US$2.5 million in May 2009.

The next step is to prove up a 100-million tonne resource, which requires not just drilling but also overcoming the social obstacles that have plagued other companies that ventured into Guatemalan nickel. Both efforts are well underway — Anfield has five drills turning at Mayaniquel, often in the middle of villages or farmers’ fields, which is possible because of the strong community relations.

The third step is for the world to demand more nickel than current mines can supply, pushing its price upwards, and there are some signs indicating that movement is already underway. One forecast predicts a 7.6% annual increase in nickel demand for the next five years. And that demand increase, driven by China’s appetite for stainless steel, is coming in the face of a dwindling supply of quality nickel deposits and mines.

Those three steps may set Anfield up for a perfect Lumina repeat. The company has already executed the steps it can control unerringly — it acquired a cheap project with good potential, focused on a commodity with rising demand and insufficient supply — and now some of the less controllable factors will come into play, like geology and interest from majors.

Why nickel?

Anfield was founded because Beaty, Strang, and Koval believe in nickel. A closer inspection of the market shows they are not alone.

Nickel demand appears to be going in only one direction: up. Currently, London Metal Exchange nickel inventory levels are down 20% from their peak in February and the latest production data from the International Stainless Steel Forum suggests the market will remain in deficit for the next year and a half at least.

There are many voices making similar forecasts. Barclays Capital predicts a 30% increase in the spot price of nickel over the next two years, stemming from increased Chinese demand for stainless steel and supply shortages due to labour disputes. Roskill Information Services foresees a 7.6% growth rate in nickel consumption every year until 2014, with China alone needing 400,000 tonnes of new capacity within five years.

The Chinese demand component is nothing new — from 1998 to 2008 Chinese demand for nickel increased by 24% annually. Even with the growth rate slowing, Chinese nickel demand is still expect- ed to increase by 12% each year until 2014.

“If you don’t believe in China and Chinese growth, then this is not the story for you,” says Strang. “But if you do, you have to believe that nickel demand is going way up.”

And China does not have anything close to the domestic supply needed to match that demand. As such, Chinese companies are increasingly seeking to secure nickel supply through acquisitions. In April, Jinchuan Group offered to acquire Crowflight Minerals (CML-T), which produces nickel at its Bucko Lake mine in Manitoba, for $150 million in cash; negotiat- ions are ongoing. That offer followed on the heels of Jien Canada’s hostile takeover of Canadian Royalties, to get a hold of the Nunavik nickel project. Jien Canada is a partnership between China’s Jilin Jien Nickel Industry Co. and Vancouver- based Goldbrook Ventures (GBK-V).

“The Chinese are looking to secure supply,” says Koval. “We saw it very aggressively in copper and now we’re starting to see it in nickel.”

As a final piece of evidence, nickel is one of the only metals to have held its price over the first volatile half of 2010, along with precious metals and molybdenum. Nickel started 2010 priced at just over US$8 per lb., spiked to above US$12 per lb. in April, and has since settled to just under US$9 per lb.

Where nickel is found

Nickel is found in two forms — in sulphide deposits and in laterites. Most current nickel production comes from sulphide deposits. The world’s great nickel sulphide deposits — Voisey’s Bay in Labrador and the Sudbury nickel mines being prime examples — carry nickel grades of 1.5% or better, creating ore of sufficient value to merit the underground mining they require.

The other great thing about nickel sulphides is that the contained metal can be recovered using a simple flotation process, just like with other sulphide-hosted metals such as copper.

But it is getting harder to find sizeable, high-grade nickel sulphide deposits. And with nickel sulphides, lower grades are a significant problem because a certain absolute amount of the nickel is usually locked up with pyrite and therefore cannot be recovered by flotation. When the deposit averages 2.5% nickel, losing perhaps 0.1% is not a big deal, but when the grade falls to 0.3% nickel all of a sudden the loss makes it much more difficult to engineer an economic mine.

