New investor gives European Nickel strong lift

European Nickel’s (LON: ENK) landmark tie-up with a leading mining investment house signals the "end of the pain" for the company and its investors, deputy chairman Simon Purkiss told Proactiveinvestors.

ENK this morning revealed Canada’s Hunter Dickinson (HDI) will invest US$60 million in the company in return for a 27% stake.

The cash will bridge the gap between the US$300 million bank financing it is seeking for the company’s Caldag nickel project in Turkey and the estimated US$350 million it needs to fully underwrite the venture.

The past 12 months have been challenging for European Nickel, which fell victim to a change in both mining and forestry law in Turkey.

"Last year was difficult. We managed to survive it. In 2010 we go from strength to strength. It is quite pleasing," Purkiss said.

The HDI investment will come in two tranches. The Canadian investment group will acquire US$5 million-worth of shares in a private placement immediately, followed by the major investment in the final quarter of 2010.
This will coincide with successful completion of talks with a consortium of banks that will eventually provide bank finance for Caldag.

The initial sale of stock will be completed at 32p a share – which compares to a Friday closing price of 17p – while the rump will be sold at 44p.

It is also a massive endorsement of the Caldag project, Purkiss said. "HDI have done due diligence and they are very comfortable on two sides: one there’s significant upside in the project and secondly that it is being continually de-risked."

However, the one major question mark hanging over Caldag is the award of a forestry permit, which is crucial to the commencement of work in Turkey. Both the bank financing and HDI rely on European Nickel landing the licence.

However, Purkiss reckons ENK could get the green light from the authorities as soon as September.

Looking at the Hunter Dickinson investment, he says European Nickel gains more than a much-needed cash boost. The tie-up gives miner access to whole array of expertise that would be difficult and expensive for a small miner to recruit.

"HDI takes stakes in companies where they think they can add value," Purkiss explained."They have around about 150 people we are able to draw on. So if we need a particular sort of service then they will source people from their team to come for either the short-term or longer term.

"We are talking geologists, engineers, metallurgists....They also bring a wealth of experience to sourcing alternate forms of financing for projects."

He also thinks that HDI may be able to help with the financing of ENK’s next big project Acoje, in the Philippines. "They are probably going to be able to bring various novel forms of finance to us.  They have raised three or four billion dollars for their group of companies in various forms including convertibles and equities ..... so they are very active."

However, it is unlikely HDI will be involved with the bank financing of Caldag, which is being led by France’s Societe Generale and Unicredit of Italy.

"We are pretty much on track with that (bank finance). But it is always nice to have expert advice on it," Purkiss said.

"If we can find some off-take financing then this will reduce the bank debt, which makes it just that little bit easier. They will be working alongside us on that. But the bank debt is coming on quite nicely."

The ENK boss says investment from HDI ought to speed up negotiations with the banks, which is due to be completed by the end of this year.

"We will put out an information memorandum at the end of August to attract in the rest of the club of banks. All indications from the other banks we’ve already canvassed suggests there is a lot of interest to participate," he added.

Separately, Purkiss said the group is still in talks with the Chinese over Caldag. As part of the original financing plan, European Nickel signed an off-take agreement with Jiangxi Rare Earth and Rare Metals Tungsten Group (JXTC), which has now expired.

"We are still talking to them (the Chinese). They are still interested in the product. But we have told them they are competing with the rest of the world," the ENK deputy chairman added.

The company also plans US$20 million private placing with its existing investors. "Our institutional  shareholders have been very supportive. So what we have been looking at doing is allowing some of them participate at the same share price as Hunter Dickinson," Purkiss said. "It would be nice to have (them involved) but it’s not required."

In its Morning Note to investors, London-based stockbroker Fairfax Securities said that the good news “indicates that there is growing interest and a desire to see the Caldag project built”.

The broker highlighted that if successful, the project would demonstrate the nickel laterite heap leach technology which is expected to provide a much cheaper and lower risk option for the treatment of nickel laterites.

The Çaldağ project is ENK’s flagship asset, offering near-term nickel production and will be one of the largest foreign direct investments in Turkey's mining industry.   With proven JORC reserves of 33.2 million tonnes at 1.13% Ni, the mine is targeting 20,000 tonnes per annum of nickel production over a 14 year life of mine.

Using low cost, environmentally friendly, heap leach technology, it anticipates a net cash operating cost of US$3.59 per pound of nickel and project capital expenditure of US$277 million, which equates to a capital cost per annual pound of nickel of US$6.12. The project's NPV is US$490 million, at a 10% discount rate, with an internal rate of return of 32.4% at a nickel price of just US$7 per pound.