understanding economic open pit nickel grades

As we wait for the assay results from Drake's 200m sulphide intersection in diamond drillhole TS006, a discussion of the difference between bulk-tonnage open-pit mining grades and low-tonnage/high cost underground mining grades may be useful. This should be helpful in evaluating those assay results when they come.

Firstly, the economic target at Granmuren is a bulk-tonnage open-pit nickel resource, with additional value to come from the associated copper and in particular the cobalt. This is typical of the economic nickel resources being mined in the Scandinavian deposits, although there are also high grade massive sulphide bodies present there, and these may also occur at Granmuren.

Two of the most encouraging things about the results from Granmuren so far are: 1. the nickel sulphide mineralisation appears to occur in bulk tonnages, ie. in more than one place, and over large intervals in each of the drillholes, and 2. that it starts just below the surface. This means it is beginning to look like a classic bulk-tonnage open-pit mining opportunity.

The problem that the Australian sharemarket has in understanding this is that the vast majority of Australian nickel mines are low-tonnage, high-grade underground operations such as those at Kambalda and Forrestania, so that Australian shareholders and brokers are only used to seeing the sort of high nickel grades that are necessary to make a profit in underground mines. Underground mines in Australia currently have incredibly high capital costs and almost prohibitively high operating costs, so that nickel grades have to be very high to make money on any underground mine. The sort of nickel grades being mined here underground are in the order of 3-5% Ni, and so these are the sort of grades that the market is used to thinking of as 'economic' and then getting excited about.

And if you think about it, sinking a shaft or a decline at tens of thousands of dollars a metre, and then sending down miners paid a thousand dollars-plus a day, on what is effectively part-time fly-in/fly-out employment, to hand-mine 3% nickel ore in narrow stopes using air-leg drills and jumbos, it is amazing that anybody makes any profit at all. Which is before you even start to think about the often appallingly high ground support costs when driving development through the frequently soft, fractured, soapy, water-charged serpentinite rocks that host a lot of the Australian nickel deposits. The only thing you can afford to mine underground is massive sulphide!

There are some low grade bulk tonnage open pittable resosurces here too, and I have mentioned the historic resource at BHP's Mount Keith as an example: 270 million tonnes at 0.6% nickel. If you say '0.6% nickel' to an Australian stockbroker and he will usually yawn, turn away and ignore you. But that grade in an open-pittable resource of that size is worth $100 a tonne and has a contained nickel value of $27 billion dollars. And that is why WMC/BHP hung onto that deposit, but gave away all the hard-to-mine, profitable, but overall low-value, small massive sulphides at Kambalda to start-ups like Mincor. The low grade, bulk-tonnage resource at Mt Keith is worth far more than all those scraps. It is a BHP-sized orebody, and makes the sort of profit that makes a difference to a company the size of BHP.

And that is the sort of orebody that the big-company men now in charge of Drake resources are after at Granmuren.

However, there is one type of bulk-tonnage open pittable deposit that the Australian market is very familiar with and that is gold. Small companies like Doray in the Eastern Goldfields and even Bulletin up at Halls Creek can certainly get a bit of a market kick from the discovery of a small, narrow vein, high grade underground gold deposit, but what the market is really looking for is a multi-million ounce, bulk tonnage, low grade, open-pittable gold discovery like Tropicana, Boddington, or one of the many multimillion ounce open-pittable West African gold deposits beiing mined by Australian companies. The brokers can tell exactly where the value is there when it's expressed in millions of ounces of gold, and they know just how low the grade can be and still make a handsome profit.

So if the market wants to evaluate the nickel grades of an emerging bulk-tonnage, low grade nickel deposit, the best way that it can do it is by comparing the tonnes and conatained metal value there to those of the equivalent open-pittable gold deposits that it is so much more familar with.

Generally a grade down to 1-2 grams/ton Au is mineable if there are sufficient tonnes.

