HudBay's quest for a less complex nickel mining project--combined with Skye Resources need for cash and financing--has led to a proposed friendly US$477.5 million stock M&A deal announced Monday.
Located in Guatemala, the Fenix project has basic infrastructure in place, which is in remarkable condition, that should keep project capex costs are around $1.1 billion, HudBay CEO Allen Palmiere and Skye Resources CEO Colin Benner told analysts during a conference call Monday to announce the friendly takeover.
The transaction will be structure as a Plan of Arrangement or private agreement which automatically exchanges all Skye common shares on the basis of 0.61 HudBay common shares for each Skye share. Upon completion of the transaction, Toronto's HudBay will own 79.7% and former Skye shareholders will own 20.3%.
The attraction is the Fenix project, once an operating nickel mine in the 1970s, which had been earmarked by Skye for a restart of the mine and smelter until credit markets for junior mining company financing began evaporating during the current credit-crunch environment. Another attraction to HudBay is that Fenix relies on low risk ferro-nickel production using conventional smelting technology. All major permits have been received and basic engineering has been completed.
During their conference call, Palmiere and Benner asserted that most new large nickel laterite projects are scheduled to begin production between 2008 and 2011. If the projects are on schedule, which will result in what they claim will be a large structural deficit occurring between 2014 and 2015 for new nickel sources, which can be filled by Fenix.
The old mine is believed to have additional resources beyond its planned 30 year mine life and considerable exploration potential. Phase 1 calls for refurbishment and expansion of the mine and process plant for the ferro-nickel process that using conventional smelter technology. A smelter is already on the property.
Phase 2 requires the construction of a $343 million to $400 million power plant. A possible future third phase would accommodate a hydromet project, requiring construction of a hydromet plant and a reconfigured mine plan so that material is processed by hydromet rather than smelting.
Average nickel production during the ferro-nickel phase is expected to average 44.4 million pounds annually at a cost of $3.50/lb.
Vale Inco has a production interest and sales agency agreement with Skye Resources, which will probably carry into a HudBay acquisition since Vale Inco is represented on the Skye board of directors, which unanimously have voted in favor of the Plan of Arrangement with HudBay. Including support from two yet to be identified institutional shareholders, it is estimated that 42% of Skye shares are also committed to the deal.
The Globe and Mail identified BHP Billiton with 9.5% and Vale with about 11% of Skye's shares. The government of Guatemala owns 1.8% of Skye.
The private placement keeps Hatch Engineering and current construction management teams in place and initiates project design and construction ramp up. It provides funding from a HudBay that was under pressure to use some of its $781 million cash balance for acquisitions that would ease the base metals producer's exposure to zinc prices. Skye needed money to pay for large mining and processing equipment expenditures it has already ordered.
The combined market cap of the merged HudBay and Skye could be as high as $2.3 million. Despite the projected $1.1 billion capex, Palmiere told analysts Monday that he expected a very quick payback for the project due to today's nickel prices.
He also suggested that HudBay is seriously considering selling some of its significant silver production as a funding alternative to pay for the transaction and development of silver projects.
Benner assured analysts that the Fenix project is enjoying a good relationship with the Guatemala Government, including trying to ease the ongoing issue of illegal land occupation in Guatemala. Skye is striving to separate land that is really crucial to the operation of Fenix from land that is now being illegally occupied but isn't needed.
Skye would like to encourage the so-called squatters-whom they view to be poor people who simply require land and housing rather than illegal occupants of the property--to legally acquire their land through sweat equity and other programs that would encourage land procurement along with housing.