Is a Profitable Nickel Laterite (HPAL) Mine a ‘Black Swan’? – by Patrick Whiteway (Canadian Mining Review Blog – January 31, 2011)

Canadian Mining Review: Discussing ideas and issues related to mining in Canada 

Thoughts on mining nickel laterites inspired by two recent books: ‘Linkages of Sustainability’ and ‘The Black Swan.’  

It’s October 2008 and I’m relaxing in a second-row seat of an air conditioned tour bus. It’s crossing the Swan River in beautiful downtown Perth, Australia, when the driver suggests to passangers that the river should be called the Black Swan River. That’s because 300 years ago, he explains, European explorers first visited this part of Western Australia and saw black swans for the very first time. Up until then, the only swans they had seen were white ones. Seeing black swans on this wide, lazy river revolutionized their thinking.

Reading Nassim Nicholas Taleb’s best-selling book “The Black Swan,” could revolutionize your thinking. This book is all about highly improbable events. Taleb skillfully questions how we think about these events that turn out to have serious consequences. He calls them ‘black swans’ and as I’ll show here, they have a significant role to play in the mining industry.

As a Canadian mine engineer who has visited and written reports on many mines in Canada, I can tell you that improbable events, sometimes called simply luck, surprises, randomness or human error, have enormous consequences for the success or failure of many mines. The only successful, high pressure acid leach (or HPAL) nickel laterite operation in Australia is one of my favorite examples.

Before my visit to Western Australia, in October 2008, the only profitable nickel mines I had either worked in or visited were high-grade nickel sulphide mines. I had never seen a laterite nickel mine, let alone a successful one. So, to me, seeing a HPAL nickel laterite mine that operates at a profit was analagous to 18th century European explorers seeing black swans for the first time in this same part of the world.

I was very fortunate to be in this beautiful city – boarding a small chartered plane that flew its passengers some 700 km east to the Murrin Murrin mine.

Murrin Murrin is an open pit operation located in the hot, arid region of Western Australia, north of the historically famous mining town of Kalgoorie. Water is such a scarce resource here (the temperature was hovering around 40 degrees Celsius when I visited) it has to be pumped to the mine from many tens of kilometres away.

The mine is run by the publicly-listed company Minara Resources and 40%-owned by Glencore International, the largest metals trading company on the planet which, incidently, has designs to acquire even more nickel production capacity.

At the time of my visit, Murrin Murrin was operating at a head grade of 1.45% nickel and had a targeted production cost of US$4.50. That’s the total cost to the company for every pound of nickel that goes out the back gate.

More recently, Minara reported a profit in the first six months of 2010 of US$39.3 million on the sale of 8,707 tonnes of nickel (and 605 tonnes of cobalt), which represents 60% of total production from Murrin Murrin. Profits to Dec. 31, 2010 have not been reported, but total production from the mine in 2010 (to Dec. 31) was 30,514 tonnes of nickel and 2,018 tonnes of cobalt. Production during the period was affected by a 3-week shutdown.

The Murrin Murrin mine has proven and probable reserves of 196 million tonnes grading 1.05% nickel and 0.078% cobalt. In addition, there are 268 million tonnes of measured, indicated and inferred resources, grading 1.01% nickel and 0.074% cobalt. That’s enough material to keep the mine running for the next 50 years (at a rate of 40,000 tonnes per year).

There are many reasons why Murrin Murrin can profitably recover nickel from low-grade, lateritic soil. Collecting $40 million in an arbitrated legal settlement from the engineering firm that built the processing plant helped to repay the capital cost of the operation, but I wouldn’t go into that here.

Today, fantastic operating personell are the main reason this mine is profitable. A high nickel price, above US$12 a pound, is another. The ‘black swan’ that could change all that is a much lower nickel price. But before examining how that might be possible, lets look briefly at the operation itself.

