10 Base Metal Stocks to Watch in 2011 – Part 2

3. Mirabela Nickel Ltd. (TSX:MNB)

By the end of 2008 Nickel prices had fallen by 80% from their May 2007 high of just over (US) $52,000 per tonne. In the first half of 2009, in the midst of the economic crisis, around a quarter of all nickel production from 2008 was suspended. Major producers such as Norilsk Nickel, BHP Billiton, Vale Inco and Xstrata all had to curtail production. Since then, prices have stabilized; nickel currently trades on the London Metals Exchange for US$26,605 per tonne.

Mirabela’s Santa Rita mine in Brazil feeds a traditional nickel sulphide concentration plant.

Mirabela Nickel’s focus is its Santa Rita project in Bahia, Brazil. The company says the mine is expected to be among the largest open-pit nickel sulphide mines in the world, with an estimated life of 23 years. Proven and probable reserves are reported to be 121 million tonnes at 0.60% Ni (726,000 tonnes of contained nickel); and, the company’s nickel sulphide concentration plant produces metal concentrate (nickel-copper-cobalt) containing approximately 14% nickel.

Mirabela has off-take agreements covering 100% of its nickel production until December 2014 with Votorantim Metais, a Brazilian mining company that is the world’s sixth largest nickel producer worldwide. In addition, the company has an agreement with Norilsk Nickel, the world’s largest producer. Votorantim takes delivery at the mine site and then trucks the concentrate to its Fortaleza de Minas smelter in Brazil.  Mirabela ships the concentrate to Norilsk CIF Rotterdam where it is then transported to Norilsk’s Harjavalta refinery in Finland. Payment is determined based on the metal content of the nickel concentrate produced and market metal prices.

Unfortunately, Santa Rita’s slower than expected production ramp-up led Mirabela back to the equity market. On April 15th, 2011 the company announced the closing of a US$395 million of 8.75% senior unsecured notes. Once released from escrow, Mirabela intends to use the net proceeds to pay down its senior and subordinated debt facilities, to make prepayments in connection with the termination of certain commodity call options, interest rate hedging and foreign exchange hedging, to provide further general working capital and for general corporate purposes.

Standard & Poor’s rated the notes ‘B-‘ whereby S&P credit analyst Thomas Jacquot said, “The ‘B-‘ corporate credit rating reflects our view of Mirabela’s lack of geographic and revenue diversity, which stems from the operation of a single site in Brazil that is almost exclusively focused on the extraction of nickel, a product that has historically experienced high price volatility.” He went on to say, “We believe, however, that the combination of performance to date in the ramp-up of the Brazilian mining operations, the company’s adequate liquidity, and the experience of the management team will partially offset those weaknesses. In addition, we expect performance and profitability to improve during 2011, provided nickel prices are maintained at current levels and the company is able to deliver its remaining capital expenditure on time and budget.”

In response to improving performance at the Santa Rita mine in 2010, Argonaut Securities analyst Troy Irvin said, “…the improved plant recoveries demonstrate that the ramp-up challenges presented by the transitional ore can be overcome, with the longer-term prize intact, that is, a low-cost, long-life, large disseminated nickel sulphide asset.” While BMO Capital Markets analyst David Radclyffe was a little less optimistic, saying that Mirabela’s improved operational performance was encouraging but that consistency really needs to be demonstrated over several quarters.

4. Rathdowney Resources Ltd. (TSXV:RTH)

Are we on the cusp of a zinc shortage? Around the world, almost 2.4 million tonnes per year of zinc mine production will close between 2011 and 2016. The Skorpion mine in Namibia, the Tara and Lisheen mines in Ireland, the Perseverance and Brunswick mines in Canada and the Cerro Lindo operation in Peru, and several others, are soon to be exhausted and closed. With increasing demand projected by many industry experts, some think the zinc market profile may become very tight, particularly from 2012-2016.

Hunter Dickinson (HDI), the largest private mining group in Canada, shares that opinion. HDI, based in Vancouver, is a diverse operation with experience around the world. Over its quarter-century of existence the group has explored for mines, developed them, and has gained expertise in project engineering, project financing and partnering.

In 2007 HDI subtly shifted its corporate development strategy. The new strategy focused on building and maintaining a value-added interest in a portfolio of mineral companies. After the briefest of pauses during the economic downturn, the strategy was fully implemented last year. From the top down, Hunter Dickinson is bullish on base metals. HDI President & CEO Ronald Thiessen recently noted, “While many continue to temper optimistic views on the global economy with a sense of caution, it is hard to argue that copper and other base metal commodity prices are strengthening at a surprisingly fast rate – exceeding predictions of pundits and investors alike.”

