Poseidon hopes to restart Mt. Windarra in 2014

Australian billionaire Andrew Forrest stepped down in September as non-executive chairman of Poseidon Nickel (ASX: POS) to focus on his philanthropic endeavours, but his resignation didn’t signal any underlying loss of confidence in the company’s Mt. Windarra nickel sulphide project, management says, and the mining entrepreneur still has a lot of skin in the game.   

The 51-year-old is perhaps best known for turning Fortescue Metals Group (ASX: FMG; US-OTC: FSUGY) into the fourth-largest iron exporter in the world, and  has a net worth of US$5.7 billion, according to Forbes.

Forrest holds a 31.7% stake in Poseidon and has guided management every step of the way, as it took Mt. Windarra, 260 km northeast of Kalgoorlie in Western Australia’s northern goldfields, from a concept to a shovel-ready project.

Mt. Windarra was previously mined between 1974 and 1991, and Poseidon acquired it in 2006. Over the last five years the company has invested A$94 million (US$87 million) to refurbish the existing mine and facilities, and expand the resource base, which supports an initial mine life of 10 years.

The project is permitted and ready for construction. But like so many other mining projects, it has stumbled in the challenging financial markets, and, for those in the nickel sector, depressed metal prices. Nickel is trading at US$6.21 per lb., down from an average of US$7.95 per lb. last year and US$10.36 per lb. in 2011.

The definitive feasibility study completed earlier this year “was intended to lead directly into a campaign to finance the project into production using the U.S. debt capital markets,” management stated in a quarterly report for the three months ended Sept. 30. “Poseidon’s approach was, however, at the same time that the U.S. Federal Reserve announced the tapering of the QE program and the bottoming of the nickel spot price to near 10-year average lows. As a result, the financing was not completed.”

The company says that “considerable efforts continue,” but conceded that “a key trigger will be the anticipated strengthening in the nickel market,” and that it “believes that the current oversupply of the nickel market will reverse, and that the medium-term future for the metal is positive.” Poseidon cited forecasts — including forecasts from London-based Consensus Economics — that it says support its view that “nickel has one of the best potential forward-price dynamics of all hard commodities.”

Poseidon is looking at options to fund the A$200 million it will cost to restart the nickel project next year. As of Sept. 30, the company held A$2.7 million in cash and signed an extension to an A$8-million bridge loan that was due for repayment on Oct. 1, 2013, with Forrest’s private-investment vehicle, Forrest Family Investments. The parties agreed to extend the maturity date until Oct. 1, 2014.

The Mt. Windarra project is made up of 24 km of ultramafic host rock containing an open-pit and an underground mine. By September, the company dewatered the underground mine and refurbished the decline down to a vertical depth of 430 metres from surface.

The definitive feasibility study outlined average annual production of 9,600 tonnes contained nickel in concentrate at an average operating cost of US$3.35 per lb., over an initial 10-year mine life. Another gold-processing facility was estimated to produce over 45,000 oz. gold in the first three years.

Pre-start capital costs were around A$197 million, which excludes nickel tailings reprocessing, which is planned to start three years later. Construction will include a nickel–sulphide concentrator plant and a retreatment plant, as well as developing a gold-production facility on-site at a later date.

Mt. Windarra’s Joint-Ore Reserves Committee-compliant probable reserve stands at 498,000 tonnes grading 1.78% nickel for 8,850 tonnes nickel from the brownfield Mt. Windarra deposit, and 1.2 million tonnes grading 1.3% nickel for 15,900 tonnes nickel from the greenfield Cerberus deposit, which the company discovered in 2008, 10 km south of the Mt Windarra mine.

Simon Tonkin of Australian stockbroker Pattersons has a 12-month target price on the stock of A22¢ per share. At press time Poseidon was trading at A9.3¢ per share.

Tonkin calculates that a 10% increase in the nickel price would move his company valuation by 30%.  

“The capital intensity for the project is relatively low [US$8 per lb.] when compared to the other new nickel operations [US$10–50 per lb.],” he writes in a Nov. 4 research note. “This is due to the fact that the project has low complexity and significant established infrastructure . . . despite the project’s relatively low grades (1.55%), Poseidon has the potential to mine at a similar cost per pound to Independence Group. The main reason is the vertical geometry and orientation of the Mt. Windarra orebody, which allows for bulk sub-level caving.”