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African Eagle Resources plc – Clarity on Dutwa Improves with each Milestone. Speculative Buy with 56p Target (up from 41p).

The release of an updated economic model on the Dutwa Nickel project marks another milestone on the road to African Eagle establishing operations in Tanzania. Announced on the 14th of March, independent engineering consultant Simulus’ second iteration provided a comparison between heap leaching and atmospheric agitated tank leaching and a 3Mtpa (million tonnes per annum) and 5Mtpa operation.

The establishment of a heap leach operation is estimated to cost less than that for tank leaching for throughputs of either 3Mtpa or 5Mtpa, but operating costs are lower for tank leaching. This benefit of tank leaching is sufficient to give it a significant advantage in terms of NPV (net present value – at 10% p.a) and IRR (internal rate of return), and thus tank leaching is currently the leading processing technology candidate. A final selection on which process Dutwa will use will only be made after bench-scale and pilot-scale metallurgical test work is completed. These test are currently underway as part of the project’s pre-feasibility study due for completion by October 2011.

With the price of Nickel currently in excess of $11.50 / lb, Simulus’ use of $10 / lb and $8 /lb in Dutwa’s analysis gives plenty of room for manoeuvre. Thus, looking at the economics of each of heap and tank leach methods in turn, a 3 Mtpa tank leaching operation at a nickel price of $8 /lb produces an NPV of $385 million, post tax IRR of 20%, CAPEX (capital expenditure) of $600 million and OPEX (operating expenditure) of $3.37 /lb nickel. These figures rise to an NPV of $475 million, post tax IRR of 20% and CAPEX of $840 million, while OPEX falls to $3.30 /lb with a 5 Mtpa operation. At the higher nickel price of $10 /lb, CAPEX and OPEX costs are the same as above, but NPV and IRR both increase to $870 million and 29% respectively for a 3 Mtpa operation and $1,125 million and 31% respectively for a 5 Mtpa operation.

A 3 Mtpa heap leach operation at a nickel price of $8 /lb produces an NPV of $260 million, post tax IRR of 17%, CAPEX of $550 million and OPEX of $3.56 /lb. These figures rise to an NPV of $310 million, post tax IRR of 17% and CAPEX of $770 million, while OPEX falls to $3.47 /lb with a 5 Mtpa operation. At the higher nickel price of $10 /lb CAPEX and OPEX costs are the same as above, but NPV and IRR both increase to $705 million and 26% respectively for a 3 Mtpa operation, and $920 million and 27% respectively for a 5 Mtpa operation.

In all cases the most significant operating costs are the use of reagents and transportation which comprise in excess of 46% and 28% respectively of total OPEX in each scenario. The analysis so far has only looked at the production of a mixed nickel-cobalt hydroxide intermediate product and transported by road to its downstream market. These assumptions will be tested as part of the pre-feasibility study which will look at the economics of producing a mixed sulphide intermediate product and the use of rail as its primary transport method.

Working backwards from first production slated for the first quarter of 2015, construction is due to take place between 2013-2014, the completion of Dutwa’s definitive feasibility study at the end of 2012, financing throughout 2012, completion of the pre-feasibility study by October 2011, and the completion of a JORC indicated resource and commencement of the environmental and social impact assessment in the second quarter of 2011.

Managing Director Mark Parker acknowledges the significant economic benefits of a 5Mtpa operation, “…but under present conditions, logistical challenges are likely to make 3Mt per annum a more realistic production target. (However) throughput could be scaled up if proposed infrastructure developments allow.”

One of the standout statistics in the current economic model is the difference a $2 /lb increase in the price received for nickel makes to project returns. This highlights both the upside potential (receive a price above $10/lb) and downside risks (receive a price below $8 /lb) African Eagle bears in operating Dutwa alone. While financing plans can change a lot in 12-18 months, debt financing has not been considered in Simulus’ model. There is still much to work out, but each and every milestone reached increases project clarity and de-risks potential new investment. Based on these updated figures, GE&CR increases its target price from 41p to 56p and retains its speculative buy recommendation.

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