Western Areas signs offtake agreement with Jinchuan Group

China’s largest nickel company has signed a two-year offtake agreement with Western Areas (WSA-T, WSA-A) that will give the Australian nickel producer exposure to one of the world’s fastest growing markets.

Under the contract Western Areas will sell up to 25,000 tonnes of nickel in concentrate from its Forrestania project to the Jinchuan Group starting in early 2010. The contract expires in December 2011.

The first 10,000 tonnes per year of nickel in concentrate from Forrestania, up to a limit of 75,000 tonnes nickel, is currently being sold to BHP Billiton (BHP-N) under an existing offtake agreement that was announced earlier this year in March. High grade nickel concentrate from Western Areas’ Flying Fox mine is processed at BHP Billiton’s smelter at Kalgoorlie, 300 km from Forrestania.

“The two-year contract with Jinchuan provides Western Areas with excellent exposure to the nickel price and provides flexibility for us to negotiate new contracts in the future,” Julian Hanna, Western Areas’ managing director wrote in an email response to questions from The Northern Miner. “The seven-year ‘baseload’ contract with BHP Billiton provides Western Areas with steady cash flow without the need to export our nickel concentrate outside Australia.”

Under the new contract, the balance of nickel that is not sold to BHP Billiton during 2010 and 2011 will be sold to Jinchuan. Concentrate will be exported to Jinchuan from the Esperance port.

In addition to concentrate sold to BHP Billiton since May 2009, current stockpiles of ore and concentrate at Forrestania contain about 3,430 tonnes of nickel with an in situ nickel value of around US$55 million.

Western Areas expects to double annual production this year from an estimated 10,000 tonnes of nickel to 20,000 tonnes in 2010 and 25,000 tonnes from 2011.

This year Western Areas anticipates an average cash cost of between US$2.00 to US$2.50 per lb. nickel.

At its other projects, final permitting is underway for the high-grade Spotted Quoll open-pit mine. First production from Spotted Quoll should overlap production from the high-grade Lewinsky Lode at the top of the Flying Fox T5 orebody starting in early 2010. Recently announced drill hole intersections in this area of the mine include 13.2 metres grading 10% nickel and 12.4 metres at 8.3% nickel.

Hanna remains very positive about the medium-term nickel price. “A large part of global sulphide production is coming from ageing, mature underground mines which are facing declining grades and rising costs,” he explained. “The alternatives of laterite and nickel pig iron production are either capital or energy intensive and many require higher nickel prices to operate.”

Only in October last year analysts were calling it down to $3 per lb., Hanna noted. But nickel found a floor at around $4 per lb. and recovered better than most people thought.