Dynatec reels on Implats exit

Shares in Dynatec (DY-T) plummeted as much as 26%, to $1.01, in early trading in Toronto on Nov. 28, after the company said that South African platinum producer Impala Platinum (IMPUY-O) intended to exit the US$2.25-billion Ambatovy nickel-laterite project in central Madagascar.

“Following a meeting of the board of directors of Impala Platinum Holdings, Implats has advised that it has determined that the benefits to Implats which it had initially anticipated from the project do not now appear to be achievable,” Dynatec said in a release.

The Richmond Hill, Ont.-based miner said it has not yet received a formal notice of withdrawal from Implats, something required under the Ambatovy shareholders agreement inked in mid-October. The agreement governs the ownership, financing, development and operation of the project.

“This is another major milestone for the Ambatovy nickel project,” said Dynatec president and CEO Bruce Walter at the time. “The strong partnership that has been forged among Implats, Sumitomo and Dynatec, and the continued support of the government of Madagascar, positions us well as we move forward with the project,” he added.

Dynatec’s director of communications and investor relations Mark Utting said there was no indication at the time of signing of any sense of dissatisfaction from Implats. In fact, he said there was nothing but a sense of commitment from all of the parties.

Dynatec and its other Ambatovy partner Sumitomo (SSUMY-O) plan to meet with Implats on Nov. 30 to discuss its plan to exit the project. Pending a formal notice of withdrawal, the remaining partners plan to reinitiate discussions with parties who had previously expressed interest in the project.

“If Implats provides a notice of withdrawal we’ll have to work with Sumitomo and go about replacing them,” said Utting. “Whether that’s bringing in a new partner or making some other arrangement to represent that share in the ownership group.”

Utting says Dynatec is more likely to seek out a new partner rather than reacquire the stake itself.

“We talked to Sumitomo over the weekend and they have confirmed their positive view of the project. We remain very committed to it; we think it is certainly one of the best nickel projects in the world and it’s a good time to be pursuing a nickel project,” he added.

Implats signed on to take a half-interest in the project in late May, agreeing to contribute US$50 million towards Dynatec’s equity portion of project financing, and guaranteeing US$170 million of the project debt for Dynatec. The pair were joined by Sumitomo in August, with the Japanese-based trader committing to cover a quarter of the project’s equity costs, and thereby dropping both Dynatec and Implats to 37.5% stakes. Sumitomo also agreed to fund its share of guarantees for at least US$1.25 billion in project financing, loan Dynatec US$98 million, and guarantee US$249 million worth of project debt for Dynatec.

As for exit fees, Implats must pay the difference between what they’ve put into the project so far and US$20 million. Utting was not a liberty to disclose how much Implats had invested so far.

Under the shareholders agreement, Implats can withdraw from the project and terminate its obligations any time before binding financing arrangements have been made. In such case, Dynatec can acquire Implats’ interest (represented by its project company shares and any loans made by it, on a pro rata basis) for a cash payment equal to 99% of the aggregate price originally paid for such shares and loans. Sumitomo has a similar right of withdrawal.

Ambatovy is home to proven and probable reserves totalling 125 million tonnes grading 1.04% nickel and 0.1% cobalt, based on a cutoff grade of 0.8% nickel. The operation is expected to produce 60,000 tonnes nickel and 5,600 tonnes cobalt annually over 27 years. Cash operating costs are expected to rank among the lowest in the world at an estimated US67 per lb. of nickel (net of byproduct credits) during the first decade of operation, following two years of ramp up.

Construction is slated to begin in the second quarter of 2006; production could conceivably crank up by the end of 2008. That timetable may change depending upon Implats final decision and, if required, how long it takes to bring in another partner. Implats’ potential departure could also affect project financing in that having an ownership group in place is an important component in talking to lenders.

Under a feasibility study completed earlier this year, the after-tax rate of return is pegged at 11.1%, based on conservative base-case metal prices of US$3.50 per lb. nickel and US$10 per lb. cobalt. The rate improves to 16.4% at US$4.07 per lb. nickel and US$18.65 per lb. cobalt — the average prices for the period from 1980 to 2003. Dynatec says the project is capable of maintaining a positive rate of return at nickel prices as low as US$1.70 per lb. (with byproduct credits remaining at the base-case level).

The project’s net present value rings in at US$168 million (at a 10% discount) under the base case, and US$1 billion at the longer-term averages.

On the financial front, Dynatec recently sold 88 million shares at $1.35 apiece for gross proceeds of $118.8 million. The deal includes a 30-day overallotment option whereby the underwriters, led by Merrill Lynch Canada and GMP Securities, can acquire another 13.2 million like-priced shares.

Dynatec ended the recent third quarter with net earnings of $2.1 million (or 1 per diluted share), compared with year-ago earnings of $1.3 million (0.7 per share). Revenue between the two periods increased by 21% to $44.9 million. Cash flow from operations quadrupled to $19 million thanks largely to increases in accounts payable and accrued liabilities primarily related to advances by Sumitomo and Implats at Ambatovy.

At quarter’s end, the carrying value of Dynatec’s stake in Ambatovy was $65.7 million — little changed from the end of the second quarter, as Implats funded most of its costs.

During the quarter, the Ambatovy partners began engineering work designed to support a revised feasibility study and project control estimate for the capital and operating costs. The feasibility study was to consider the impact of locating the project’s refinery at Implat’s existing Springs refinery in South Africa. Dynatec expects the project’s revised price tag to come in higher than previously estimated.

Dynatec’s shares recovered through the day to end 23, or 16.8%, lower at $1.14. The issue trades in a 52-week window of 88 to $1.80.