The unique, technical reason for this operation’s success is how nickel is extracted from the oxide minerals in the soil. The technique is called high pressure acid leaching (HPAL for short) and involves mixing crushed ore in sulphuric acid at high temperature and pressure inside of titanium-lined pressure vessels. The nickel is brought into solution and is then won by electrolysis.

There are other methods that have been used successfully to recover nickel from laterites. Pyrometalurgical techniques, for example, are used in Indonesia and the Dominican Republic. These operations produce ferro-nickel as a final product.

But it’s here at Murrin Murrin over the past five years that operators have worked out the technical kinks in the hydrometallurgical HPAL process. This has make it possible for other mining companies to convince investors that HPAL can be profitably used to process low-grade laterites elsewhere in the world.

Over the next few years, some metals analysts are predicting that new laterite mines (so-called greenfields projects such as Vale SA’s Goro project in New Caledonia, Sherritt Internaitonal’s Ambatovy project in Madagascar and MCC Ramu Nico Ltd.’s Ramu project in Papua New Guinea, for example) will contribute 100,000 tonnes of ‘new’ nickel to world markets this year (2011). The US$4-billion Ambatovy project will produce it’s first nickel metal in July/August at the earliest, provided all the moving parts of the project work according to plan.

Success didn’t come easy for Murrin Murrin. That story began with Andrew Forrest a visionary Australian who thrives on profiting from highly improbable events, or ‘black swans’. He convinced Anaconda bond holders in the United States to put up $420 million to build the HPAL plant at Murrin Murrin — an amount that turned out to be insufficient.

Flying from Perth to Murrin Murrin, it’s easier to envision, than looking at textbook diagrams, how laterites are formed. In the world’s tropical climates near the equator and here in the arid region of Western Australia, the Precambrian bedrock has been weathered over the eons to create a 20-metre-thick layer of soil. (In Canada, that layer of soil would have, of course, been pushed south by glaciation 12,000 years ago.)

Our flight path took us over the lush green farmlands near Perth and then, as we progressed further inland to the east, the vegetation began to thin out until there was very little in the way of greenery left, just dry scrubland fit only for kangaroos.

By the time one arrives at the minesite, you can imagine how the landscape below has been cyclically flooded by heavy rains in the winter and then baked in the relentless summer sun in a never-ending cycle over geological time. The subsequent raising and lowering of the water table in annual cycles over hundreds of thousands of years has transformed the Precambrian sulphide mineralization below into the friable soils that are modern nickel-containing laterite deposits.

Today, water is a scarce resource, as is energy to run a nickel recovery plant.

Why are so many low-grade nickel laterite deposits being developed today? Population growth and demand for nickel-containing stainless steel in the world’s developing countries is the main answer.

As GDP per capita increases in China (from US$1000 in 2000 to US$7000 in 2009), so too has stainless steel use per capita (1 kg in 2000 to 5 kg per year in 2009).

At this pace, by 2020, it is projected that GDP per capita in China could be close to US$10,000 and stainless steel use could be close to 15 kg per capita, on par with that in Japan, South Korea and Taiwan.

Of the 24-million-tonne global demand for stainless steel in 2009, China accounted for nearly 40%. The growth in demand for stainless steel in China has increased at a rate of 21% per annum in the nine-year period from 2000 to 2009.

The amount of ‘new’ nickel used in China to make stainless steel has increased at a compound annual growth rate of 30% from 2003 to 2010. Meanwhile, in the rest of the world, primary nickel use has decreased at a rate of 3.4% to 4.3% in the same time period.

The ability of new nickel laterite operations to pay back the billions of dollars that were invested in them is questionable, however. That’s because they are exposed to ‘black swans’ — highly improbable events that have massive consequenses. The most important of these for laterite mines is a significantly lower nickel price.

Another  ‘black swan’ relates to production costs. When, as is now happening in the U.S., developed nations legislate some form of cabon tax or cap-and-trade system to reduce greenhouse gas emissions, then the mining of nickel laterites could unprofitable very quickly.

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