Royalties feasibility study shows quick payback (June 11, 2007)

Development of the Raglan South nickel deposits in the Nunavik region of far northern Quebec is economic, and high nickel prices shrink the project’s payback period substantially, says a feasibility study prepared for operator Canadian Royalties (CZZ-T, CRYAF-O).

The study, led by SNC Lavalin, considered three of the five deposits with known resources on the property — Ivakkak, Expo and Mesamax. A fourth, Mequillon, is now at the stage of a scoping study, and the smallest, TK, was not included.

The study found a mine, a mill with a 3,500-tonne daily throughput, and infrastructure including roads and a port at Deception Bay, would have a price tag of $438 million. The project would produce 11,800 tonnes nickel, 17,600 tonnes copper, 14,500 oz. platinum and 78,600 oz. palladium, all in concentrates.

All three deposits would be mined by open pit, with some later-stage underground mining at Ivakkak. Production at the proposed rate would mine out the reserve in nine years, but additional resources, including Mequillon, could later be converted to reserves to extend the mine life.

The overall project reserve is 11.3 million tonnes grading 0.97% nickel, 1.13% copper, 0.05% cobalt, 1.86 grams palladium, 0.45 gram platinum, and 0.1 gram gold per tonne. Expo has the largest reserve, 8.3 million tonnes grading 0.68% nickel, 0.69% copper, 0.04% cobalt, 1.25 grams palladium, 0.29 gram platinum and 0.07 gram gold, in a pit with a strip ratio of 3.6. That comes out of an indicated resource of 8.6 million tonnes grading 0.76% nickel, 0.76% copper, 0.04% cobalt, 1.36 grams palladium, 0.32 gram platinum and 0.08 gram gold per tonne. The reserve incorporates dilution and a mine call factor of 95%.

Mesamax has a reserve of 2.2 million tonnes, at 1.85% nickel, 2.49% copper, 0.07% cobalt, 3.46 grams palladium, 0.95 gram platinum, and 0.19 gram gold per tonne, in a pit with a 2.6 stripping ratio. Virtually all the Mesamax resource was converted to a reserve. At Ivakkak, Canadian Royalties plans to mine 636,000 tonnes grading 1.22% nickel, 1.53% copper, 0.05% cobalt, 3.22 grams palladium, 0.67 gram platinum and 0.16 gram gold per tonne out of a pit with a stripping ratio of 4.9. Underground reserves total 219,000 tonnes at 2.29% nickel, 2.73% copper, 4.9 grams palladium, 1.04 grams platinum and 0.21 gram gold. About 270,000 tonnes of Ivakkak’s indicated resource did not make it into reserves in the study.

The capital cost estimate is $180 million higher than had been predicted in a 2006 preliminary economic study — which had assumed some shared infrastructure with Xstrata (XTA-L, XSRAF-O) at a saving of $60 million. Labour costs have also increased, by about $40 million, and tailings disposal will cost about $40 million more to comply with new regulations. The proposed mill is also larger than in the 2006 study, and adds $40 million to the budget.

The largest item in the capital budget would be infrastructure, which would include a road to join the existing haul road network serving Xstrata’s Raglan mine, and a port at Deception Bay on the northern coast of the Ungava. Xstrata already operates a seasonal port and concentrate warehouse at Douglas Harbour on the east side of the peninsula. To build the road and a port at Deception Bay, plus a power plant, airport, buildings and utilities, would cost about $144 million.

The mining fleet has been costed out at $21 million, and stripping and development at $19 million. The project would have a 3,500-tonne-per-day mill producing separate nickel and copper concentrates, and that has been estimated at $75 million, with another $8 million for a paste tailings plant and pipeline. The rest of the budget, $171 million, goes to indirect, contract, and owner’s costs, and a contingency figure. In operation, the mine and mill would employ 270 people.

Operating costs have been estimated at $53.65 to $66.28 per tonne of ore, omitting transportation costs of concentrate once they are aboard ship.

Assuming US$13,200 per tonne (US$6 per lb.) for nickel and US$3,300 per tonne (US$1.50 per lb.) for copper, the base-case discounted cash flow analysis puts the project’s after-tax net present value at $400,000, at a discount rate of 8%, with a pre-tax internal rate of return at 11.3%. It would, however, pay back the capital cost in less than three years.

Higher nickel and copper prices increase the value and rate of return substantially, with a US$22,000-per-tonne nickel price (US$10 per lb.) and a US$4,400-per-tonne copper price (US$2 per lb.) bringing the net present value to $285 million. Those figures are well below present metal prices.

The cash flow models assumed complete equity financing.

The study also fulfills the last requirement in Royalties’ option agreement with Ungava Minerals (UGVAF-O), bringing Royalties’ interest in the optioned part of the South Raglan land package, which includes Mesamax and Expo, to 80%. Ungava has launched several lawsuits to overturn the agreement, which have failed in Quebec courts; one suit, alleging trespass and misrepresentation, was filed in August 2006 and dismissed in April 2007.