Sherritt’s Ambatovy Nears Completion

Political unrest in Madagascar has had no impact on Sherritt International’s (S-T, SHERF-O) massive Ambatovy nickel project in the troubled island nation. Construction is past the halfway mark and the project is on track for commissioning in the fourth quarter of 2010, the company says.

Sherritt is also in the final stages or papering process of a new financing agreement with its partners on the $4.5-billion project, Ian Delaney, Sherritt’s president and chief executive, told reporters following the company’s annual shareholder meeting in Toronto earlier this month.

In February, Sherritt announced that the cost of the project had soared from the original estimate of $3.4 billion and that it was trying to find alternative funding options to finance its 40% share of the project. It already has financing in place of $2.1 billion.

Sherritt’s partners are Japan’s Sumitomo Corp. (SSUMF-O), Korea Resources Corp. and SNCLavalin Group (SNC-T, SNCAF-O).

News of the looming financing on Madagascar’s largest industrial project will go a long way in easing shareholder jitters about the hugely expensive base metals project.

It won’t ease fears about foreign investment risk in the Indian Ocean island state, however, which is undergoing a political crisis. In March, the army forced out the elected president (Marc Ravalomanana) and installed the opposition leader (Andry Rajoelina) in his place. Washington called the takeover a “coup” and terminated non-humanitarian aid, while the African Union suspended Madagascar’s membership in the group.

Ravalomanana was re-elected to a second term as president in 2006. Rajoelina is a 34-year-old former disc jockey and mayor of Antananarivo, the capital. According to the BBC, more than 100 people died in violent protests and looting that accompanied the power struggle.

“Tourism has collapsed since the coup” and “about 70 per cent of all hotels in the country have been closed because of a lack of business,” Canada’s Globe and Mail newspaper reported on May 19.

In an effort to calm shareholders, Guy Benting, head of Sherritt’s capital division, said at the recent annual meeting that the transitional government had “expressed continuous support” for the nickel project.

“We believe our assets are safe,” Delaney added in response to a shareholder’s question on the future of Ambatovy and the country’s ongoing political risk. “We are making 35-year decisions. . . Politicians come and go. . . but we have demonstrated our capacity of maintaining our relationships.”

Elaborating on his point, Delaney explained that no one in 1974 could have predicted the events of 2008- 09, so no one can presume to have any idea of where countries like Madagascar will be 35 years from now. Instead, he said, “the best way is to make yourself part of the fabric of that country.”

One way Sherritt hopes to do that is by creating local employment. The company estimates employment during the peak construction phase will be about 10,000 local workers. It also believes thousands of long-term jobs will be created once initial production begins in early 2011.

Once in production, Ambatovy will employ roughly 2,000 local workers annually.

It has also helped more than 60 small, medium and micro enterprises, or SMMEs, set up businesses in fields such as construction and water management to support the project.

Ambatovy will be among the largest lateritic nickel mining, processing and refining operations in the world. It is a large-tonnage nickel and cobalt project with two nickel deposits near Moramanga that are planned to be mined over a 27-year period.

A feasibility study released in May 2006 demonstrated that Ambatovy has proven and probable reserves of 125 million tonnes grading 1.04% nickel and 0.099% cobalt with an annual production capacity estimated at 60,000 tonnes (100% basis) of nickel and 5,600 tonnes of cobalt.

Capital expenditures last year for the joint-venture partners totalled $1.8 billion. By the end of the year, almost all key equipment, fabrication and construction contracts were in place and 88% of the engineering was completed.

While Delaney told shareholders that Sherritt’s financial position was “very sound” (the company had $789.6 million in cash and equivalents on its balance sheet at the end of the first quarter), he said management is continually taking steps to increase its operating cash flow and cut capital expenditures and operating costs.

“Until we see greater clarity, our credo is prudence and caution,” Delaney said.

At presstime, Sherritt was trading at $4.98 per share. The company has a 52-week trading range of $1.69- 16.60 and 293.1 million shares outstanding.