African Eagle update sets the scene for a transformational year

Kicking off what is expected to be a busy period of activity, African Eagle Resources (LON:AFE) this morning unveiled a material upgrade to the economics for the Dutwa nickel project in Tanzania.

It is one of a series of landmarks and announcements that will come thick and fast in the next 12-18 months as Dutwa moves from pre-feasibility phase of development to a full-blown bankable feasibility study.

The next milestone for the company is the planned upgrade of the Dutwa resource from the inferred to indicated category expected in Q1, 2011. 

What follows is a whirlwind of activity, including the results of bench-scale metallurgical tests on a bulk sample currently being shipped to Perth.

Then in the third quarter of 2011 we will get the results of the aforementioned pre-feasibility study.

Today’s announcement gives more granularity than the scoping study published 18 months ago. 

And it hopefully underlines the potential of Dutwa as the company continues to build investor interest in the project.

Work by the Perth-based consultants Simulus gives a pre-tax net present value of US$650 million at a discount rate of 10 percent and a nickel price of US$8 per pound. 

It means the project would take just five years to cover its capital costs, with the initial capex estimated to be in the order of US$600 million.

The life of mine earnings, meanwhile, are forecast to be US$8.2 billion based on an annual average output of 23,000 tonnes of nickel concentrate and 582 tonnes of cobalt over 26 years.

African Eagle estimates the mine itself can be up and running by 2015.

The re-assessment of the prospects of the mine by Simulus takes into account the increase in JORC resource from 32 million tonnes to 98 million tonnes. 

It also draws on work carried out by Snowden Mining Industry Consultants and AMEC Minproc.

“We are moving along the right track, we hope people see that,” finance director Bevan Metcalf told Proactive Investors.

“We are upgrading the resource to the indicated category soon. So any lingering doubt we have what we say we’ve got will be dispelled.”

What African Eagle has presented today is essentially a base case with potential to reduce the initial capital expenditure and operating costs, analysts said.

This may rely on factors out of management’s control such as an improvement in Tanzania’s infrastructure in order to move the mine’s output from road to rail or the ability to treat the nickel laterite using ultra-cheap heap leach techniques.

Elsewhere, there is scope to raise throughput from three million tonnes per annum and the potential to increase in the overall resource.  

“These results are encouraging and we look forward to ongoing developments as work continues more accurately defining the optimum project scope,” said Fairfax mining analyst John Meyer. 

“Further metallurgical work will also be of great interest as this will give confidence in the best way to process the ore and that it is potentially a high quality nickel laterite ore.  

“We recommend this to investors seeking exposure to early stage nickel developers, but we note that this is relatively early stage and that nickel laterite stories often face considerable difficulties, so not without risks.”

Ocean Equities, meanwhile, says the new model, based on a break-even of US$6 a pound of nickel, will continue to be refined and analyst Christopher Welch predicts the economics will improve between now and Q3 next year.

His colleague Justin Tooth has identified African Eagle as a small-cap client company with the potential to double in value in the next 12 months based purely on news-flow. 

With £3.5 million on the balance sheet the company will have to come back to the market at some point next year to raise the funds necessary to fund the definitive feasibility study.

Finance director Metcalf recognises the company will need to bring in additional people with the right skills and experience to take the project forward.

He says the current plan is to take the mine into development and ultimately production and “we are still looking at a number of processing options to produce the optimum economic return”. 

But he also reveals that “we have had a lot of interest in the project and are talking to various interested parties”.

“Obviously we will be looking to see what’s best for shareholders,” Metcalf added.

“The big fat cigar is getting someone coming in and paying a top price for the project”. 

“But we are not sitting on our laurels. Our interest at the moment is to take Dutwa as far as we can.”