Skye about to decide on Fenix

Vancouver — Breaking into the nickel business is a daunting proposition for a small company, given the technical and financial resources typically required to bring a large-scale project into production. Skye Resources (SKR-T, SKRZF-O) has the unique advantage of owning rights to a project with a history of past production and the potential to be expanded using modern hydrometallurgical processing.

Skye has a positive feasibility study in hand for a ferro-nickel smelting project at its Fenix property in eastern Guatemala, along with a preliminary assessment of the proposed hydromet expansion. Both studies were led by Hatch, with input from a range of other metallurgical, engineering and environmental consultants.

Skye president and CEO Ian Austin says the studies support management’s view that Fenix is “one of the world’s best high-grade nickel deposits capable of being brought into production in the near-term.” He notes that the studies “confirm robust economics” using a base-case nickel price of US$5 per lb., well below the current nickel price of more than US$13 per lb.

Austin says both projects could produce about 100 million lbs. nickel annually over at least 20 years, but would consume less than half the total resources identified to date.

“This provides potential to further expand the production rate, or to extend the mine life,” he says.

A production decision is imminent and represents a major turning point for the Fenix project, which has sat dormant since previous operator Inco (N-T, N-N) placed the Exmibal plant on care and maintenance in 1980 because of high oil prices and low nickel prices. Inco constructed the nickel-laterite mine and smelter in 1997 to process the saprolite portion of known deposits and produce a nickel sulphide matte in a single rotary kiln-electric furnace production line.

Inco gave the project another look in the early 1990s, but opted not to resume production, and then divested the project to Skye in 2004. A feasibility study drilling program was launched in spring 2005, with 1,450 holes totalling 36,200 metres completed by early 2006. This work led to independent reserve and resource estimates. Proven and probable reserves total 41.4 million tonnes of 1.63% nickel, plus additional saprolite and limonite resources in various categories.

The newly completed feasibility study for the ferro-nickel project examined a 30-year mine life, starting in 2009, to produce a total of 1.3 billion lbs. nickel from an annual average of 1.37 million tonnes of ore grading 1.63% nickel. Average annual production during the first 20 years (after ramp-up) is estimated to be 48.5 million lbs.

Capital construction costs are projected to be US$754 million, including US$265 million for a new power plant. The ferro-nickel project uses conventional smelting technology, but requires that the existing mine and plant be refurbished and expanded. Priorities are to replace the existing oil-fired dryer with a larger coal-fired unit, convert the existing oil-fired kiln to coal-firing, install a second kiln and add a ladle refinery to produce ferro-nickel.

Cash operating costs in the first 20 years are expected to average about US$1.87 per lb. of nickel produced, after iron credits and before royalties, rising to an average of US$2.01 over the 30-year mine life.

The feasibility study for the ferro-nickel project showed an internal rate of return (IRR) of 13.4% and a net present value (NPV) of US$374 million, calculated using an 8% discount rate.

The hydromet project has higher capital costs, estimated at US$858 million, but lower cash operating costs (before royalties) of about US$1.38 per lb., including refining costs and cobalt byproduct credits. The new plant would employ high-pressure acid-leach technology to process limonite resources and produce a nickel-cobalt hydroxide intermediate for further refining.

The proposed project would have a 20-year mine life, starting in 2012, and would produce a total of 1 billion lbs. nickel and 84 million lbs. cobalt from an annual average of 1.76 million tonnes of limonite grading 1.33% nickel and 0.12% cobalt.

The IRR for the hydromet project is estimated at 14.2% (at a US$5-per-lb. nickel price and a cobalt price of US$15 per lb.), with an estimated NPV of US$424 million, using an 8% discount rate.

Skye intends to complete further engineering studies leading to a feasibility study for the hydromet project, along with drilling to upgrade resources.

Skye initially acquired 60% of the Fenix nickel project, and has since increased its stake to 92.4%. The company and its consultants have conducted extensive social and environmental assessments related to the feasibility study for the overall project, which if developed as planned, would become the largest operating mine in Guatemala.