Sherritt scales back Ambatovy ownership, to remain operator

VANCOUVER (miningweekly.com) – Canadian diversified miner Sherritt International has reached agreement with its joint venture (JV) partners to reduce its interest in the Ambatovy nickel/cobalt mine, in Madagascar, from 40% to 12%.

Sherritt, which derives about a quarter of its revenue from Ambatovy, has long ceased funding Ambatovy cash calls due to the ‘40 for 12’ issue. “It no longer makes sense to fund 40c of every $1 capital for only an effective 12c return on Ambatovy cash distributions,” Sherritt CEO David Pathe stated in an interview with Mining Weekly Online late last year.

Owing to the structure of the Ambatovy partner loans, at current nickel prices, Sherritt’s 40% ownership is reduced to a 12% economic interest.

Under the terms of the deal-in-principle struck among the partners, Sherritt’s partner loans totalling $1.4-billion at the end of March will be removed from its balance sheet with the transfer of 28% interest in Ambatovy, but the company did not state what the new ownership profile looks like on completion of the arrangement.

Under the previous structure, with Sherritt at 40% ownership in Ambatovy, partners Sumitomo Holding held 32.5% and Korea Resources (Kores) held 27.5%.

While Sherritt will also resume funding for a 12% interest retroactively to the end of 2015 (Sherritt will make a cash payment upon closing of about $24-million, including accrued interest), Sherritt will also remain the operator until at least 2024.

Sherritt has agreed to escrow about $23-million to satisfy 12% of potential future funding requirements. Amounts in escrow not used for project funding will be applied towards repaying the Ambatovy JV partner loans at maturity, which totalled about C$132.3-million at March 31.

"After months of negotiation, I am pleased to be able to announce a resolution which removes the largest area of uncertainty for both Ambatovy and Sherritt. With this transaction, we eliminate C$1.4-billion in debt from Sherritt's balance sheet, and maintain our exposure to Ambatovy with a clean 12% interest and continuity as the operator," Pathe stated on Monday.

Sherritt advised that discussions are ongoing to advance positively among the partners, with substantial progress having been made to resolve tax, accounting and ancillary business issues associated with the revised structure, in order to complete binding and definitive documentation as soon as possible.

Implementation of the revised structure would be subject to certain internal and third party approvals, including senior project lender approvals.

Meanwhile, more than half of nickel producers have been cash negative as costs rise and prices decline.

The nickel price has been volatile, ranging between $8 500/t and nearly $12 000/t in the past 12 months, with recent price swings mainly driven by policy instability in major producers Indonesia and the Philippines. Indonesia has imposed new export rules relaxing certain beneficiation requirements and allowing low-grade nickel ore to be exported, while the Philippines has closed many operations on environmental grounds.

The market is expected to be balanced in 2017, with prices improving towards the $15 000/t level in years to come, as greater supply deficits emerge. London Metals Exchange cobalt prices have jumped about 60% so far this year to more than $55 000/t, with demand expected to continue outstripping supply until at least 2025.