Ambatovy: Big and bold

The $3.3 billion Ambatovy nickel mine is the subject of probably the largest-ever project financing in its sector. It involved a large group of export credit agencies, including the Japan Bank for International Cooperation, in its first project financing in Africa. It is also the largest project financing ever in host country Madagascar, and its first financing under a new mining law.

The lead sponsor of the project is Sherritt International, a Canadian energy and resources developer that bought the mine's original developer, Dynatec, in June 2007. Sherritt owns 45% of the project, while Sumitomo Corporation, and Korea Resources each own 27.5%. The project's engineering, procurement and construction contractor, SNC-Lavalin, exercised an option to buy 5% of the project's equity from Sherritt in December 2007, and will sell it back to a combination of the other sponsors at completion.

The project involves the construction of one of the largest nickel projects in the world. It will have an annual production capacity of 60,000 tonnes of nickel, 5,600 tonnes of cobalt and 190,000 tonnes of ammonium sulphate. The sponsors hope to have the project operational by 2010. It is located about 80km east of Madagascar's capital, Antananarivo, roughly halfway towards the coast.

The scope of the project includes an open pit mine to extract laterite ore, and a preparation plant, which will turn it into slurry before it is carried by a 220km pipeline to the port of Toamasina. Additional works include a pressure acid leach processing plant, a metals refinery, water, power and steam generation, acid production, tailings disposal, and port facilities.

Nickel, which trades on the London Metal Exchange, can experience severe price volatility, and its fortunes are at the mercy of a small number of stainless steel producers and a similarly small group of producers. Developers with access to the most generous ore bodies and low-cost locations enjoy the most pronounced advantage. Nickel prices spiked as high as $24 per pound in June 2007, but are now back to around half that level. According to Sherritt, the project will be in the bottom quartile of the cost curve.

For Dynatec, a mining services company with ambitions to develop its own projects, the size of the resource made it a tempting joint venture partner – or target. Dynatec, however, had struggled since 2003 to bring on board a rich operator, after buying out original co-developer Phelps Dodge in 2005. Impala Platinum, for instance, came and went that year.

The final shareholder structure, as well as the financing, rests on the appetite of Japanese and Korean steel producers for the plant's output. In August 2005, before Implats' departure, the two each sold a 12.5% stake in the project, and after Implats exited, in 2006, Dynatec signed agreements for the remaining equity with SNC as contractor and Korea Resources, a state-run company that supplies Daewoo, Keangnam Enterprises and STX Corporation, all of which are big users of nickel.

The agreements assured Dynatec of a ready market for its output, since Sumitomo and Korea Resources each promises to take half of the project's output. The project is still exposed to metals prices, but the presence of two major users of nickel as sponsors, as well Ambatovy's low cost, reassured lenders. The project's environmental impact assessment, explicitly designed to meet the needs of potential export credit agency and development bank guidelines, as well as the Equator Principles, was approved in late 2006.

Sherritt acquired Dynatec only two months before the project closed, and it had a much wider spread of businesses than Dynatec. But it still did not have the resources to meet a 45% share of the project's $1.2 million equity requirement or its share of the project's completion guarantees, which are required because SNC's construction contract is not fixed-price, and only encourages it to minimise cost overruns. The cost of the project increased during the development period from $2.5 billion to $3.3 billion, but in the intervening period lenders' assumptions of nickel prices also increased, which allowed the project to support an increase in debt from $1.7 billion to $2.1 billion.

The other shareholders are providing Sherritt with a $236 million subordinated loan to cover some of its contribution, to be repaid through its proportionate share of the project's revenues. They are also counter-guaranteeing $598 million of Sherritt's $840 million share of the completion guarantee. The Export-Import Bank of Korea is in turn lending Korea Resources $100 million towards its share of the project's equity.

The $2.1 billion 17-year senior debt's structure is reasonably straightforward, if notable for the presence of a large number of ECAs and multilaterals. It consists of $700 million from JBIC, $650 million from Kexim, $300 million from Export Development Canada, $150 million from the African Development Bank and $300 million equivalent in euros from the European Investment Bank. Each commitment was structured as a separate facility, though under a common terms agreement. The pricing on these facilities is between 135bp and 140bp over Libor precompletion, and roughly 250bp after that.

Of the JBIC and Kexim facilities, 30% is cofinanced through SMBC (facility agent), BTM UFJ (administration agent), Mizuho, Calyon, ING, SG and BNP Paribas. Shinhan and Woori are lending under the Kexim tranche. Commercial lenders, however, are not exposed to political risk, a prerequisite for lending 17-year money in an untested jurisdiction. The deal was the first to close under Madagascar's Loi des Grands Investissements dans le Secteur Minier, which provides for more genrrous tax treatment of resources projects in the country.

The project is currently under construction, thanks to $800 million in sponsor equity. The sponsors anticipate the project meeting its conditions precedent to funding, which include the receipt of officer's letters and land permits, among other issues, shortly. According to Dean Chambers, the former CFO of Dynatec who brought the project to completion at Sherritt, "for us the major challenges were making lenders comfortable with Madagascar – a country with which many were unfamiliar, and keeping costs down in an atmosphere of escalating prices."

The scarcity of similar-sized deposits makes it little value as a template. It is however, a suitably impressive bar for future developers to try and exceed.

Ambatovy Minerals Société Anonyme
Status: Closed 23 August 2007
Size: $3.3 billion
Location: Madagascar
Description: 60,000 tonnes per year nickel project
Sponsors: Sherritt International (45%), Sumitomo Corporation, and Korea Resources (each 27.5%), and SNC-Lavalin (holds 5% out of Sherritt's stake to completion)
Debt: $2.1 billion
Providers: JBIC, Kexim, Export Development Canada, the African Development Bank and European Investment Bank.
Co-financing banks: SMBC, BTM UFJ, Mizuho, Calyon, ING, SG, BNP Paribas, Shinhan and Woori
Financial adviser: NM Rothschild
Lender legal counsel: Milbank Tweed, McCarthy Tétrault (in Sherritt matters)
Borrower legal: Sullivan & Cromwell,
Sherritt legal: Stikeman Elliot
Model auditor: Ernst & Young
Lender insurance consultant: Marsh
Sponsor insurance consultant: Aon
Cobalt market study: CRU
Independent engineer: Chlumsky. Armbrust & Meyer
Feasibility study and EPC-M: SNC Lavalin