Five to 10 years ago, when the nickel industry realized it was facing a dearth of quality sulphide deposits, metallurgists started revisiting another kind of nickel deposit: the laterite deposit. Nickel laterites are produced when peridotite, a mafic rock with low nickel content, weathers in a hot, humid environment to create a layered deposit. On top is a layer of ferricrete, essentially an iron cap, a few metres thick. Next are two layers of limonite, red and yellow, that carry nickel grading between 0.7% and 1.5%. Below the limonite is saprolite, a greenish muddy rock that contains nickel grading between 1% and 3%. The saprolite sits atop fresh, unweathered peridotite. The entire package, from surface to peridotite, ranges from 10 to 40 metres in depth.

Clearly the saprolite layer carries the best grades but it is usually covered by 5 to 25 metres of ferricrete and limonite, which is a lot of overburden to remove. Moreover, to recover nickel from limonite and saprolite requires completely different
metallurgical processes, so unless a company has two separate processing facilities, a mine can only tap into one or the other.

Since limonite is on top, several companies have in recent years tried to develop limonite mines. The biggest, BHP Billiton’s Ravensthorpe mine in Western Australia, was a disaster.

BHP tried to use high-pressure acid leaching (HPAL), which is one of the original methods for processing limonites and still used at the granddaddy of all laterite mines, Moa Bay in Cuba. But HPAL essentially requires playing with a big chemistry set under high-pressure conditions, which leaves significant room for failure, and the process cannot handle much magnesium. BHP spent $2.2 billion building Ravensthorpe. After less than six months, the major shut it down and walked away.

Ravensthorpe was not the only tale of HPAL woe. The Murrin Murrin nickel mine, also in Western Australia, produced such poor recoveries that its owners, Minera Resources (MRE-A) and Glencore International, successfully sued the plant’s designer twice, winning roughly A$200 million. The winnings repaid only a small part of the capital cost to build the mine, which ballooned to A$1.6 billion from A$1 billion. Murrin Murrin still operates, producing roughly 30,000 tonnes nickel and 2,000 tonnes cobalt annually, but it has never come close to achieving its target recovery level.

The saprolite advantage

Saprolites offer better grades and easier metallurgy: to recover nickel from saprolites requires simple smelting. There are two kinds — ferronickel smelting and matte smelting — but both basically involve milling and calcining the ore, and then melting it in a large furnace. Magnesium and other impurities rise to the top and the product, after refining, is a ferronickel concentrate grading between 20% and 35% nickel.

The process demands a lot of power as well as careful treatment of the off-gases and slag to minimize pollution, but it is straightforward and reliable. As such, the only drawback of mining saprolites is the high strip ratios created by the overlying ferricrete and limonite.

And Guatemala is a perfect place for creating laterite deposits, as its hot, humid weather erode rock quickly. But another interesting geological event transpired in Guatemala that left several saprolite deposits much more accessible than usual.

The area experienced rapid uplifting over the last million years, leaving the laterite deposits near El Estor on hillsides. Since angled rocks eroded much more quickly than those that lie flat, the change sped up erosion of the upper laterite layers. The result is that in many places the ferricrete and much of the limonite are now gone, leaving saprolite essentially at surface.

If timing is everything, one could argue that Anfield is even a bit late — by a few hundred thousand years — because the saprolite layer has disappeared in places as well. Ridgetops near El Estor have usually been stripped down to fresh peridotite, the nickel-rich saprolite having washed away.

Regardless, the Mayaniquel property is already home to four defined saprolite deposits and Anfield thinks it can both grow those deposits and find several more.

The project then and now

Previous explorers have been seeking out nickel laterites around El Estor, an area 120 km northeast of Guatemala City near Lake Izabal, since the district was discovered in the 1950s.

