Nickel laterites fail to live up to early promise

The pioneers of Australia’s nickel laterite industry set the bar way too high. Just three years ago, they were the stars of the nickel business, determined to lower the industry cost curve and revolutionize nickel’s journey from ground to market. Now, despite billions of dollars of investment in new technology, the three highest profile producers — Preston Resources, Centaur Mining and Exploration, and Anaconda Nickel — are all but bust.

Preston is turning over the Bulong mine to creditors and focusing its attention on a gold project in Malaysia.

Centaur has sold the Cawse deposit to the OM Group (OMG-N) to help tackle a $A700 million debt and is being investigated by the Australian Securities and Investments Commission for possible insolvent trading offences.

Only Anaconda and partner Glencore International continue the struggle to keep the Murrin Murrin operation alive while juggling negotiations with secured creditors and a lawsuit against the builder of the mine’s processing plant, Fluor Daniel.

Recently, Anaconda was awarded A$40 million in a recent interim judgment on the suit, net of counterclaims by Fluor. Phase 2 of the arbitration process is leading to a judgment on a separate claim worth A$160 million.

The landscape looked very different in mid-1999. Centaur’s Cawse –the first of the Western Australian nickel laterites to use a combination of high pressure acid leach (HPAL) and solvent extraction-electrowinning (SX-EW) technology — had just entered production amidst expectations that it would become the lowest-cost producer in the Western World. Traditional sulphide producers were running scared, worried that competitors mining the lower-cost laterites might eventually put them out of business.

Nickel laterites are oxide ores, the products of deep weathering of ultrabasic rocks in hot climates. The mineralogy differs depending on the prevailing environment when the deposits were formed. Wet laterites, like those in New Caledonia (for example, the Goro project), formed under tropical conditions. Dry laterites (the Western Australian ones) developed under dry conditions and tend to be of lower grade, and trickier to process, than their wet cousins.

In the 1990s, the Western Australia laterite boom was triggered by the use of the Sherritt HPAL process to treat the dry oxide ores. Some industry representatives were uneasy about the new mines, fearing the Australian mavericks were starting commercial production before adequately testing the technology. But endorsements by senior companies that formed alliances with the juniors, including mining powerhouses Sherritt International (S-T) and Anglo American (AAUK-Q), lent the projects a huge dose of credibility.

It turned out the skeptics were right. From the time the producers flipped the switches in their shiny new processing plants, the projects have fallen far below expectations. Commissioning delays, catastrophic plant failures, low recoveries and a price collapse of the major by-product, cobalt, have prevented adequate returns. Operating costs, once expected to range from US50-80 per lb. (US$1,100 to US$1,760 per tonne) are nearly triple that amount. Sulphide deposits, which had looked expensive at US$2 per lb., are in fact highly cost-competitive.

“With little improvement in cobalt prices in sight, [we are] still forecasting that average future costs will be above targeted levels. A realistic goal for the HPAL projects may be close to US$1.50 per lb. after credits, possibly falling as low as US$1 per lb. in the longer term,” said AME Mineral Economics in a press release to announce its latest cost report on the nickel industry.

Capital costs, too, have proved unsustainable. Originally forecast to be around US$5 per lb. of annual nickel production capacity, true costs are closer to US$8-10 per lb., estimates AME.

Post-it notes reading “note to self: next time, build a pilot plant” would not be out of place on the executive desks of the pioneer producers.

But HPAL technology does work. While the Australians were courting financial ruin in their haste to reach commercial production, Inco (N-T) was quietly working out the acid-leaching bugs at a pilot plant on the Goro laterite in New Caledonia. Now the US$1.4-billion Goro project is the centrepiece of the nickel giant’s growth strategy. Using its proprietary hydrometallurgical and solvent extraction process techniques, Inco expects to produce 54,000 tonnes nickel and 5,400 tonnes cobalt annually at a cash cost of US$1 per pound of nickel, starting in 2004.

Meanwhile, BHP Billiton (BHP-N), through its Queensland Nickel subsidiary, is poised to become the firstborn in a second generation of laterite producers in Western Australia. Having completed pilot testing, the company is conducting a feasibility study on the Ravensthorpe deposit in Western Australia and will decide whether to go ahead with the A$945-million mine next year. Ravensthorpe is expected to produce 35,000 tonnes of nickel and 1,300 tonnes of cobalt per year at a cash cost of about US95 per lb. nickel. The project will use a combination of PAL and atmospheric leaching to process the ore.

Even the prognosis for Murrin Murrin is beginning to brighten. Owner Anaconda is currently negotiating with U.S. bondholders for a cash buyout at about 25 to the dollar. If successful with the restructuring, Anaconda plans to change its name and ramp up production at Murrin Murrin to 92% of capacity, or 40,000 tonnes of nickel per year, by next year. Anaconda is already reporting positive cash flow from the mine and has slashed its overhead from A$22 million to A$6 million.

But after losing so much money on the first generation of mines, investors are reluctant to back the dozens of other potential laterite producers in Australia and Southeast Asian countries. If these projects were to proceed, worldwide nickel production could as much as double, to 2 million tonnes per year.

“The commissioning problems at the HPAL plants combined with the downturn in the market have meant that finance for new nickel mining developments has been difficult to obtain. As a consequence, the second series of projects will find it harder than previously expected to proceed to the construction phase,” says AME.

Still, AME believes the laterite producers, big and small, will eventually prevail. The research house identifies 10 projects that have the potential to begin operations by 2006.

“Even if a small handful of these HPAL projects are developed, the future cost profile will be markedly different from today — a cost curve stacked with laterite mines in the bottom quartile.”

And just the threat of cheaper production has already lowered the cost curve for the whole industry. The estimated average cash cost of nickel production is now US$1.88 per lb. (US$4,140 per tonne) and falling.

—The author is a Toronto-based freelance writer on mining and environmental issues.