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Thanks, MiningNews.net

Head down, tail up

Monday, June 14, 2004
RISING metal prices have made MPI Mines Ltd one of the sector's glamour stocks during the past 12 months. However, the time has come to deliver on promises made.

Cast an eye over the small-to-medium end of the Australian resources sector and it's hard to find a company as blessed with assets as MPI Mines.

It has an excellent mid-scale nickel mine in Western Australia called Silver Swan - where there is the potential to add to the production profile via the development of the nearby Black Swan openpit.

It has long-term exposure to the nickel market via its 80% stake in the huge Honeymoon Well resource north of Leinster. And it also produces gold via two mines: one in partnership with Herald Resources at Coolgardie, the other at Stawell at Victoria.

The plethora of riches have not been lost on the market who has warmed to the MPI story marching the market capitalisation up to as high as $200 million last year. It has fallen back since then (to about $180 million at press time on a share price of about $1.40), yet make no mistake, MPI is a stock of choice for investors wanting exposure to nickel in particular.

But like all investment stories there comes a time when upside can no longer be factored in and the company needs to get down to the business of delivering what it
has promised.

It's a fact not lost on MPI's managing director, Brian Phillips, who says candidly MPI currently has its "head down, tail up, doing what we said we would do."

At the Silver Swan underground mine that means maintaining tonnes and watching costs while the company's engineers and geologists look at expanding output via the Black Swan Disseminated openpit project – or BSD to use MPI company speak.

Silver Swan is forecast to produce 10,000 tonnes per annum of nickel in concentrates this calendar year and currently the mine is on target to do this. The March quarter yielded 2728t of nickel at an excellent average LME nickel price of US$6.64 per pound, however, higher treatment charges pushed the total unit cost of production up to A$5.71/lb.

Phillips says the quarter was an unusual one (the total unit cost in the December quarter was $4.53/lb) in that apart from higher treatment tariffs due to the higher nickel price, the company was streamlining its mining fleet from two fleets into one, there were vendor royalties to pay and ventilation in the mine was improved so that deep drilling programs could be conducted later this year.

"The current resource will support the current rate of mining for five years but we're optimistic that we'll find more ore," Phillips said. "The bulk of the work has been on the BSD where we've pre-stripped the pit and are on track to start milling in July.

We're targeting an extra 2,500tpa of nickel in concentrates. The BSD has a resource of 450,000t at 0.8% Ni and production costs will be in the order of A$4.20/lb."

While Silver Swan and the BSD are the short-term cash cows for the business it is Honeymoon Well that has the potential to transform MPI into a global nickel force.

With an indicated and inferred resource of 130 million tonnes at 0.8%Ni, this former CRA asset has the potential to ultimately produce 40,000t of nickel in concentrates per annum over more than 30 years.

Phillips says the reason CRA never turned the mine on was because it and former JV partner Outokumpu were trying to produce a high-grade concentrate of 20%Ni with low iron and magnesium ratios to suit Outokumpu's Finnish smelting operations.

"We're taking a different approach," Phillips said. "We're planning to produce a lower grade concentrate of between 6-12% but at a higher rate. We'll use our partner, OM Group's tried and tested HIKO process."

MPI's modelling is seeking a 15% rate of return on a 40,000tpa operation using a long-term nickel price of US$3.20/lb and a $A0.68 exchange rate.

Before considering how to get the large amount of capital needed to develop such a big mine (the start up of WMC's Mt Keith operation was $400 million and there has been expensive expansions and modifications since), MPI plans to mine the high-grade eye of the deposit called Wedgetail which has a resource of 800,000t grading 7% Ni. This will be a four to five year underground project producing about 10,000tpa of nickel in concentrate per annum.

"We'll make a final call on Wedgetail following a study review in the third quarter and finalisation of an offtake agreement," Phillips said. "We're still targeting the final quarter of 2005 as the start up date."

While MPI's nickel mines are closely watched by analysts given the high nickel price courtesy of rampant Chinese demand Phillips says it gets no value factored into its share price for its gold business.

MPI acquired the Australian gold assets of US-based partner Pittston (50% of Coolgardie and the remaining 50% of Stawell) for a bargain price of $1.5 million and a $2 per ounce royalty at Stawell in December last year.

Coolgardie has been expensive producer in its twilight years but that may soon change given that exploration during the last quarter unveiled a new gold lode below the Empress underground mine. Intercepts included 10.26m at 5.6 grams per tonne and 14.87m at 4.66gpt. The mine already has an existing reserve base of 110,000oz and production of 70,000oz has been forecast.

While Coolgardie is really small beer, Stawell is not. After sounding the death knell for the historic mine about a year ago, positive exploration work revealed a new discovery called Golden Gift which has 600,000oz of high grade gold.

"In April we told the market that we were determined to make Stawell into a turnaround story," Phillips said. "Total site resources are 1.4Moz and we are spending $2.6 million in the second half of this year to extend the resource base at Golden Gift.

"We see Stawell producing about 120,000ozpa and throwing off about $15 million cash per annum. To sell the assets today given the resources, plant, level of underground development and all the approvals etc we would never come close to realising full value, hence we're looking at building Stawell up again.

"Given that the market assigns us next to nothing for our gold assets I think we can't lose. It's early days but our geologists are very optimistic about the potential of the Golden Gift zone to the south and in terms of the Stawell Corridor we've demonstrated that our exploration model works."

While all companies speak of new exploration programs and potential mine developments, few have three on the go at once, let alone the funds to progress them without going back to the market.

That's MPI's big strength. At the end of the March quarter it had $43 million in the bank and was generating an operating cashflow of $25 million per quarter.

Providing nickel prices stays firm – and the fundamentals still look good despite the recent market malaise – then BSD, Wedgetail and Golden Gift will go-ahead again making MPI a terrific growth story. This is to speak nothing of the greater Honeymoon Well project.

Consequently, it's going to be a busy second half for the boys and girls at MPI. To borrow from Phillips: it's head down, tail up.

* This report, first published in the April/May 2004 edition of RESOURCESTOCKS magazine, was commissioned by MPI Mines