Over the next 20 years Inco delved into the area, exploring for resources and then building the Exmibal nickel mine in 1977. The Exmibal matte smelter ran for three years, processing saprolite material from the La Gloria pit to produce 11,000 tonnes of nickel annually, but in 1980 the price of nickel fell and the price of oil, used to power the energy-sucking plant, shot upwards. Inco and its government-owned partner mothballed the expensive new operation.

The plant was never re-started and for years sat untouched, rusting away in the Guatemalan heat. More recently major components have been removed but it remains an ugly scar on the landscape. And the scar is not only from its appearance. Local Mayan leaders say much of the land was given illegally to prospectors who then evicted families from their homes. Numerous efforts to relocate local farmers have often turned violent, particularly during Guatemala’s nasty civil war, which lasted from 1960 to 1996. And a 1998 United Nations-backed truth commission linked people employed by an Inco subsidiary to the killings of anti- mine activists.

Things have not improved with subsequent owners. Skye Resources bought the Exmibal land package in 2006 and renamed the project Fenix; two years later HudBay Minerals (HBM-T) bought Skye for $560 million. Despite the transitions, relocation talks with the locals are still highly acrimonious, enough that in September a primary school teacher was killed when security guards employed by HudBay’s Guatemala unit clashed with residents. The truth of the situation remains unclear: Guatemala’s attorney general’s office said the man died of a bullet wound but security guards claimed members of the local community attacked him with a machete.

So Anfield knew it had to tread very carefully if it wanted to work in the area. The Mayaniquel project lands are interwoven with HudBay’s ground positions; together the claims form an east-west trend, along the north side of Lake Izabal and stretching west beyond it.

Unlike Fenix, the Mayaniquel project did not come with any specific social conflicts — previous owners had failed to bring the project into production for other reasons. In the 1970s, Basic Resources International delineated 33.7 million tonnes of 1.81% nickel at the Sechol deposit as well as 34.8 million tonnes of 1.47% nickel at Marichaj, before moving on to other projects. In the 1990s, Cominco confirmed these values in a quest to find high-grade ore that it could ship directly to its smelter in Oregon, which it then closed.

In the late 1990s Chesbar Resources, which was later renamed Jaguar Nickel, took on Mayaniquel. The company delineated several new mineralized zones but failed because it tried to use a new, low- energy, less polluting kind of recovery process in vogue at the time, known as atmospheric chloride leaching. Unfortunately for Jaguar, it did not work with the high magnesium content present at Mayaniquel. Jaguar had poured so much effort into its concept that the metallurgical failure prompted management to sell the project, to BHP for $19 million.

BHP started exploring. The major had a vision of consolidat- ing the entire district but that vision was destroyed when HudBay bought Skye. Then BHP was hit with the catastrophic failure at Ravensthorpe and immediately put all of its non-core nickel assets up for sale.

BHP was hoping to get $60 million for Mayaniquel. Then the fin- ancial crisis hit. Anfield managed to acquire the project for US$2.5 million, plus a 1.5% net smelter return royalty to the major. The royalty is not payable if the price of nickel falls below US$4.50 per lb. and payments do not start until a Mayaniquel mine has been in operation for four years.

The 834-sq.-km Mayaniquel project came to Anfield with four deposits hosting defined resources, but one of them — Sechol — is by far the largest. Sechol, which sits in the south-central part of the project area, is home to 11.2 million indicated tonnes grading 1.57% nickel and 12.5 million inferred tonnes averaging 1.5% nickel, as saprolite resource. The deposits also hosts 4 million indicated tonnes grading 1.4% nickel and 2.2 million inferred tonnes of 1.38% nickel as mixed limonite and saprolite, known as transition material.

The other three deposits at Mayaniquel are Chatala, Chiis, and El Tunico; together they host roughly 4.5 million inferred saprolite tonnes grading between 1.18% and 1.5% nickel.

Anfield is drilling to expand and upgrade the resource at Sechol but the company has its sights set on defining 100 mil
lion tonnes of resource, and that will require proving up new deposits. The company has a drill program underway, currently targeting three new zones, while prospecting crews are preparing several other target areas for drilling.

