European Nickel looks west for financing

Shareholders in European Nickel (LSE:ENK) have been kept busy the last few days digesting two updates from the junior mining company. 

This morning European Nickel announced that project financing for the its key Çaldağ nickel laterite project in Turkey will be provided by a consortium of western banks – a new direction on previous discussions to forge a deal with a consortium of Chinese backers that was flagged by the company in March as a possible alternative financing route.

The would be nickel developer is looking to secure some $350 million in finance to develop a world class laterite mining operation to exploit Çaldağ’s JORC proven reserve of 33.2 million tonnes at 1.13% nickel (nickel content of 375,000 tonnes). 

It initially began talks with lenders from the People’s Republic after the company secured off-take and procurement agreements with Jiangxi Rare Earth & Rare Metals Tungsten Group Corp and China Tianchen Engineering Corporation respectively, who also committed to securing finance for the project.

However, more than a year into the negotiations the company has yet to conclude a formal deal with the Chinese backers, and after the recovery in global nickel prices, managing director Simon Purkiss said expiry of the agreement and the re-opening for business of the domestic credit markets had prompted the company to re-think its financing options.

"Whilst we worked hard to deliver the Chinese project finance, we could not go on indefinitely without a clear sign of commitment from the Chinese parties before our extension deadline,” Purkiss said this morning.

The company has now negotiated a term sheet with the putative lead arrangers of loan and will update the market when it has formally signed a mandate letter. “The signing of the mandate letter with lenders will show that the company is well on its way to obtaining the necessary debt finance.”

It is understood that a consortium could have the funds in place by the autumn.

As part of the original financing plan, European Nickel signed an off-take agreement with Jiangxi Rare Earth and Rare Metals Tungsten Group (JXTC) - this has now expired, leaving Purkiss and his team with the task of finding a new off-take partner.

One possible solution could be Australian mining heavyweight BHP Billiton (LSE:BLT, ASX:BHP), the original purchasers, before giving up this right, for a fee, so that European Nickel could sell the production to JXTC. With the off-take agreement with JXTC not being extended, the off-take now reverts to BHP who must decide whether they still wish to purchase it. However, even if BHP decided not to take the off-take, considering the strong recovery in demand for nickel, analysts are comfortable the company will be able to sign a new off-take deal in fairly short order.

Separately, Purkiss spoke for the first time yesterday about the revocation of the firm’s forestry licence in Turkey - which was announced late on Friday - calling it a ‘hiccup’: “Our forestry permit fell foul of Turkish law due to a technical legal conflict between the forestry law and mining regulations and the judge thought he had better play it on the safe side.”

European Nickel was hit by a court ruling last year relating to the issue of forestry permits to mining companies in Turkey that was previously understood to only have affected mining companies that had applied to the Ministry of Environment and Forestry since the ruling became effective rather than to permits already in issue. The company’s permit will be reinstated under the new mining law, which should be enacted by June 10.  The backlog of applications will then also be processed.

Purkiss seems fairly confident European Nickel will receive a permit within as little as a fortnight of petitioning the local authorities for it.

Shares in the company perked up 7% this morning on the financing update, after falling 23% on Friday on the back of the forestry permit news.

A bankable feasibility study was concluded in 2006, based on an operation producing 20,400 tonnes of nickel in concentrate per annum and 1,200 tonnes of cobalt. It calculated that at a nickel price of US$6 per lb, the project will generate US$50 million per annum in free cash flow when at target production.

Nickel is currently trading at just under $9.50 per lb.