A US$2.1-billion debt financing deal has just brought Sherritt International (S-T, SHERF-O) one step closer to mining nickel on the Eden-like island of Madagascar in the Indian Ocean.
The company says the financing deal with international lenders from Japan, Korea, Europe, Canada and Africa, is one of the largest project finance agreements ever completed in the mining industry, and that it is particularly impressive given the current lending climate.
“It’s significant in today’s environment,” says Michael Minnes, a company spokesman in Toronto. “With the asset-backed commercial paper fiasco that is going on, obviously markets are not as open to lending as they were in the past.”
Sherritt acquired Ambatovy — a large-tonnage nickel-laterite project — through its takeover of Dynatec in June.
Sherritt holds a 40% stake in the project, Sumitomo of Japan and Korea Resources, leading a consortium of Korean enterprises, each own a 27.5% interest, and SNC-Lavalin Group (SNC-T, SNCAF-O) has the remaining 5% stake.
Full-scale construction is expected to begin in the second half of 2007 and startup is anticipated in 2010.
The project will be an open-pit operation with an ore preparation plant at the mine site. The laterite ore slurry will travel by pipeline to a processing plant and refinery just a few kilometres from the Port of Toamasina.
Ambatovy is 80 km east of Antananarivo, the capital of Madagascar, and lies within a few kilometres of the main road and rail system connecting Antananarivo and the main port city of Toamasina on the east coast.
Probable reserves at Ambatovy are estimated to be in the 125- million-tonne range, grading 1.04% nickel and 0.099% cobalt.
The project is expected to reach full capacity of 60,000 tonnes per year of nickel and 5,600 tonnes per year of cobalt by 2012. The estimated life of the project is about 27 years.
In a recent research report to clients, RBC Capital Markets called Ambatovy “a good strategic and operational fit” for Sherritt.
RBC noted the acquisition provided “longer-term growth potential which Sherritt did not otherwise have,” and could “signal a more aggressive stance towards growing its metals business.”
It also stated that with the loss of Falconbridge, Inco and LionOre Mining International as nickel investments, “investors may turn to Sherritt as an alternative.”
Sherritt’s primary asset in the metals industry is the Metals Enterprise, which includes Moa Nickel, a joint-venture mining project with the Cuban government.
Sherritt holds a 50% interest in a vertically integrated nickel and cobalt mining, processing, refining and marketing joint venture with General Nickel of Cuba, a state-owned agency.
Last year, Sherritt and its Cuban partners recorded full-year production of more than 30,200 tonnes nickel and 3,300 tonnes cobalt.
The deposit at Ambatovy was first identified in 1960 and has been the subject of several studies and drilling campaigns. Phelps Dodge first acquired the rights to the deposit in 1995 and undertook an intensive 2-year campaign to evaluate it.
The Ambatovy project is based on mining two orebodies that are about 3 km apart. According to a feasibility study completed in 2006 by Dynatec, the deposits cover an area of about 13 sq. km, with an average thickness of about 40 metres.
Sherritt notes that its proprietary hydrometallurgical technology used in the extraction of metals from lateritic ores will be used in Madagascar, as it has been in Cuba.
“The fact that we can go into Madagascar and replicate the same technology process that we have in Cuba makes us believe that we are well-positioned to succeed,” Minnes says. “Laterite ores are very finicky and there are many variables that can disrupt the process. It’s a chemical balancing act to a degree and you have to have the knowledge and understanding of how those ores react in order to extract the total possible metal content that is in the ore.”
Sherritt can also take comfort from the ongoing strength of the nickel market. According to the 2006 feasibility study, demand growth for nickel clocked 4% annually between 1960 and 2005 and 6% for stainless steel, the major end-user of nickel.
The study forecast 4.7% annual growth in nickel consumption between 2005 and 2012 for total annual demand in 2012 of 1.76 million tonnes. The study also reported that 18 new major nickel projects are scheduled to potentially start production between 2006 and 2012.
“Shortages and high nickel prices have prevailed from the latter part of 2003 and are expected to continue to 2008 and possibly beyond,” the study found, “depending on the degree of new project slippage.”
In Toronto on the news, Sherritt shares finished up 1.64% or 25 higher at $15.45 on more than 880,000 shares traded.
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