Xstrata approves nickel project in New Caledonia

Xstratas (XSRAF-O, XTA-L) board has given the go ahead to develop New Caledonias rich Koniambo nickel project — one of the best undeveloped nickel resources in the world, the company says.

Resources at the massive nickel deposit will support a low-cost, open pit mine for at least 25 years, Xstrata says, with the potential to extend the mine life well in excess of 50 years of economic production.

Koniambo is really a key part of our growth pipeline and in fact has always been labeled as an anchor asset for our business, Ian Pearce, Xstrata Nickels chief executive, said in a presentation. It is in the lower quartile cost sector and has an incredible resource base, which offers fantastic optionality.

Xstrata will invest US$3.8 billion in the project to own 49% of the nickel project. Its joint-venture partner, Societe Miniere du Sud Pacifique, will own the remaining 51%.

Koniambo sits in the northern part of New Caledonia, an island about half the size of Taiwan, in the South Pacific Ocean. The island is east of Brisbane, Australia and just north of New Zealand.

The mine will have an initial production of 60,000 tonnes per annum.

Koniambo boasts a major resource base with 7.6 million tonnes of contained nickel. It has a 25-year-reserve as the basis for initial production of 62.5 million tonnes grading 2.40% nickel.

But the deposit also has a vast resource for future expansion. It is made up of 142.1 million tonnes of measured and indicated saprolite resources grading 2.13% nickel at a 1.5% nickel cut-off grade, 140.7 million tonnes of inferred saprolite resource grading 2.16% nickel (1.5% cut-off) and 104 million tonnes of inferred limonite resources at 1.5% nickel (1.2% cut-off).

In a presentation posted on Xstratas website Wednesday, Pierce noted that laterites are the future of the nickel business and that Koniambos good resource base and very good grade made it a tier one asset for our business.

Added Shawn Usmar, Xstratas chief financial officer: There just arent that many sulphide deposits of a world-class nature anymore.

Construction of the mine and supporting infrastructure will start in the fourth quarter of this year. Production will begin in the second quarter of 2011 with full production getting underway in 2013.

Xstrata says a conservative long-term nickel price of US$4.60 per lb. would cover its cost of capital.

Xstata will be contributing a little over 80% of funding during the construction phase of the project. But it says its joint venture partner has in the last month or two indicated that it has the capacity and desire to contribute between US$500 million and US$700 million to the project over the next three or four years.

Xstrata also benefits from a 15-year tax holiday and a further five years at a corporate tax rate of 17.5% — half the national corporate tax rate of 35%. It is also exempt from new taxes or duties for the first 25 years after commercial production begins. Royalties are also waived for the first 25 years of the mines life.

Weve got a very well-defined 25-year ore body here but there is a significant resource and we believe a lot of prospectivity beyond that, Usmar said. Theres the potential to not only significantly increase the size of this operation in the years ahead, as dictated by market conditions, perhaps doubling it in a reasonable timeframe, but also to enjoy the benefit of multiple price cycles.

With Chinas seemingly insatiable appetite for stainless steel, the outlook for the industry is likely to remain strong in the coming years, Xstrata says. Sixty-seven percent of the worlds nickel supply is consumed in stainless steel production and Usmar pointed out that the demand for stainless steel is in excess of 6%.

According to a Bloomberg report on October 18 citing London-based metals consulting company CRU, demand for nickel will rise at a 4.6% annual rate through 2011 because of consumption by stainless-steel makers.

Usmar added that an important feature to highlight in terms of Xstratas prospects is the inability of the nickel industry in a supply-constrained environment to meet the demand that the market has seen over the last ten years.

The analysis suggests this industry has quite consistently missed the expectation by the order of about 3% of global production or 45,000 to 50,000 tonnes in recent times and thats a sign of the inability to deliver on some of the green-field projects, Usmar said. At the same time, brownfield additions hold marginal addition to nickel supply, Xstrata believes.

All of that is good news for nickel prices. According to Reuterss long-term base metals price poll released in October, consensus long-term nickel prices range from JP Morgans estimate of US$5.44 per lb. to Barclays US$8.62 per lb. to Goldman Sachs US$10.43 per lb.

You dont have to have been in the industry for long to have seen what a year like this does for a commodity like nickel in terms of incremental cash, said Usmar. There should be — over the next fifty years or so — at least a repetition of what weve seen.

Three-month London Metal Exchange nickel closed the days floor trade at $32,498 per tonne, up from Wednesdays close of $31,800 per tonne.