INVESTMENT COMMENARY — Voisey Bay seen as tip of nickel iceberg

The Voisey Bay nickel-copper discovery in Labrador has already vaulted Diamond Fields Resources (TSE) into the big league, and Yorkton Securities believes the huge deposit represents only “a tiny tip of the iceberg” when it comes to the area’s ultimate potential.

Since late 1994, when it disclosed the original discovery holes, Diamond Fields has had a spectacular ten-fold run to a high of $81.25.

Speculation that a major mining interest would make an offer to take over the company waned following a recent deal with Inco (TSE), which gave the major a 25% interest in Voisey Bay.

Diamond Fields has since pulled back to the $65 level, and Yorkton continues to view the issue as a strong buy. The investment dealer points out that although base metal prices are close to cyclical highs, even at lower price levels the deposit’s economic potential is clearly huge.

Teck (TSE), which holds a 10.4% equity interest in Diamond Fields, recently estimated diluted minable reserves at 31.7 million tonnes grading 2.83% nickel, 1.68% copper and 0.12% cobalt at a stripping ratio of 0.36-to-1. Contained within the ultimate pit is a higher-grade reserve of 20 million tonnes grading 3.5% nickel, 2% copper and 0.14% cobalt.

Assuming a 1.6-million-tonne-per-year operation and current metals prices, Yorkton estimates yearly operating profit at $682 million and earnings at $333 million.

Based on its 75% interest, the mine would generate earnings of $250 million per year, or about $8.56 per share for Diamond Fields. With the addition of dividends from the US$386.7 million in Inco preferred shares that the company holds, yearly earnings would be about $10 per share.

Yorkton goes on to point out that this is almost certain to be only the first of several similar valuable deposits to be found in the area.

The geology of the Voisey Bay discovery appears to be closer to that of the huge Norilsk deposits in northern Siberia than to Sudbury, the firm notes. Norilsk and Sudbury both proved to be host to multiple nickel deposits with ultimate reserves exceeding 1 billion tonnes, and Yorkton is confident the one major ore deposit found at Voisey Bay to date will not be an isolated event.

“The inference is obvious: At $65 per share, Diamond Fields Resources is still cheap.”

Furthermore, the broker believes Diamond Fields represents an inherently safer nickel play than Inco, since the Voisey Bay deposit has a low (or even negative) cost of nickel production after byproduct credits. {For the first quarter, Inco incurred an operating cost of US$1.25 per lb. nickel, including byproduct credits.)

Yorkton says the different cost structures are apparent when Inco’s underground mining grades are compared with Voisey Bay’s considerably higher and relatively cheaper-to-mine, open-pit reserve grades.

Yorkton reports that Inco’s Sudbury operations averaged 1.2% nickel and 1.1% copper in 1994, while its Manitoba operations averaged 2.6% nickel.

Yorkton puts the significance of Voisey Bay further into perspective when it points out that, in 1994, Inco produced only 2.65 times the amount of nickel from its 14 mines that Voisey Bay will produce in one year from the one deposit discovered to date.