Dynatec plans Madagascar production

A 60,000-tonne-per-year nickel operation at the Ambatovy nickel laterite deposit in Madagascar should be profitable, according to a feasibility study commissioned by Dynatec (DY-T).

Ambatovy, about 100 km east of Antananarivo, was purchased from Phelps Dodge (PD-N) in transactions between August 2003 and January of this year. Dynatec now has a full interest in the project, Phelps Dodge having taken shares in Dynatec in a deal in January.

Dynatec is shopping the project around to potential partners, with the intention of keeping at least a half-interest in the property.

The feasibility study concluded the project has reserves of 125 million tonnes grading 1.04% nickel and 0.1% cobalt, part of a resource of 134 million tonnes at the same grades, based on a 0.8% nickel cutoff grade. Another 39 million tonnes of low-grade material that did not meet the cutoff grade can be stockpiled and processed; it has average grades of 0.69% nickel and 0.06% cobalt.

The reserve is divided between two zones, Ambatovy and Analamay, which will be developed as two open pits, with truck-and-shovel excavation and no blasting. Laterite ore would be slurried down a 195-km pipeline to a plant site near Toamasina, Madagascar’s principal port city.

The pipeline, which descends 1,000 metres over its course, would need only one pumping station at its head. Water for the pipeline can be sourced largely from dewatering the pit.

The stripping ratio over the 20-year life of the project is 1.33, starting at 1:1 in the early years of production and rising to 2:1 as the pits deepen. The design uses a shallow slope (20) on the pit walls, though excavation walls from the 1970s are still standing at Ambatovy.

The low-grade material (included in the waste calculation for the two pits) would be stockpiled between the pits. It would provide a further six years of mine life after the pits are exhausted.

The plant uses a pressure-acid-leach (PAL) process with sulphuric acid leaching at 260C. Leached nickel and cobalt would be precipitated with hydrogen sulphide to produce a sulphide material, and this would be re-leached with oxygen before solvent extraction. The nickel and cobalt would then be reduced with hydrogen to produce a metal powder product.

The process is similar to that used in the Western Australian PAL projects, which were a conspicuous economic failure in their early years, more because of construction failures than because of their design. The surviving projects in Western Australia, Cawse and Murrin Murrin, are now in the hands of new owners; in Murrin Murrin’s case, operator Minara Resources has posted operating profits since its reorganization from the ashes of Anaconda Nickel.

Dynatec expects no problems with the process at Ambatovy, because the ore has a low magnesium content, the principal culprit in the metallurgical problems with early PAL plants. Gerry Bolton, Dynatec’s vice-president, metallurgical technologies, told The Northern Miner that while the PAL process differed little from the one used at the Western Australian projects, Ambatovy ore had been “very straightforward.”

The project has a massive capital cost: US$2.3 billion, about half of which is required to build the plant. The mine is estimated at US$157 million, and the pipeline, at US$156 million.

The capital cost estimate includes US$287 million in infrastructure costs, some of which are improvements to the port and rail lines at Toamasina. That includes an extension of one pier to accommodate bulk carriers of up to 30,000 tonnes dead weight.

There is no agreement yet for the government of Madagascar to cover some of the infrastructure costs, but Dynatec obviously hopes for some agreement that recognizes the general benefit of upgraded facilities.

Some approvals for the project are in place already. An environmental assessment is in preparation and the government has already issued the terms of reference for it. Consultants for Dynatec have delivered an interim assessment to the Office national pour l’environnement, and a final study is due by the end of the year. There have also been 80 public meetings.

Production costs are expected to be low, around US$3,650 per tonne nickel (US$1.66 per lb.). Production costs fall to US$1,475 per tonne (US67 per lb.) after including credits for cobalt, at US$10 per lb., and ammonium sulphate (a byproduct of the hydrogen-reduction stage of the process) at US$60 per tonne.

The byproduct credits are conservative. Cobalt prices are now around US$18 per lb. Ammonium sulphate markets in Africa and the Indian Ocean generally pay at least US$100 per tonne, and producer Sherritt International (S-T) reported ammonium-sulphate revenue of around US$280 per tonne in the first nine months of 2004.

Discounted cash flow models of the project show an internal rate of return of 11% and a net present value of US$168 million in a base-case analysis that assumes a nickel price of US$7,700 per tonne (US$3.50 per lb.), a cobalt price of US$10 per lb., and a discount rate of 10%. The project is still economic at nickel prices of US$3,740 per tonne (US$1.70 per lb.), and based on long-term average prices of US$8,950 per tonne for nickel and US$18.95 per lb. for cobalt, it has a net present value of US$1 billion, or an internal rate of return of over 16%.

At market prices of US$15,400 per tonne for nickel and US$19 per lb. for cobalt, the net present value rises to US$2.3 billion and the project would provide free cash flow of US$6.6 billion over the first 10 years of mine life.

Ambatovy’s history begins at the end of the French colonial period, when geologists for the Malagasy government found nickel values in the weathered laterite of the Ambatovy ultramafic intrusive suite. The first evaluation of the resource came in 1972, at about the same time that a civilian government was falling and the military taking over. Subsequent upheaval brought Marxist Didier Ratsiraka to power in 1975, and the country adopted a policy of nationalization.

North Korean development aid included some work on Ambatovy during the 1970s, but the project went nowhere. Unrest in the early ’90s forced Ratsiraka out of the presidency, and some liberalization of the economy followed. (Ratsiraka, though returned to power in 1997, was defeated in a 2001 election by Marc Ravalomanana, whose pro-Western and anti-corruption program has gained traction since.)

In 1995, Phelps Dodge received a concession for the property and drilled off a resource of 52 million tonnes grading 1.24% nickel and 0.09% cobalt. The project remained on the shelf until 2003.

Dynatec’s original earn-in from Phelps Dodge obliged it to spend US$20 million, mainly on feasibility studies, and to license its hydrometallurgical technologies for use at Ambatovy. For that, it got a 53% interest.

The deal to take over the project saw Dynatec issue 20.9 million shares to Phelps Dodge, giving the copper behemoth a 9.99% share in Dynatec, in exchange for Phelps Dodge’s remaining 47% of the project. Those shares are under hold periods: 18, 24 and 36 months for each third of the shares.

In addition, Phelps Dodge got 100 preference shares of Dynatec’s British Virgin Islands subsidiary, which it can cash-in at its option for the difference between US$70 million and the market value of its 20.9 million common shares. That option comes up one year after the start of production at Ambatovy.

In the event Phelps Dodge exercises the option, Dynatec can pay up to half of the redemption price in common shares, provided those shares do not bring Phelps Dodge to an interest greater than 9.99%. Dynatec can also knock out the option before production starts by paying the difference in cash.