First Nickel on firmer ground with Lockerby

First Nickel (FNI-T, FNKLF-O)wants to put market questions around its Lockerby nickel mine, in Ontario’s Sudbury basin, to bed.

Dogged by inconsistent production over the past three years and lacking a proven and probable reserve estimate for the mine, the company announced that a prefeasibility study for a mine expansion and a reserve estimate have both been completed.

“I think we’ve removed uncertainty,” said president and chief executive Bill Anderson on a conference call connected with the release. “We’ve shown the market this is where we’re going, folks, and if you like it, come on board.”

Keeping investors on board has proven a challenge of late.

In May of last year, First Nickel’s share price was in the $1.80-range but it has fallen steadily since then.

On July 2 — the day before the latest news was released — its shares touched a 52-week low of 26 before correcting slightly to finish the day at 28.

“It has been a concern in the past as to what kind of operating mine we have,” says Anderson of Lockerby, which has been producing nickel while subject to an aggressive exploration campaign. “Our production profile was a bit erratic and it was difficult to explain that. We needed reserves first.”

Lockerby produced roughly 931,000 lbs. nickel and 612,000 lbs. copper in the first quarter of 2008. The ore from the mine is milled at Xstrata’s (XSRAF-O, XTA-L) Strathcona facility.

This year’s first-quarter production compares favourably with the roughly 700,000 lbs. nickel and 433,000 lbs. copper Lockerby produced in the first quarter of 2007, but those numbers were down from the same period of the previous year, when roughly 788,000 lbs. nickel and 470,000 lbs. copper were produced.

Delays in constructing air raises for two levels of the mine were blamed for the lower production in the first quarter, but more detrimental to the company was a failure of its crusher in the fourth quarter.

Lost time to repair the crusher meant lower production, which contributed to a net loss of $1.4 million in the first quarter of 2008.

With those technical hurdles now cleared, First Nickel is moving forward with a more solid understanding of the ore it will be sending to Xstrata’s mill. The new resource estimate puts probable reserves at 1.84 million tonnes grading 1.69% nickel, 1.16% copper and 0.06% cobalt.

As for the mine expansion, key metrics for the project put forth in the prefeasibility study include an estimated 69.3% internal rate of return and a net present value of $47 million at a 10% discount rate.

The mine life is estimated at just over five years with total capital costs coming in at $86 million — roughly $52 million of that will be to build the expansion, while the remaining $34 million will go toward sustaining operations.

Anderson says that the relatively humble capital requirements mean the prospects for debt financing look good, with more than half a dozen banks already having expressed an interest in providing funds.

He expects construction to begin on the expansion by the end of the year.

Once built, the expanded mine would produce 46 million lbs. nickel, 37 million lbs. copper and 900,000 lbs. cobalt.

Cash operating costs net of byproduct credits are estimated to average out at US$6.08 per lb. nickel with full production milling of 1,200 tonnes per day or 420,000 tonnes per year.

Currently, First Nickel is mining ore at a cost of roughly US$9 per lb.

The company acquired Lockerby from Falconbridge in 2005, roughly a year after the nickel giant (since taken over by Xstrata) placed it on care and maintenance.

At the time, Anderson says, his team determined the mine had at least two more years of mining left, as well as considerable exploration upside.

But the newly acquired mine didn’t come without challenges.

Falconbridge’s original shaft wasn’t in line with a deeper orebody it discovered later on. So when Falmuch conbridge chose to access the new deposit, it did so the cheap and quick way: by sinking a non-surfacing shaft between the two surfacing shafts.

Anderson says the decision led to an awkward set-up, leaving First Nickel to mine ore, then move it up a series of ramps before getting it to the shaft.

It’s a situation the company plans to remedy with its mine expansion. That way, both Lockerby ore and First Nickel’s share price, will be free to rise, unencumbered.