Rio Tinto to build Eagle nickel mine

Rio Tinto (RTP-N, RIO-L) will build the first new mine in Michigan in decades, which would be the only primary nickel mine in the United States.

Construction of the Kennecott Eagle nickel-copper mine would start this year with production slated for 2013. The mine would be a “small yet robust” project for the company, UBS Investment Research asserted in a research note to clients.

Eagle is expected to have a mine life of six years and produce separate nickel and copper concentrates containing an average of 17,300 and 13,200 tonnes per year of nickel and copper metal, respectively.

The deposit has reserves of 3.6 million tonnes grading 3.47% nickel and 2.93% copper.

Rio Tinto has all the environmental approvals it needs to start building the underground operation and would invest US$469 million in the project. Its plans include rehabilitating the existing Humboldt mill and developing a multi-use access road.

The mining conglomerate also intends to explore for additional resources in the area, and describes the Upper Peninsula of Michigan as a “highly prospective region for nickel and copper.”

UBS analysts wrote, “After the tough 2008/09 period where Rio was in cash conservation mode, we now see Rio Tinto back on the capital spend trail. While Eagle is a small project, we would look for Rio to increase its capital spend, which will set the platform for future growth.”

According to UBS Research’s calculations, with capital expenditure of US$469 million and composite cash operating costs of US$4 per lb. for payable metal (copper and nickel alone), the Eagle project would generate a net present value (NPV) of US$90 million and an internal rate of return of 14%. When cobalt and precious metal credits are added to the mix, UBS says the NPV would grow to US$99 million.

UBS has a “buy” on the stock.

At presstime in New York, Rio Tinto’s share price was US$49.02, trading within a 52-week range of US$30-US$62.24.