SIRIUS Resources is within weeks of turning the first sod at its $473 million Nova nickel-copper-cobalt project in Western Australia’s remote Fraser Range.
The start to Nova’s development could be a rare event in 2015, such is the scale of the pullback by the broader resources sector in response to commodity price weakness.
That Sirius is about to drop the flag on the start to development, while others in the industry have gone weak at the knees, is due to the stellar quality of the orebody, set to become one of the lowest-cost nickel producers in the world (after credits for its copper and cobalt).
But serendipity has also been at work, initially with the discovery itself, which can be traced back to the hunt by millionaire prospector Mark Creasy in WA’s outback for space junk after the US space station Skylab crashed to Earth in 1979.
Creasy figured the remote Fraser Range location could be prospective for nickel and was later to peg the ground, since parlayed into a 35 per cent stake in Sirius, which has gone from penny dreadful explorer ahead of the Nova discovery to the $1.05 billion development company it is today.
Sirius managing director Mark Bennett told The Weekend Australian that Skylab’s crash to Earth has not been the end to the run of serendipitous events surrounding the discovery, and Sirius’s march to first production.
“It is somewhat surreal the way the planets have lined up for us,’’ Bennett said. He explained that because of the 2011 end to the decade-long mining boom, finding Nova when Sirius did has also proved fortuitous.
The availability of quality skilled labour and professionals for the project has improved markedly since the boom began to deflate. Pay and conditions demands have all become more sensible, as have contractor rates. Lead times for materials and equipment have also greatly improved as demand from competing projects dries up, and the end of the boom has dragged the dollar down to revenue-boosting lower levels.
Continuing the lucky run, a surge in nickel prices in the first half of 2014 in response to an Indonesia ban on nickel ore exports allowed Sirius to have a sweetly timed equity raising ahead of its recently completed project finance package.
On the flip side, nickel prices have weakened since. But Bennett argues that that, too, is good luck as the company won’t produce its first nickel for close to two years.
Starting the development later this month — subject to the issue of two final permits — will put Nova on a pathway to first mining in the second quarter of 2016, and its first production late in 2016.
“Two years ago when we found Nova people said, ‘Great, but it is nickel, who cares about nickel?’,’’ Bennett said. “Our response was that was exactly the time we wanted to be finding it as cyclically we will hopefully be producing in to the nickel upswing.
“The Indonesian ban happened and it was an 11th-hour reprieve for some of the high-cost producers. But our concern with that was that it might run too hot too quickly, and that the bubble might burst before we got to produce any nickel.
“So the tempering of that upward trend that we have with the nickel price coming off for various reasons is exactly what we would have hoped for.’’
Prices for the stainless steel ingredient averaged $US7.70 a pound last year, up from $US6.80 in 2103. But the year-end price of $US6.84 was barely above the 2013 average. Even so, Credit Suisse and others are calling the price higher this year ($US8 a pound) and next ($US9.65).
Bennett said that as Sirius would not produce nickel for two years, and that predictions were that it would be a two to three-year time span in which nickel prices would go up, the current low price was “great for us from a fundamental perspective’’.
“Obviously from a share price perspective it hurts sometimes. But all indications are that the Chinese nickel pig iron industry isn’t going to relocate to Indonesia as quickly and as cheaply as people first suspected, and replacement supplies from the Philippines are not ultimately a long-term substitute,’’ Bennett said.
“And although the London Metals Exchange stockpiles haven’t dropped because of that, they ultimately will.
“In the end, we would like to see a longer and slower price change rather than any kneejerk price increase like we had in the first half of 2014.’’
The feasibility study into an initial 10-year mine life at Nova estimated all-in sustaining costs of $US2.09 a pound, making Sirius the best of its ASX peers and ranking Nova in the lowest quartile of the global cost curve for its annual output of 26,000 tonnes of nickel, along with 11,500 tonnes of copper and 850 tonnes of cobalt.
Despite the recent weakness in nickel prices, Sirius shares have put on 16 per cent to $2.60 in the last couple of weeks. The rise followed the completion of a $440m project finance facility with four tier-one banks for Nova’s development, all at a time when finance has become hard to secure by resources companies.
“It was the low-cost nature of the project and its long life that got all the banks to be very enthusiastic to do the deal,’’ Bennett said.
Sirius chief financial officer Grant Dyker said the project was an easy lend for the banks, given the cashflow cover that modelling on very conservative nickel prices provided. “We had more than 20 expressions of interest across the full financing landscape of products, from project finance through to term loans, and high-yield bonds and all the rest of it,” he said.
“With that competitive landscape, the advantage was back with us to drive terms.”
Dyker said the appetite of lenders for new resources projects was a case of horses for courses.
“If you asked a bank today to do a financing in iron ore it might be challenging, and they might not be interested,” he said. “But some of these guys are still open for gold, base metals and certainly good nickel projects.’’
SIR Price at posting:
$2.58 Sentiment: Buy Disclosure: Held
