Western Areas’ great deal

Reading the daily newspaper can bring big rewards.

Just ask Julian Hanna.

The managing director and chief executive of Western Areas (WSA-T, WSA-A) followed up on an advertisement in a Perth, Australia paper offering a large swath of permits where Helsinki-based Outokumpu once ran a nickel mine.

Tellingly, the tiny blurb tried to mask the land’s nickel heritage and play up its gold potential nickel prices were that depressed at the time but Hanna, a geologist with 25 years experience at the time, knew exactly what he was going to look at.

And he didn’t have much of a crowd to fight through to see it. Hanna was only one of three people to answer the ad, and one of only two who bothered to check it out.

“There was a known deposit on the property called New Morning. We just wanted that one permit for the deposit. We thought we’d make $20 million on it and move on,” Hanna says. “But they told us we had to by all 37 permits.”

The permits became available after Outokumpu packed up and left in 2003 following a corporate decision to pull back on all of its global mining interests.

After much hesitation, Hanna decided go for it, and he signed on for all 37 permits. He didn’t have to wait long before a single drill result kilometers away from New Morning made him glad that he did.

While drilling at the New Morning deposit, Kevin Frost (Frosty), a geologist who had worked for Outokumpu but was now working for Western Areas, told Hanna of an electro magnetic result below a massive granite intrusion which ran beneath the old Outokumpu pit.

“We thought, alright, we’ll sink another hole over there,” Hanna says with a smile.

That single hole which was announced in October of 2003 returned 21.4 metres grading 7.8% nickel. The Flying Fox deposit had been discovered and almost overnight Western Areas stock went from trading in the 40 range into the $2 range.

“Frosty was shaking when he called to tell us of the results,” remembers Hanna. “‘We just hit 20 metres of massive sulphide’ he said.”

The results couldn’t have come at a better time as they coincided perfectly with the beginnings of the recovery in nickel prices. The coincidental events gave investors the confidence and Western Areas the capital to put more holes in the ground.

As the drills went down through the granite base beneath the old pit they hit ore. And then they hit ore again…and again.

Western Areas was beginning to understand that beneath the pit sat three very high grade pods of mineralization.

That first drill hole struck what is now known as T1; beneath that more drilling hit upon the pod known as T4; and then yet another pod, down roughly 900 metres from surface was discovered and dubbed T5.

T1 has a probable reserve of 314,5000 tonnes grading 4.8% nickel for 15,000 tonnes, attached and below T1 is T2 which has an inferred resource of 30,000 tonnes at 5.7% nickel for 1,700 tonnes.

T4 requires more drilling to get up to a resource but has best a best intersect of 13.7 metres at 4.7% nickel.

T5 has an indicated resource of 860,000 tonnes at 6.8% nickel for 59,000 tonnes of nickel and an inferred resource of 164,000 tonnes at 6.8% nickel for 11,2000 tonnes.

The orebodies formed in pod formations in ultramafic rock where lava channels containing nickel settled along the bottom. A huge granite sheet intrusion cooked up the sulphides, re-melted and squeezed them into larger volumes and higher grades. High enough to make Flying Fox one of the world’s higher grade nickel deposits.

While Western Areas owns 100% of Flying Fox the T5 body appears to continue over the southern portion of its boundary and onto a concession which Kagara Zinc (KZL-A) outbid Western Areas for.

Thus far the company has 7 years worth of reserves drilled off and Hanna would like to get up to 10 years. But given that it is an underground mine, the need for reserves far off into the future isn’t quite so pressing and the company has cut back to just two drill rigs on site.

As for exploration potential, Hanna says drills will go down beneath T5 to see if there is yet another pod of mineralization.

In the meantime, mining at the project got underway in the latter part of 2006 as high grade ore from the shallowest body — T Zero — is being shipped to LionOre’s facility for processing.

Western Areas plans to begin construction on its own nickel concentrate plant in September with completion targeted for early 2008.

The plant is expected to produce nickel concentrate grading 14-16% for an estimated capital cost of A$25 million. The facility will have a capacity of 250,000 tonnes per year.

Using a nickel price of US$5.50 a lb, cash costs at Flying Fox are estimated at US$2 a lb.

The company is also in the midst of a pre-feasibility study at Diggers South a project locate 40 km south of Flying Fox. The deposit has a resource of 1.45 million tonnes grading 1.56% nickel and an inferred resource of 530,000 tonnes grading 1.49% nickel. But, Western Areas says, those numbers could become more robust as recent drilling has hit on mineralization 200 metres below the current resource. Pre-feasibility is expected to be done in April.

Counting Flying Fox, Diggers South, New Morning which has 117,000 tonnes grading 3.6% of indicated and 37,000 tonnes grading 4.4% in the inferred category — and two other smaller deposits known as Daybreak and Cosmic Bay, the permits bought by Hanna back in 2003, which are collectively known as the Forrestania Nickel Project, have yielded a total resource (including probable reserves, indicated and inferred resources) of 3.8 million tonnes with an average grade of 3.3% for 126,300 tonnes of nickel.

Considering the vendors were only asking for A$100,000 up front and additional A$2 million to be paid later, Hanna happened upon a company builder at a bargain basement price.

The purchase has been so fruitful that Western Areas now has its eyes on becoming an international nickel producer. It currently holds nearly a 20% interest in Mustang Minerals (MUM-V) and its Maskwa nickel deposit in Manitoba.