Here are a few examples of grades from some of the bigger West Australian open pit gold operations:

Boddington: 1.0 g/t
Tropicana: 2.0 g/t
kalgoorlie Super Pit: 1.5 g/t
Telfer: 1.5 g/t
Paddington ( a smaller historical pit): 1.5-2.0 g/t

So an overall resource grade of 1.5 to 2.0 g/t Au will please the market, provided it is for a million ounce plus, low-cost, bulk tonnage open-pit mining operation.

3 g/t plus is real cream.


Looking at that in terms of (US) dollar value:

Gold price per troy ounce: $1,650
Grams per troy ounce: 31
Gold price per gram: $53

So, 2.0 g/t Au ore is worth $106 a ton

And a million ounce gold deposit has a contained metal value of $1.65 billion, quite a lot of which will be profit because bulk tonnage open-pit mining costs are so low.


So what is the equivalent bulok tonnage, open-pit nickel grade and contained metal value? Or in the case of Granmuren, nickel-copper-cobalt grade?


Well, here are todays $US metal prices:

Gold: $53/gram
Nickel: $17,000/ton
Copper: $8,000/ton
Cobalt: $25,500/ton


So in terms of contained metal value, 2.0 g/t Au is equivalent to $106/t, or:

0.6% nickel, or
1.3% copper, or
0.4% cobalt


And a million ounces of gold (31,000,000 grams) at 2.0 g/t is equivalent to:

15.5 million tonnes of 0.5% Ni (or any of the above equivalents).

And 15.5 million tonnes is a very modest tonnage for an open-pittable mining resource, particularly at the density of the Granmuren host rocks and sulphides, which is be about 4 tonnes per cubic metre. It would fit into a body 25m wide, by 300m deep, by 500m strike length, ie. well within the apparent dimensions of the Granmuren discovery, if you consider that the geophysical image gives an indication of minimal strike length.


Finally, it is worth considering the value of the Granmuren assay results to date from the less-sulphide rich zone intersected by hole TS003 and proably beneath there in hole TS004-extended:


The TS003 intersection of 11.6m at 0.5% Ni, 0.5% Cu and 0.05% Co from 54,4m depth is worth $137/ton.

In gold equivalent terms, it is equal to 11.6m at 2.6g/t Au. And that is a very impressive start.


And bear in mind that mining and labour costs are significantly cheaper in Sweden that in mining-boom Australia, and that this discovery has all the necessary infrastructure is already in place, unlike the desperately remote West Australian outposts of Telfer or Tropicana at the time of their discovery.


Within that TS003 intersection, the higher grade zone, of 3 metres at 0.73% Ni, 0.48% Cu and 0.07% Co is worth $180/ton.

In gold equivalent terms that is equal to 3.0m at 3.4 g/t Au.

So to summarise, if this were a shallow, open-pittable gold deposit, the market would understand the value of what has been discovered and reported to date much better and would be a lot more excited.

When it comes to interpreting the forthcoming assay results from Hole TS006 and the deep hole currently being drilled under it, a quick conversion of the nickel, copper and cobalt grades into gold equivalent grades and $/ton value will help to get a much better handle on what has actually been found.



And the upside of course is that these bulk-tonnage disseminated nickel deposits can run into not tens, but hundreds of millions of tons.

eg. that 270mt at 0.6% Ni historical resource at Mt Keith in Western Australia is equivalent to a 17 million ounce gold deposit at 2.0g/t Au. No exclamatiion mark required!

The big-company men running little Drake Resources are thinking on that sort of scale: they are chasing a 20m oz gold deposit at Tasiast South in Mauritania, and base metal and gold deposits of potential equivalent value in Scandinavia.

That is potential leverage!


End of geology lesson. Back to finger tapping on desk, waiting for those assay results..




Adding of course that the above discussion is simply intended as background geological information, never as any sort of financial advice, and I am not a finacial advisor.