Canico proves up Onca-Puma in Brazil

Vancouver — Going from successful gold explorers to a nickel producer may seem like a daunting task, but the management team behind Canico Resources (CNI-V) plans on doing just that by advancing one of the world’s highest-grade nickel laterite deposits at the Onca-Puma property in north-central Brazil.

Canico was formed in late 2001 through the merger of Oliver Gold and privately held Hastings Resources. Both companies were run by strong management groups that found success exploring for gold in Africa. Hastings is led by the former team of Sutton Resources, which delineated the gigantic Bulyanhulu gold deposit in Tanzania and was subsequently acquired by Barrick Gold (ABX-T) for $490 million in March 1999, whereas Oliver pocketed $5.5 million from the sale of its Segala project in Mali in January 2000. Under the merger, Oliver acquired all the outstanding securities of Hastings and consolidated its shares on a 9.3-for-1 basis. The junior then issued one new share for each Hastings share. Hastings’ principals received 5 million consolidated shares, 90% of which are held in escrow pending completion of the acquisition of Onca-Puma. Canico began trading in early February with 9 million outstanding shares.

“We agreed to the deal in order to move forward with a solid project, with cash in the bank and with an experienced management team that has developed more than a dozen mines around the world,” says Patrick Downey, Oliver’s past president and now on Canico’s board of directors. “We looked at a lot of projects and Ona-Puma was just too compelling to pass up.”

Canico can acquire the promising property from Inco (N-T) in return for raising at least US$22.5 million by Jan.31, 2003. At the end of the day, Inco will receive no cash payments but hold an 18% stake in the junior. To date, the company has $4 million in cash.

Says Canico President Michael Kenyon: “We hope to raise $30 million in a one-shot financing before the year is out. This would see us all the way through to a feasibility study.”

Canico and Inco have also agreed to an offtake deal that allows Inco to buy all nickel matte produced from the property, and a technical service agreement allows Canico to use the major’s reduction smelting process.

“We have the grade, the tonnes and [the assistance of] the world’s pre-eminent nickel producer, so the opportunity to create a mid-tier nickel producer is good,” says Downey.

Situated in the northern Brazilian state of Para, the 400-sq.-km Onca-Puma property hosts a near-surface inferred resource of 50 million tonnes grading 2.3% nickel and 0.09% cobalt using a 1.5% nickel cutoff grade.

“The mineralization marks a long, linear and thin blanket of laterite sitting on a ridge of weathered ultramafic rocks,” says Kenyon. “There is only 1.7 metres of overburden and about 4.5 metres of mineralized saprolite underneath.”

The resource consists of three separate targets. The Onca target covers an 18-by-1-km area, with the mineralized laterite having an average thickness of 4.1 metres. Moving 10 km northeast, the Puma West target extends for 10 km along strike and is also about 1 km wide. The mineralization is slightly lower grade but has an average thickness of 5.1 metres. Between the two deposits lies an iron formation. Another 3 km to the northeast is the smallest zone, called the Puma East area, which measures 7 km long by 500 metres wide.

Half of the Puma West and all of the Puma East deposits lie within an indigenous reserve and may not be available for development. Even when the 10-11 million tonnes of ore-grade material that occur on the native lands are excluded, the project economics appear robust and Canico sees potential upside by increasing the tonnage of the deposits.

“There is still excellent exploration potential, says Downey, “because about 40% of the holes finished in high-grade material, and the extremities of the property have not been tested.”

Conventional smelting

A 1997 scoping study by Watts, Griffis & McOuat indicates that the deposit could be exploited using conventional smelting technology. A single-line pyrometallurgical process similar to that used by Inco in Indonesia, would generate throughput of 1.1 million tonnes of laterite annually, yielding 50 million lbs. nickel matte yearly over a mine life of 20 years. The stripping ratio is a respectable 0.4-to-1 and the recovery rate is set at 91.6%. Capital costs are pegged at US$450 million; operating costs, at US$49 per tonne.

Canaccord Capital conducted a preliminary review of the financial merits of the project and came up with a net present value exceeding US$100 million. The estimate is based on a nickel price of US$3.25 per lb., a 10% discount and 100% equity financing. Assuming higher-grade material would be processed in the early years of production, the project is expected to generate more than US$100 million in cash flow per year at a cash cost of under US$1.30 per lb. of nickel (after refining charges). Research Capital concurs with the analysis, giving the project a net present value of US$114 million for the resources outside of indigenous land, at a nickel price of US$3 per lb. and a 10% discount rate.

Onca-Puma is accessible by road from the town of Maraba and is only 150 km from rail facilities. A major source of hydroelectric power is 100 km away.

Canico plans to start drilling in the first quarter, with metallurgical tests slated for 2003. A bankable feasibility study could be in hand by 2004, with mine construction starting shortly thereafter.