Canadian Royalties moves Nunavik Nickel project toward construction, expansion

Kangiqsujuaq, Que. – A stone figure peers down at the cluster of tents and stacked crates of drill core samples, known to Canadian Royalties (CZZ-T) as the Mequillon camp at its Nunavik Nickel project. Its one of several deposits in Nunavik that the company hopes to be mining in two and a half years.

The inukshuk has stood sturdy and still while geologists and drillers have been working feverishly since the snow melted in late June, drilling hole after hole into the ground to expand nickel resources as much as possible before the harsh weather returns.

Commonly identified as several rocks balanced on top of one another, Inuit would make an inukshuk for several purposes, such as marking a place of respect or helping in the caribou hunt.

But perhaps the function behind this inukshuk, made by Canadian Royalties employees, is to show direction or to warn of danger.

Operating in a region with extreme weather located 500 km from the Arctic Circle thats inhabited by hungry wolves and polar bears is dangerous.

But then again, a little guidance is always welcome when exploring on a 2,500-claim, 1039-sq.-km property.

A property this size, is something you get excited about, says vice-president exploration Grant Arnold. Where do you drill? You can drill anywhere.

The property, formerly called Raglan South, is located about 20 km south of the Raglan nickel mine operated by Xstrata Nickel, a subsidiary of Xstrata (XSRAF-O, XTA-L), which currently produces about 1.1 million tonnes of ore per year.

And over the last six years, Canadian Royalties has drilled enough to complete a bankable feasibility study. Offtake agreements were signed in October with Norilsk Nickel (NHILSY-O, MNODL-L) and a pre-construction list is being systematically checked off as the company gears up for production by the second quarter of 2010.

The study looked at mining three deposits (Mesamax, Ivakkak and Expo) at a rate of 3,500 tonnes of ore per day, or 1.28 million tonnes per year, to produce 26 million lbs. of nickel in concentrate, 38.8 million lbs. copper in concentrate, 900,000 lbs. cobalt in concentrate, 14,500 oz. platinum and 78,600 oz. of palladium per year.

The project cost is estimated at $466 million and with a current mine life of nine years, financed through equity and debt with a payback period of two years.

During the first four years, all three deposits will be exploited through open-pit mining at a cash cost of $58.87 per tonne of ore. Years 5 and 6 will focus on Ivakkak from the underground and Expos open pit at a cash cost of $66.28, and the final two years will be dedicated entirely to Expo at a cash cost of $53.65 per tonne of ore.

Taking care of tailings over the nine-year mine life means an extra $4 per tonne in cash costs, but once Expo has been mined out, the company will permanently close the cells and acid waste rock dumps where the tailings were deposited and begin using the Expo pit for tailings disposal. This will reduce operating costs for the next 20 to 25 years, should the company expand resources to last that long.

In our view, its quite expensive, says president and CEO, Richard Faucher. But after that you have minimal costs.

The other option would have been a normal tailings pond, constructed with the assumption that the permafrost would freeze it.

But because of climate change, we did not want to take the risk with that, Faucher says.

Thats not the only risk Canadian Royalties is avoiding as it hurtles toward construction next year.

The company signed an option to acquire up to 80% of the 500-claim Expo-Ungava property, which consists of the Expo and Mesamax deposits, in 2001 with Ungava Mineral Exploration, a subsidiary of Ungava Minerals (UGVAF-O).

Over the years, Canadian Royalties has had to acquire its growing interest through arbitration, despite the agreement. Now that the company has completed a bankable feasibility study and is moving towards production, it is being proactive ensure the terms of the deal are upheld.

Were not taking a chance this time, Faucher says. Were going to arbitration (right away) to make sure we get the 80% as it was agreed.

Ungava also has a 2% net smelter return.

Canadian Royalties hasnt let the ongoing arbitration slow productivity in the past and the case is the same now. The company plans to do an updated bankable feasibility study in 2008, which will include drilling from this year.

Since 2005, the company has drilled more than 9,000 metres at its Mequillon deposit alone, resulting in a 94% increase in the resource estimate with improved metal content.

Mequillon has an indicated resource of 5.4 million tonnes grading 0.74% nickel, 1.07% copper, 0.04% cobalt, 0.23 gram gold per tonne, 0.7 gram platinum and 2.65 grams palladium and an inferred resource of 167,000 tonnes grading 0.8% nickle and 1.2% copper.

The deposit is going to be incorporated in the updated study, along with an assessment for open-pit and underground bulk mining, which will increase the current mine life.

The 2007 exploration campaign has focused on expanding resources, and included more than 17,000 metres of drilling. In August, a new zone was discovered, called Allammaq, which means clear sky in Inuktituk. The company hopes to have an inferred resource for it by early 2008.

The discovery hole at Allammaq intersected 8.3 metres grading 0.6% nickel and 1.22% copper. A 6.6-metre intersection graded 1.68% nickel and 2.34% copper.

