“Internationally, both the capital and production costs relating to mining projects have escalated since the initial feasibility study was completed in February 2005,” the world’s second-largest platinum miner said in a release.
“While there still were synergies for Implats’ own nickel production cost profile, in Implats view, the project as a whole would not meet Implats’ hurdle rates.”
Implats’ formal departure came just three days after
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, 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.
The three companies inked a shareholder’s agreement in mid-October governing 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 says there was no indication of dissatisfaction from Implats at the time of signing. In fact, he said, all parties seemed committed.
Dynatec plans to work with Sumitomo to replace Implats at Ambatovy, Utting says. Whether that means bringing in a new partner or making some other arrangement to represent that share in the ownership group remains to be seen.
The partners plan to renew discussions with parties who had previously expressed interest in the project. Utting says Dynatec is more likely to seek out a new partner than to reacquire the stake itself.
“We talked to Sumitomo (recently) and they have confirmed their positive view of the project,” he says. “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.”
As for exit fees, Implats must pay the difference between what they’ve put into the project so far and US$20 million. Utting is not at liberty to disclose how much Implats has invested.
According to the Ambatovy shareholder’s agreement, Implats can withdraw from the project and terminate its obligations any time before binding financing arrangements have been made. In that 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 could produce 60,000 tonnes nickel and 5,600 tonnes cobalt annually over 27 years. Cash operating costs could 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 was slated to begin in the second quarter of 2006, with production conceivably cranking up by the end of 2008. That timetable may change depending on how long it takes to bring in another partner. Utting says 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 over-allotment 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 related to advances by Sumitomo and Implats at Ambatovy.
At quarter’s end, the carrying value of Dynatec’s stake in Ambatovy was little changed from the previous quarter at $65.7 million, 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 Implats’ existing Springs refinery in South Africa. Dynatec expects the project’s revised price tag to come in higher than previously estimated.
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