Inco partnership secures future of Diamond Fields

Officials of Diamond Fields Resources (TSE) say the recently formed partnership with Inco (TSE), aimed at advancing the Voisey Bay nickel-copper-cobalt deposit near Nain, Labrador, is a “win-win” situation for both companies.

“It means a change in strategy for us,” said Clifford Carson, president of Diamond Fields. Speaking at a presentation in Toronto, he said: “We are no longer an exploration company; we are a mining company, soon to a blue-chip producer.”

In keeping with its elevation in status, the company will seek a listing on the New York Stock Exchange, study the idea of having a dividend policy, and look at a possible stock split later in the year.

Director Edward Mercaldo said that while Diamond Fields is proud of its management team, “the partnership with Inco rounds us out, and gives us depth.”

The agreement allows Inco to acquire a 25% interest in the discovery and related claims, in return for preferred shares worth $525 million. The major will also provide $25 million in cash to fund a feasibility study and further exploration. Through the purchase of 2 million Diamond Fields shares valued at $71.50 per share, Inco will increase its total direct and indirect interest in the project to about 30%.

Diamond Fields will not only retain control and have a majority interest in Voisey Bay; it will also end up, at closing, with no debt and $650 million in cash and marketable securities.

“The benefits are numerous,” Mercaldo said. “We will have accelerated access to world nickel markets and a tax-free dividend stream of $34 million per year, which means $1.40 per share in earnings before we even get into production.”

Diamond Fields will also end up with an approximate 10% stake in Inco, and receive $40 million in annual earnings before production from the dividend stream (from the Inco preferred shares) and other income. It is, by all accounts, a remarkable deal for Diamond Fields. Analysts say much of the credit goes to co-chairman and “dealmaker extraordinaire” Robert Friedland.

As for Inco, Chairman Michael Sopko says participation in the Voisey Bay discovery, as both direct owner and marketer of nickel production, “provides an exceptional opportunity for [the company] to achieve its objectives and will be an important component of [our] program to build shareholder value.” Inco is also interested in the property’s “very exciting” exploration potential.

Analysts say Inco, currently the world’s leading producer of nickel, has dashed other companies’ hopes of becoming a competitive threat to it in the nickel market.

Voisey Bay hosts a resource totalling 27 million tonnes grading 3.6% nickel, 2.17% copper and 0.15% cobalt in massive deposits, plus quantities of lower-grade resources in semi-massive and disseminated deposits.

Mercaldo fully expects that other discoveries will be made on the land package. “We staked every troctolitic intrusive available,” he said. Carson, who just returned from his first visit to the site, was also enthusiastic about the potential for discoveries. “We have five geophysical anomalies as exciting to look at as the one we have now [i.e. Voisey Bay]. Zorba, Archie and the Edge are three good ones, but Joseph is the one I like the most.” Looking ahead, Diamond Fields intends to pursue its new strategy, which has three main thrusts. “We want to develop a mine and do more drilling,” Carson explains, “we want to add value to the operation by choosing the right processing technology, and we also want to expand in the mineral industry by regional exploration and acquisitions. This asset will be a stepping stone for growth.”

The company is still considering the possibility of spinning off its diamond assets, which have been assembled largely under the direction of Co-chairman Jean Boulle.

In the meantime, Diamond Fields intends to form a project committee (to include representatives from Inco), which will oversee the feasibility study, the project construction, and the eventual operation of the project. Inco will provide technical and operating expertise and arrange project financing for its 25% share, as well as for Diamond Fields’ 75% portion.

Diamond Fields is, however, making it clear that it is still in the driver’s seat. “We may be the new kid on the block, but we will be in charge of this project,” Carson said.

Since the deal with Inco, a few other interested companies have made site visits to Voisey Bay. “We are not in a hurry to sell any more,” Mercaldo said. “We had a hard time selling what we did.”

John Paterson, Diamond Field’s vice-president of nickel operations, said the study will examine hydrometallurgical processing, as well as conventional pyrometallurgical methods. Inco is a leader in modern pyrometallurgy, while Teck (TSE), which has a 10.4% stake in Diamond Fields, is a leader in pressure leaching through its ownership interest in Cominco (TSE).

So far, pressure leach hydrometallurgy is the favored route because it allows for improved cobalt recoveries, is more environmentally benign, and allows the flexibility to build the project up in stages. Diamond Fields expects that it will be able to produce nickel at, or below, zero cost, after taking into account cobalt and copper credits.

The ultimate size of the operation is not yet known, although the study targets production at a minimum annual rate of about 130 million lb. of nickel, 90 million lb. of copper and 3 to 5 million lb. of cobalt.

During the first five years, Inco will market all nickel and cobalt produced by the mine. “We will still have upside on increased production,” Carson says. “After five years, if we produce more than 130 million lb. of nickel, it will be ours to market.”

Carson insists, however, that the company intends to be a responsible player in the nickel business. “The stainless steel market grew 12% last year and is expected to grow 10% this year. This translates into a growth rate for nickel of 3.5% per year.”

He says Voisey Bay’s production of 130 million lb. could easily be absorbed in current markets, but that weakness could occur in those markets if production were to double. He said this might have the effect of preventing projects that require a nickel price of US$4.50 per lb. from coming on stream.