Nickel producer Western Areas has signed an offtake and $45 million financing agreement with BHP Billiton, with the funds earmarked for mine development and plant expansion.
The company, which operates the Flying Fox nickel mine in the Forrestania region of Western Australia, has signed a heads of agreement to sell up to 10,000 tonnes of nickel concentrate to BHP Billiton per year.
The nickel miner said the contract represented only part of its planned output, with the company seeking another short term agreement for up to 15,000 tonnes per year from 2010.
Western Areas has a production target of between 20,000t and 25,000t of nickel from Flying Fox and Spotted Quoll from 2010
The company said it negotiated with a number of parties after offtake partner Norilsk placed its Lake Johnston nickel operations in WA on care and maintenance last month.
Western Areas has an agreement to supply concentrate to Norilsk as part of an existing ore tolling and concentrate purchase agreement, with an option, but no obligation, to terminate that agreement.
The nickel producer said it would retain the right to continue selling nickel concentrate from Flying Fox, in excess of that sold to BHP Billiton, to Norilsk under the terms of the original agreement.
"The new agreement provides significant benefits to Western Areas including terms which are an improvement over the existing agreement with Norilsk and substantial financing which can be directed towards increasing low cost nickel production at Forrestania," managing director Julian Hanna said in a statement.
Shares in Western Areas were still in a trading halt, with shares last trading at $3.29.
The announcement is below:
The Board of Western Areas is pleased to announce that the Company has executed a Heads of Agreement with BHP Billiton for a contract to sell up to 10,000 tonnes of nickel in concentrate per annum to a total of 75,000 tonnes nickel from the Forrestania Nickel Project. BHP Billiton has rights to negotiate an extension to the term of the contract. The new agreement with BHP Billiton is subject to final approvals and bank consent. Details of the contract are confidential. The product to be sold to BHP Billiton will be a high grade blended concentrate produced at the Forrestania nickel concentrator, initially from Flying Fox and Spotted Quoll ore.
Flying Fox mine is currently producing approximately 1,000 tonnes of nickel per month from the T1 and T4 ore bodies. A decision to proceed with development of an initial open pit mine at Spotted Quoll and to expand the capacity of the Forrestania nickel concentrator is expected early in the June quarter. Expansion of the plant is required to process Spotted Quoll ore. As a part of the offtake agreement, BHP Billiton will provide A$45 million in financing to Western Areas, the majority of which is intended to be used for early development of Spotted Quoll and the plant expansion. Repayment of the financing will start in July 2012 and is subordinated to the Company's senior lender, the ANZ Bank.
The 10,000 tonnes of nickel in concentrate per annum to be sold to BHP Billiton represents only part of planned production at Forrestania. Western Areas is targeting between 20,000 and 25,000 tonnes nickel from Flying Fox and Spotted Quoll mines from 2010. Depending on the nickel price, potential exists to develop the proposed Cosmic Boy, Diggers South and New Morning mines which could further increase production from Forrestania between 2011 and 2013. Preliminary site works have already been completed at Cosmic Boy and Diggers South.
Western Areas is seeking a short term offtake contract for the balance of between 10,000 to 15,000tpa nickel in concentrate to be produced at Forrestania, commencing in 2010.
As announced on 12 February 2009, Western Areas can elect to remove 40% of the Flying Fox concentrate from 1 April 2009 (Option 1) and 100% of the Flying Fox concentrate from 1 January 2010 (Option 2) from the existing offtake agreement with Norilsk Nickel. Western Areas retains a right to continue selling nickel concentrate from Flying Fox (in excess of that sold into the BHP Billiton contract) to Norilsk under the terms of the original agreement.
Western Areas Managing Director, Mr Julian Hanna said, "We think Western Areas represents a reliable long term nickel producer and we look forward to building a strong relationship with BHP Billiton. The new agreement provides significant benefits to Western Areas including terms which are an improvement over the existing agreement with Norilsk and substantial financing which can be directed towards increasing low cost nickel production at Forrestania".
Mr Hanna added "the agreement with BHP Billiton is consistent with the Board's earlier decision to split the Forrestania nickel sales into two contracts. This first contract is intended to lock in a long term revenue base for the Company. The other, which is yet to be negotiated, is intended to be a short term contract delivering more nickel concentrate on an annual basis". Flying Fox nickel concentrate (14% nickel grade) in Forrestania concentrate shed.