article on lanfranchi project

Sally Malay picks up last Kambalda cast-off
By: Peter Gonnella
Posted: '23-JUN-04 06:58' GMT © Mineweb 1997-2004

PERTH (Mineweb.com) -- Emerging nickel stock Sally Malay Mining [ASX:SMY] has struck a timely deal that could help catapult it into the top league of Aussie-based nickel miners.

While it might be seen to be paying towards the upper end of the scale for the dormant Lanfranchi underground mine and associated Tramway tenements, Perth-based Sally Malay has clinched the last of WMC Resources’ remnant Kambalda nickel resources when the nickel price has zoomed past US$15,000 per tonne again (up more than 42 percent on the calendar 2004 low touched just last month of US$10,530/t) on the back of tightening market fundamentals and the return of heavy speculative interest.

Sally Malay reported that attributable nickel production from its new Sally Malay mine, which is due to be commissioned in a few weeks, and the Lanfranchi project, both in Western Australia, is predicted to reach a combined total of around 15,000 tonnes of nickel by 2006, which would place it behind only WMCR, BHP Billiton, Minara Resources and LionOre Mining International as the fifth largest Aussie-based nickel producer – albeit for a short period unless Sally can expand mineable reserves and sustain or increase that production level.

The Lanfranchi asset is costing the joint venture of Sally Malay (75 percent stake) and Donegal Resources (25 percent) A$26 million in staged payments, a price according to Macquarie Bank analyst John Santul that’s “close to full (as it was expected to be) but does not appear excessive”.

Based on an inferred resource of 1.16 million tonnes grading 2.6 percent nickel for a contained 30,345 tonnes of nickel, Sally Malay and Donegal are buying Lanfranchi for the equivalent of about A$855 per mining inventory tonne. “This purchase price is considered fair in light of previous WMCR Kambalda nickel mine sales,” which have ranged from A$580 to A$1,000 per tonne of mining inventory, Santul’s research showed.

The JV is likely to fund the Lanfranchi acquisition and preliminary working capital requirements via a debt facility of approximately A$21 million, cash reserves, project cash flow and further equity if needed.

From its initial production guide for Lanfranchi, Sally Malay anticipates a high conversion rate from resources to reserves. It envisages Lanfranchi will be capable of producing about 25,800t of contained nickel over four years commencing in January 2005, not taking into account exploration potential.

In addition, the company expects to produce an annualised 7,800t over an initial five and a half years (for a projected total of 41,800t) from the Sally Malay operation with nickel-copper-cobalt concentrate shipments to Sino Nickel in China scheduled to start in September this year.

Santul is forecasting the Lanfranchi property could contribute an EBITDA of about A$20 million in the first full financial year of production and analysts suggest Lanfranchi could lift Sally Malay’s NPV by about A$0.10 per share (Macquarie’s pre-Lanfranchi NPV was A$0.98/share).

“Cash costs involved in mining the current resource base are anticipated to be A$4.00-$4.50 per pound,” he estimated.

Since December 2000 WMCR has been systematically disposing of the old Kambalda mines, which have generated roughly A$100 million in sale proceeds and in most cases have become company-makers for the nickel players who have acquired them.

Those beneficiaries include Mincor Resources and Independence Group. As part of the divestments (including Lanfranchi), WMCR has entered into offtake agreements covering all output from the cast-offs of Kambalda – an area that sparked the wild Aussie nickel boom of the late 1960s – which in turn is processed at the group’s Kambalda concentrator facilities.

These ore toll treating and concentrate purchase arrangements are designed to be a win-win situation for the miners and WMCR, in this instance, the smelter and refiner as they provide the opportunity for both parties to participate in nickel price upside.

Two of the possible perceived downsides for Sally Malay are that quite a chunk of additional capital will have to be spent to redevelop Lanfranchi despite the established mining infrastructure and that the company isn’t fully leveraged to the nickel price.

“Macquarie initially estimates recommissioning and development capital of around A$15 million,” Santul told Mineweb. And against the background of a continued strong nickel price environment over the next couple of years according to most analysts, Sally Malay had to take out some hedging for the Sally Malay development under the requirements of its A$50 million senior debt financing package with Macquarie Bank and Standard Bank London, comprising 7,000t of nickel at US$10,888/t and at an Aussie currency exchange rate of US$0.6885, leaving 83 percent of the Sally Malay project’s reserves unhedged.

Shares in Sally Malay have rallied this week and climbed another 5.5 percent today (Tuesday) to close at A$0.77, which represents a market capitalisation of about A$110 million.