Poseidon Nickel (ASX: POS) has emerged from a suspension to raise $3.8 million from commitments for pre-production activities at its Mt Windarra Nickel mine in Western Australia where plans for parallel gold production are also been considered.
Notably, the production of gold from tailings that are adjacent to Windarra offers potential for early cash flows at attractive costs of A$800 per ounce.
This offers attractive margins given that the current gold price is over A$1,470/ounce.
Poseidon also highlighted that the capital costs to restart mining at Mt Windara this year could be under $15 million primarily as a result of the investment made to date though it noted that this was an indicative estimate.
It added that it will be position to capitalise on what many institutions believe will be a strong market for nickel in the short and medium term.
The recently announced Indonesian nickel ore export ban has the potential to disrupt supplies of approximately 20% of the world's nickel ore. This could cause the structural nickel supply shortages predicted for 2016 to occur much earlier.
Nickel prices have already risen 7% from January lows and could continue to strengthen.
Poseidon raised the $3.8 million through a placement of about 54,285,715 shares priced at $0.07 each to strategic, professional and sophisticated investors.
This will be used to undertake essential activities prior to potential production start-up.
The company plans to update its Mt Windarra resource and reserve model to reflect all recent drilling and will also update its capital and operating studies.
Definitive Feasibility Study
Poseidon had in 2013 completed a Definitive Feasibility Study into commencing production at Mt Windarra and processing the ore through a concentrator to be built at the site.
An ore offtake agreement would allow Poseidon to, at least initially, avoid the high capital expenditure of a new plant.
The vast majority of infrastructure needed to restart the mine including adequate power, water, accommodation and mobile capital equipment are already available with just minor additional infrastructure required.
The decline to the ore bodies at Mt Windarra has been largely refurbished over the last 3 years although this will need to be completed if an ore offtake agreement is signed.
It is also reviewing the potential to commence gold production on site.
The gold inventory is in tailings adjacent to the Mt Windarra facilities and would be a standalone operation which could last for up to 6 years, yielding a total of over 50,000 ounces depending on the final design throughput.
This has been fully drilled to Reserve status and the current cost environment is expected to apply downward pressure on the previous $10 million estimate for the process plant.
Mt Windarra Underground Mine
Approximately 61% or 440,000tpa of the annual nickel ore production for the project is planned to be mined from the existing underground mine at Mt Windarra.
The balance of the ore feed will come from the Cerberus underground mine that was discovered by Poseidon in 2008.
Cerberus has a total Indicated and Inferred resource of 4.55Mt at 1.51% for 68,600 tonnes of nickel including a Probable reserve of 1.22Mt at 1.3% for 15,880 tonnes of nickel. The mining cost has been estimated at A$76/t in the DFS.
Poseidon had previous advised that it had received several offers for concentrate offtake from smelters and commodity traders which meet or exceed the payable pricing terms used in the DFS and remain under negotiation.
The board has elected Christopher Indermaur as its new chairman and appointed Robert Dennis, who was previously the company's chief operating officer, as a non-executive director.
Indermaur has been a non-executive director and chairman of the remuneration, nomination and diversity and corporate governance committees since April 2009.
Dennis' appointment enables the company to retain the in-depth knowledge he has of the Windarra Nickel Project and in particular the Mt Windarra mine where he was underground mine manager from 1980 - 1986.
With about $3.8 million raised for essential activities prior to potential production start-up, Poseidon Nickel is positioning itself to start mining at Mt Windarra.
Notably, the company is looking into the potential to commence gold production from the existing tailings, which offers the potential for early cash flow at attractive margins given the estimated capital cost of about A$800 per ounce vs the current gold price of A$1470 per ounce.
That the gold inventory has been fully drilled to a Reserve status and the process plant has been designed and independently reviewed in the DFS demonstrates the advanced nature of the project and which could last for up to 6 years, yielding a total of over 50,000 ounces is a game changer for Poseidon.
As is the estimate that the capital costs to restart Mt Windara could be under $15 million primarily as a result of the investment made to date though it noted that this was an indicative estimate.
There is much to look forward to for Mt Windarra with the Indonesian nickel ban expected to improve market conditions for the metal in second half of 2014.
Poseidon Nickel represents a rare opportunity to be an owner of the only 'new' nickel sulphide producer ready to meet expected supply shortfalls. This does not take into account the potential for steady cash flows at attractive margins from parallel gold production. The current market cap. of circa $38m, does not come close to capturing this upside for Poseidon.
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