International Royalty comments on Voisey’s Bay concentrate shipments

International Royalty Corp. (IRC-T, ROY-x) says Vale Inco’s agreement to stop concentrate shipments from Voisey’s Bay will not have a “significant impact” on its revenues unless the suspension exceeds six months.

Vale Inco, a subsidiary of Vale (RIO-n), confirmed that it had stopped shipping concentrate from its gigantic Voisey’s Bay nickel mine as part of an agreement with the province of Newfoundland and Labrador, pending the outcome of negotiations on a new hydromet processing plant it has promised to build at Long Harbour in southern Newfoundland.

International Royalty owns a 2.7% net smelter return (NSR) royalty on the Voisey’s Bay mine. But the company said in a press release that based on Vale’s long-standing agreements with the provincial government and First Nations, no shipments to European smelters or to storage facilities in Quebec City are permitted between Dec. 7 and Jan. 21 or from April 7 to May 21, anyway.

Under the company’s strict winter shipping schedule, which has been in place since the mine started operations in late 2005, no copper shipments are allowed to leave for European ports between Jan. 22 and April 6, and only four nickel shipments are permitted during that timeframe. (The nickel shipments permitted during that time are equal to about one-quarter of the mine’s annual production.)

“Should these negotiations [on a proposed hydromet facility] be completed prior to May 21, at most, only four shipments would be needed to get back on the routine schedule,” IRC said.

Under IRC’s royalty agreement with Vale Inco, the company receives payment from Vale about three months after the concentrates reach smelters in either Sudbury or Thompson. Typically there is a four to six month delay from the time of the shipment and IRC’s receipt of payment.

To put that schedule in context, last year IRC was not paid a royalty for concentrate shipped between February and May until the third quarter of the year.

Vale Inco ships the concentrate to Quebec City first. It is then stored and later sent by rail to the smelters in Ontario.

“Inventories tend to build during the fall months and are depleted during the winter,” IRC explained.

Royalty payments are made in mid-February, May, August and November. The mid-May, August and November payments reflect the concentrates arriving at smelters during the quarters ending Dec. 31, March 31 and June 30, respectively.

“On this basis, any reductions in concentrate deliveries that are not made up by stored concentrates in Quebec City should not impact IRC until the mid-August 2009 payment,” the company said.

Earlier this week, Bob Carter, Vale Inco’s manager of investor relations, told The Northern Miner that the company agreed not to ship concentrate while negotiations governing the terms of a planned processing plant remain unresolved.

As part of the Voisey’s Bay development agreement inked in September 2002, the mining giant committed to build a processing plant that was capable of processing concentrate and intermediate feeds containing nickel from other sources worldwide, which would give the plant the capability of operating well beyond the life of the mine.

Vale also agreed that it would submit an implementation plan for the processing plant to the provincial government by the end of December 2008.

Instead of submitting a final implementation plan, however, Vale Inco submitted a draft implementation plan in late December. The government then postponed its deadline for the final plan from Dec. 31 to Jan. 22.

That deadline came and went and Vale Inco says it is currently reviewing the draft with the government. Carter declined to comment on the nature of the discussions or what aspects of its draft agreement may be unsatisfactory to the provincial government.

“We have agreed not to ship concentrate while those negotiations are ongoing,” Carter said in a telephone interview from St. John’s. “As a consequence of the initial extension we agreed not to ship the concentrate and as of today we are still not doing so.”

Operations at Voisey’s Bay have been unaffected, Carter added, noting that the concentrate is being stored in a large storage facility in Labrador. In the meantime, a vessel ready to ship the concentrate “is in port and is standing by.”

Given the global economic crisis and collapsing nickel prices – not to mention the fact that existing smelters in Sudbury, Ontario are hungry for ore — the future of a technologically complex and very expensive hydromet plant could be in doubt, some observers say.

But if any of those factors are behind the negotiations, neither Vale Inco nor the provincial government of Newfoundland and Labrador, is letting on.

In the initial agreement, the two parties had agreed that if a hydromet plant was not commercially or technically feasible, Vale would build a commercial hydrometallurgical nickel-matte processing facility or other similar facility incorporating a proven, state-of-the-art technology to produce finished nickel product.

But in November, Vale Inco completed its research and development program on the hydromet technology and told the government it would be used for the new processing facility, Carter said.

The proposed hydromet processing plant, which is expected to cost about $2.17 billion, would take about three years to build and create an estimated 3,000 person-years of employment in the province.

Vale, the world’s second-biggest nickel producer after Russia’s Norilsk Nickel (NILSY-O, MNOD-L), has suffered a string of bad news in recent months as the global economic crisis continues to bite.

In December Vale Inco announced that it was shutting down the Copper Cliff South nickel mine in Sudbury (taking 8,000 tonnes per year of finished nickel out of the market), delaying by a year the development of the US$814-million Copper Cliff South Deep project and shutting Voisey’s Bay nickel-copper mine and mill for one month in July this year. It has also cut nickel production in Indonesia, Brazil and New Caledonia.