Sumitomo to take 25% of Ambatovy

Equal partners Dynatec (DY-T) and Impala Platinum (IMPUY-P) have unveiled Japanese-based trading company Sumitomo (SSUMY-P) as the third member of the troika charged with developing the large Ambatovy nickel-laterite project in central Madagascar.

Under the agreement, Sumitomo can take a 25% interest in the US$2.25-billion project, 130 km from the capital city of Antananarivo, by chipping in a quarter of the project’s equity needs, and thereafter funding its share of guarantees for at least US$1.25 billion in project financing currently being sought.

In the end, Dynatec and Implats would see their stakes diluted to 37.5% apiece, with Sumitomo paying Dynatec for admission. The deal is expected to close by the end of September.

Also under the plan, Sumitomo would, under certain conditions, advance Dynatec a US$98-million subordinate loan to cover a portion of its equity contribution. The loan would be repaid out of 60% of Dynatec’s take from the project.

Sumitomo will also guarantee US$249 million worth of project debt for Dynatec. In return, Dynatec would issue 10.2 million shares to Sumitomo in four equal, annual instalments.

As part of its entry into the project in May, South African platinum producer Implats agreed to guarantee US$170 million of the project debt for Dynatec, in addition to paying US$50 million toward Dynatec’s equity portion of project financing.

Finally, Sumitomo has agreed to take delivery of half of Ambatovy’s annual nickel production for 15 years, and sell it on to customers.

"Sumitomo’s decision to participate in the project reconfirms the position of Ambatovy as one of the leading nickel projects in the world, and enhances the ability of the partnership to move forward with the rapid development of the project," Dynatec CEO Bruce Walter told analysts during a recent conference call.

A US$30 million portion of Implats US$50 million investment is going to fund a US$60-million revision of Ambatovy’s current feasibility study. The new study will consider Implats expanding its existing refinery in Springs, South Africa, to handle Ambatovy’s nickel and cobalt.

The new plan would see the proposed plant at the Toamasina port scaled-down. Laterite ore from two open pits at Ambatovy and nearby Analamay would travel some 195 km in slurry form via a pipeline to Toamasina for leaching and precipitation as a sulphide containing 55% nickel and 4% cobalt. Springs would then process that product into nickel and cobalt powders, using Sherritt reduction processes.

Such a plan is expected to trim some US$330 million from the project’s price tag, and lower operating cost by about US$730 per tonne to around US$2,920 per tonne. The average after-tax cash flow is pegged at US$338 million per year, based on a nickel price of US$3.50 per lb. and US$10 per lb. of cobalt.

Walter said the project’s low cost (about US67 per lb.) would rank its as one of the lowest-cost projects in the world.

At last count, Ambatovy was home to reserves totalling 125 million tonnes grading 1.04% nickel and 0.1% cobalt. The operation is expected to produce 60,000 tonnes nickel and 5,600 tonnes cobalt annually.

Detailed engineering work continues at Ambatovy with an eye toward beginning construction by the second quarter of 2006, pending sufficient financing. The project has a life expectancy of 27 years, and could conceivably be producing by the end of 2008.

By comparison, Inco‘s (N-T) Goro nickel-laterite project in New Caledonia hosts reserves of 57 million tonnes grading 1.52% nickel and 0.12% cobalt. Production is pegged at 60,000 tonnes nickel and 4,300-5,000 tonnes cobalt per year, beginning in September 2007.

In April, Sumitomo teamed with fellow Japanese metal producer Mitsui under the Sumic Nickel banner to acquire a 21% stake in Goro for US$150 million. Sumitomo owns 52.4% of Sumic Nickel, with Mitsui owning the remainder. Inco retains a 69% stake in Goro, with the three provinces of New Caledonia owning the remainder.

Goro’s estimated capital cost rings in at US$1.9 billion.

Dynatec ended the recent second quarter with net earnings of $2.6 million (or 1.2 per fully dilute share), compared with year-ago earnings of $1.4 million (0.7 per share). Revenues between the two periods increased by 21.2% to $8 million.

At the end of June, the company had cash and equivalents totalling $41.1 million, down from $55.2 million at the end of the first quarter, owing to the $12.2 million purchase of a 50% interest in Aurora Platinum.

The company currently has more than 217.3 million shares issued and outstanding.

Shares in Dynatec were 14, or 10%, higher at a new 52-week high of $1.54 in busier-than-normal afternoon trading in Toronto following the news on Aug. 11.

In other news, Implats says it has inked workers represented by the National Union of Mineworkers (NUM) and United Associations of South Africa (UASA) to a new two-year labour pact. The agreement calls for a 6% to 6.5% increase in wages each year, plus various amendments to other benefits in the first year.