HDI now has five companies under management, including a 30% interest in Heatherdale Resources (TSXV: HTR); a 23% interest in Curis Resources (TSXV: CUV); a 41% interest in Northcliff Resources (private); a 41% interest in Constantia Resources (private); and, an 11% interest in Rathdowney Resources. In 2007 Hunter Dickinson invested $7 million privately in Rathdowney which, at the time, had secured a large prospective lead-zinc land package in Ireland.

Rathdowney’s property in Poland is located in the Upper Silesia industrial district near the government owned Boleslaw zinc smelter.

When the economic crisis hit in 2008, Rathdowney’s management team realized that a pure exploration play would likely not attract much attention from the investment community. Instead, the company set out to secure a more senior project. Already established in Europe, Rathdowney turned its attention to Poland, and its well know Upper Silesian lead-zinc bearing zone. The company was able to secure in mid-2010, after considerable effort over a two year period, the concessions for an advanced stage project with substantial historical resources of lead and zinc from the Polish government.

On March 17, 2011 Rathdowney completed its reverse takeover of Coreland Capital, a shell company (CPC) listed on the TSX Venture Exchange. Concurrent with the takeover and in association with HDI, Rathdowney raised just over $34 million privately at $1.00 per share to develop their projects. The company has drill targets ready in Ireland and a work program established in Poland to maximize conversion of historical resources into NI 43-101 compliance. MiningFeeds.com connected with Rathdowney President & CEO John Barry from his office in Ireland to find out more about their projects – CLICK HERE – for the exclusive interview.

5. Western Copper Corporation (TSX:WRN)

When, on April 25th, Barrick announced an all cash offer of $8.15 for Equinox Minerals many, including Barrick’s shareholders, were more than surprised. In the two trading days following the announcement Barrick’s shares lost over five dollars, falling from $53 to $47.75, an amount that equaled $5.3 billion in valuation. Investors and analysts alike have expressed concerns about the Equinox acquisition. Some fear that adding copper will dilute the premium investors pay for gold stocks. Analyst David Christie at Scotia Capital, however, believes that Barrick will not lose its premium if the deal goes through. “We do not view 30 percent non-precious metals as an issue for a gold producer to retain its gold multiple.” The market still remains nervous since Equinox, on the surface, is primarily a pure copper deal and, if completed, the acquisition doubles Barrick’s anuually copper production to about 600 million pounds.

So why is the world’s biggest gold mining company interested in copper? Barrick cited scarcity of opportunities of this size and quality (Equinox’s Lumwana Copper mine contains 4.5 billion pounds of copper reserves and another 5.5 billion pounds of inferred copper resources); and, the acquisition maintains the company’s gold exposure per share when factoring in Equinox’s Jabal Sayid copper-gold project which has estimated grades of 2.3% copper and 0.3 grams per tonne gold.

Apparently size does matter in mining. One company with a big asset is Western Copper with its Casino deposit in the Yukon Territories. The Casino deposit hosts 4.7 billion pounds of copper (M + I) and another 5.2 billion pounds of inferred copper resource; 7.9 million ounces of gold (M + I) and another 8.7 million ounces of inferred gold resource; along with substantial amounts of silver and molybdenum. In addition to the Casino Project, Western Copper has two other projects of merit in the Yukon and one in British Columbia.

CIBC World Markets analyst Ian Parkinson did an extensive review of TSX & TSX-V listed junior copper producers looking at 160 companies and more than 200 projects. The aim was to determine which players are most likely to draw the attention of large mining companies from China, India, Brazil and other developing economies. Mr. Parkinson ranked Western Copper 3rd on his list citing, “It holds significant gold, copper and molybdenum resources and reserves”.

F. Dale Corman, Western Copper’s chief executive officer is banging the same big drum. In an article by Bloomberg Businessweek last September Mr. Corman stated, “There’s a limited number of large deposits that are in the range the big mining companies are interested in. I expect to see a lot of people walking through our doors.”

Well the world’s largest gold producer certainly walked through Equinox’s door – more accurately crashed through it – some believe this is only the start of merger and acquisitions activity in 2011 and that this year will be another record-setting year for mining M&A.

For 10 Base Metal Stocks to Watch in 2011 – Part 3CLICK HERE.

Mike Luft

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