Anfield plans to complete 44,000 metres of drilling in 2010. Since the holes are short, averaging just 30 metres, rigs need to be moved daily. To ensure there are always five drills turning, Anfield actually has 11 man-portable rigs at Mayaniquel. On most days, half of those drills are being moved to a new location and the other half are punching new holes. Essentially, the company has two drill rigs for each of its five drill crews. The program is enabling Anfield to complete 130 holes each month.

Currently, one of the areas of drilling focus is Nueva Caledonia. Located near the eastern end of the main group of Mayaniquel licences, near the shores of Lake Izabal and the town of El Estor, Nueva Caledonia had not seen any drilling prior to Anfield. BHP drillers were halfway through their first hole at the zone when the call came to shut the entire project down.

The area is certain to provide new tonnage in Anfield’s first resource update for the project, which is due out in September. The first set of holes included 8.4 metres grading 1.79% nickel from 4 metres in hole 2. Then hole 17 intercepted 22.4 metres of 1.8% nickel in the northeast part of the zone, including 8.3 metres of 2.54% nickel, and hole 22 hit 11.5 metres of 2.23% nickel from 100 metres farther north. At the time, those were the highest-grade hits from the project to date.

The irregularly-shaped zone now stretches across 2 km at its longest part and reaches 1.5 km in width. A 500-metre-wide area in the middle of the zone has returned intercepts averaging 1.62% nickel over 12 metres; another 400-metre-wide section to the west carries average drill results of 1.51% nickel over 6.5 metres.

Some 30 km to the west is the Nueva Concepcion area. Strang describes the drill results from Concepcion as “a pleasant surprise, as there’s a nice amount of tonnage in the south that we didn’t expect to find.” The main Concepcion area strikes roughly 1 km northwest to southeast and spreads across 600 metres width. Anfield’s first hole at Concepcion returned 22.6 metres grading 1.56% nickel. Moving south, the results have remained strong: 26 metres of 1.24% nickel, 27.5 metres of 1.38% nickel and 24.5 metres of 1.27% nickel.

The area that has Anfield most excited at present, however, is Chiis. Concepcion lies along the west side of a peridotite ridge; Chiis is on the east side. BHP poked 30 holes into Chiis to define a small resource but Anfield’s vice-president of exploration, Andrew Carstensen, says the major barely dented the area.

“We’re rapidly expanding the resource at Chiis, with infill and step-out, and now it’s produced the best hole we’ve drilled on the property,” he said. “It’s a beautiful hole.”

The hole in question is number 6, which cut 45 metres grading 1.56% nickel, starting 9 metres downhole and including 21.6 metres of 2.02% nickel. Other strong hits at Chiis include 28.4 metres of 1.3% nickel, 21.6 metres of 1.16% nickel and 17.8 metres of 1.25% nickel.

Once Anfield’s drills have completed their work at Caledonia, Concepcion, and Chiis, they will move to Los Tres Juanes and San Lucas, two other promising saprolite zones within the property. Sechol will also see some drilling, to upgrade the inferred resources to indicated and test the potential for expansion.

Anfield expects to spend $25 million at Mayaniquel over two years.

“We’re not drilling a mineral deposit,” says Strang. “We and Hud- Bay are developing a mineral district that will support several mines in the next 25 years.”

Metallurgy and infrastructure

With any resource, finding a deposit with size and grade is just one part of the puzzle. The deposit also has to contain minerals that can be extracted at an appropriate cost and be located in reasonable proximity to things such as roads, rail lines, power and water.

Mayaniquel seems to be hitting all of those targets too.

Anfield just finished its first metallurgical characterization study for Mayaniquel, with positive results. The key finding was that the ore sent to the smelter could contain up to 30% limonite, blend- ed in with saprolitic rock. Since the limonite-to-saprolite ratio at Mayaniquel is 1-to-9, a 30% limonite allowance means Anfield can include all transition material as resource.

