Processing Delays Cloud Economic Outlook for Lunnon’s Nickel Mines
Lunnon Metals has completed a detailed Scoping Study on its Baker and Foster nickel sulphide deposits, highlighting potential economic viability despite ongoing uncertainty over processing arrangements. The study recommends sequential mining starting with the fully permitted Baker deposit, which remains profitable even at current nickel prices.
- Scoping Study completed with +/-30% accuracy
- Baker deposit fully permitted and economically viable at current nickel prices
- Foster deposit break-even at current prices, recommended for sequential mining after Baker
- Processing route uncertain due to Nickel West Kambalda Concentrator on care and maintenance until 2027
- Estimated funding needs of $25-30M for Baker and $55-60M for Foster, with assumed equity/debt availability
Overview of the Scoping Study
Lunnon Metals Limited (ASX, LM8) has released the results of a comprehensive Scoping Study on its Baker and Foster nickel sulphide Mineral Resources in Western Australia’s Kambalda district. The study, conducted to a +/-30% level of accuracy, updates previous assessments and provides a detailed technical and economic evaluation of potential underground mining operations at these deposits.
Underpinned by a resource base comprising 7% Measured, 84% Indicated, and 9% Inferred categories, the study applies a nickel price assumption of A$23,000 per tonne. It concludes that Baker is economically robust even at current nickel prices, while Foster is marginally break-even, supporting a strategy of sequential mining starting with Baker.
Mining and Operational Highlights
The Baker deposit, discovered in 2022 and fully permitted, is forecast to produce approximately 0.7 million tonnes of ore at around 3.0% nickel over a 4.2-year mine life. It is expected to generate a pre-tax free cash flow of about A$70 million and a net present value (NPV) of approximately A$50 million at an 8% discount rate. Foster, with a similar production target and a slightly higher grade of 3.3% nickel, has a longer mine life of 4.6 years but yields a much lower NPV of A$4 million, reflecting its break-even status at current prices.
Both mines will employ underground mechanised mining methods, including cut-and-fill and long-hole stoping, with cemented paste-fill to ensure ground stability. Infrastructure is largely in place, with Baker accessed via declines from the nearby West Idough gold pit and Foster requiring dewatering and rehabilitation of historical workings.
Processing and Market Uncertainties
A key uncertainty highlighted by the study is the processing route for the nickel ore. The nearby Nickel West Kambalda Concentrator, historically the primary processing facility for nickel sulphide ores in the region, remains on care and maintenance until at least February 2027. No binding agreements currently exist for processing Lunnon Metals’ nickel production, and the company assumes that Nickel West or a third party will exercise rights of pre-emption to process the ore in the future.
This uncertainty has led the Board to maintain the study’s classification at the Scoping Study level, without upgrading to a Pre-Feasibility or Feasibility Study, and to withhold Ore Reserves reporting until processing arrangements are confirmed. The company continues to explore processing options, including potential collaborations within the district.
Financial and Funding Considerations
The study estimates pre-production capital requirements of approximately A$27 million for Baker and A$57 million for Foster. The maximum negative cash positions are projected at just over A$30 million for Baker and just under A$100 million for Foster. Lunnon Metals assumes that funding will be available through a combination of equity and debt, supported by its strong cash position, clean corporate structure, and management’s track record in capital raising.
However, the company cautions that there is no certainty funding will be secured on favourable terms or at all. Development decisions will be contingent on a sustained improvement in nickel prices and the establishment of a processing route.
Strategic Position and Outlook
While Lunnon Metals remains primarily focused on its gold assets, the Scoping Study underscores the latent value of its nickel portfolio, particularly the Baker deposit. The company is positioned to capitalize on any recovery in nickel prices and processing capacity in the region. The study’s conservative assumptions, including separate mining of Baker and Foster without synergy benefits, suggest potential upside if operational efficiencies are realized.
Environmental and social assessments indicate minimal new disturbance is required, with existing infrastructure and permits in place. The company has also secured a Land Access Agreement with the Ngadju Native Title Aboriginal Corporation, providing a framework for community benefits and royalty arrangements.
Bottom Line?
Lunnon Metals’ nickel assets offer promising value, but processing uncertainties and funding needs mean investors should watch closely for the next strategic moves.
Questions in the middle?
- Will Nickel West restart the Kambalda Concentrator or will alternative processing agreements be secured?
- How will nickel price fluctuations impact the timing and viability of Baker and Foster mine developments?
- What funding strategies will Lunnon Metals pursue to finance the pre-production capital requirements?