As Arnold shows the site of the Allammaq discovery, crisp winds blow right through coats normally too heavy for September.

Looking out over the barren land where a drill rig is still in action, Arnold says todays sharp blue skies and rolling white clouds, which create dark shadows across the tundra, reminds him of the picture perfect discovery day.

The day we hit was like this but 20 degrees warmer, he says. But well keep going as long as we can.

Drillers must add salt and heat the water so it wont freeze. Arnold says that, luckily, the lakes near this deposit are quite deep, giving the exploration crew more time.

Its the geology that keeps Arnold going.

You see how rusty these rocks are? Arnold says picking up a rock. There are good-looking rocks everywhere but you dont know until you drill.

Drillers and drill samples come and go by helicopter as the only roads are those the company has constructed itself. A 16-km road was started last July to provide access to the Expo site at a cost of $5 million. For Nunaviks raw terrain, roads are often built along eskers, which are ridges of gravel and sand deposited during glacial melt by open channels on surface or beneath the glacier in an enclosed tunnel.

Aside from being more expensive, any form of precipitation can make travel by helicopter dangerous and limited.

Weather can also have an impact on shipping concentrate.

Faucher says the company agreed to sell concentrate to Norilsk Nickels subsidiary Harjavalta Oy, because its new fleet of ice breaker vessels will ensure the company can ship concentrate when it needs to. The only restriction is between March and mid-June when Arctic ice cannot be broken to access the port in Deception Bay, which is about 90 km by air from the project, due to a deal made with the Inuit to avoid disruption of the seal hunt or mating season.

Up until the mid-1990s, the shipping season along the Hudson Straight lasted only 75 days, but ice-strength vessels that could smash through metres of ice, extended the season to eight months a year.

Under the deal, Norilsk will also participate in a private placement valued at $25 million for $3.45 per share. To ensure the project is completed, Canadian Royalties may ask Norilsk for an additional $25 million in financing.

Faucher says Norilsk also demonstrated that recovery rates could be improved by 3% or 4% but also that it could produce a much higher concentrate grade up to 18% from 12%.

Another reason Canadian Royalties went with Norilsk was for guaranteed access to the Arctic Ocean.

We were very concerned about the availability to ship concent
rate at any time, Faucher says.

Another possibility would have been Xstrata Nickel but Canadian Royalties went with Norilsk.

When the company was working on the bankable feasibility study it unsuccessfully tried to reach an agreement to share the port at Deception Bay with Xstrata. Xstrata has rights to the port similar to a mining lease.

But with Xstratas plan to double production at its Raglan mine to 2 million tonnes of ore per year, a second port is needed no matter what, costing Canadian Royalties an estimated $60 million.

While chairman Glenn Mullan says that two years ago Xstrata wasnt very interested in making deals with the company — it was reluctant to let Canadian Royalties use its Donaldson airport — things are changing because now Canadian Royalties has moved beyond exploration.

They viewed us as the little kid next door, Mullan says. But now they are seeing the synergy.

Faucher would like to see a partnership formed for an Inuit training program. The company plans to employ employ 80 to 90 Inuit once mining begins out of 270 possible positions.

He says there have been talks with Xstrata and Makivik, which oversees the political social and economic development in Nunavik, to form a joint program.

Faucher says working together will avoid duplication and prevent competition.

The object is to contribute to the training to introduce the Inuit to operations so they can earn a wage like everyone else, Faucher says. Its better if we develop these things together because we are pretty well neighbours.

Nunavik, which covers 500,000 sq. km north of the 55th parallel, is in the process of forming a regional self-government within the province of Quebec by 2011, similar to that of the federal territory Nunavut.

With a population of 11,000 spread across 14 communities, the region is 90% populated by Inuit, who were a nomadic people for thousands of years, up until about two generations ago. People of the region are aware of the opportunities that await, which are much different from their traditions.

Development of both the mineral and the tourism industries are two ways of helping the economy in the region.

The Quebec government created the Far North program to foster closer relations with the Inuit and to ensure their full participation in the development of Nunaviks vast mineral wealth.

Forming good ties with the Inuit has been key to Canadian Royalties progression in Nunavik.

A short helicopter ride from the Nunavik Nickel project is a new national park based on lake that forms a perfect circle and glistens a deep blue. The Pingualuit crater, formerly known as the Chubb crater, was created 1.4 million years ago by a meteorite. The 3.4-km-wide basin created by the impact is now filled with exceptionally pure water reaching to a depth of 267 metres.

An interpretation centre is being built nearby, that could cater to tourists wanting to hike a few hours to the crater shore.

When an Inuit woman serving tea and fresh baked muffins at the site hears that todays surprise guests include the chairman of Canadian Royalties, she perks up.

I know Canadian Royalties, she says to Mullan. Im going to apply for a job.