The study also indicated a potential avenue for improving the project’s processing economics. Several saprolite samples from Mayaniquel included free quartz, at times comprising as much as 40% of the sample. The quartz does not contain any nickel so, if it is removed prior to processing, the head grade of the furnace feed would increase by 15-25%. The company is now investigating possible upgrading techniques, including basic screening and laser-based sorting.

In addition, the metallurgical characterization study determined that Mayaniquel saprolite does not contain any fibrous materials of concern (asbestos may be associated with laterites and can impede recoveries).

Smelting tests are now underway and early results indicate high nickel recovery, along the lines of 90% or better, to produce ferronickel concentrates containing 20-30% nickel, which is a good grade for steel makers. Final results from the smelting study are due out in September.

Smelting is a highly power-consuming process, which begs the question of whether there is sufficient power available. The short answer is no — at present there is not. Strang says the long-term solution is to build some kind of coal-fired power plant, preferably at the nearby port of Santo Tomas. The Anfield team has some experience with this type of problem, as advancing some of the Lumina copper projects towards development involved independent power producers in Chile. Anfield has a power supply study underway.

The port of Santo Tomas is a nice addition to the Mayaniquel story. It is some 70 km to the east, on the Caribbean Sea, and connected to the project by water across Lake Izabal and by a rail line just to the south. And it is capable of handling Panamax ships, meaning the largest ships able to pass through the Panama Canal.

Avoiding others’ mistakes

“Guatemala is a land of contrasts,” says Juan Pablo Carrasco de Groote, a Guatemalan lawyer who serves as Anfield’s general counsel. “There is a very small middle class, a small but very wealthy upper class, and then there are the rural poor, who are mostly indigenous.”

Some 70% of Guatemala’s 30 million people are indigenous, divided amongst 23 different ethnicities. Each ethnic group speaks a different language and clashes between ethnic groups are common.

The inequity in Guatemala is both despite and because of the country’s enormous agricultural wealth. That wealth is highly concentrated — 10 families control 80% of Guatemala’s land. Narrowing it further, five families own 61% of the country.

Until recently, Guatemala’s agricultural lords would actively prevent their workers from becoming educated. In the mid-1990s that started to change, but the literacy level among the country’s rural indigenous population is still low and the people tend to be quite superstitious. On top of that, most families do not own the land they inhabit. In Guatemala, if land is not controlled by one of the big families, it is usually “owned” by the community, through long-term habitation.

Combining those hurdles with a negative legacy left behind by previous operators in the area meant Anfield had to move slowly and carefully when it arrived at Mayaniquel. The company has embraced the challenge.

“It’s a cornerstone of how we operate — everything starts with the social aspect,” says Strang. “If we don’t have the community’s approval to do something, then we don’t do it.”

The company has learned the intricacies of dealing with the different communities in its proje
ct area. When Anfield wants to start working in a new area, it brings community leaders, which includes both Catholic and Mayan religious leaders, to areas where it already has drills turning so they can see how it works. Anfield consults not just with the community right in that spot but also those in the surrounding area. And the company doesn’t use armed guards and instead employs local watchmen.

“It’s about respect — we consult with all the communities because it’s about their rights and desires to be consulted,” says Koval. “And in fact, some of the problems HudBay and Skye have had almost gave us an opportunity to differentiate ourselves.”

Koval says they spend six months consulting and negotiating with a community before entering the area to work. The approach seems to have worked — Anfield has drilled several holes right in the middle of villages.

“When we kicked off our drill program we asked the community near Concepcion where they wanted us to put our first hole and they picked the middle of their village,” says Strang. “We had our doubts but it turns out that is the best hole we’ve drilled at Concepcion.”

Anfield’s share price has remained near the $3 mark for the last 10 months. The company raised $16 million in a private placement last September and still has roughly $10 million in the bank. The company has 31 million shares outstanding (32.5 million fully diluted).