Sherritt considering full exit from Madagascar mine project to reduce debt

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After months of negotiations with its partners, Sherritt International Corp. is still considering a complete exit from its costly joint venture in Madagascar as it struggles to reduce its huge debt burden.

The Toronto-based company owns 40 per cent of the Ambatovy nickel and cobalt mine in Madagascar, which cost more than $5-billion (U.S.) to develop. Last year, it announced a $1.6-billion (Canadian) writedown of the value of its stake in the mine, where it is also the operator.

After borrowing about $650-million (U.S.) from its partners to pay for its share of developing the mine, Sherritt has seen this loan balloon to about $1.3-billion (Canadian) on its balance sheet as the interest compounded, according to David Pathe, Sherritt's chief executive officer.

"It's an enormous debt number for a company our size," Mr. Pathe said in an interview at an African mining conference in Cape Town.

Sherritt, which also has mining and energy projects in Cuba, announced its year-end results on Thursday evening, reporting a net loss of $378.9-million for the year ended Dec. 31. This was a reduction from a net loss of $2.1-billion in the previous year. The 2015 loss was largely due to the $1.6-billion Ambatovy writedown.

The company reported an adjusted net loss from continuing operations of $81.3-million in the fourth quarter of last year, compared to an adjusted net loss of $113.8-million from continuing operations in the same period of the previous year.

With nickel prices still low, Sherritt is negotiating with its Korean and Japanese partners in an effort to surrender some of its equity in the Ambatovy project in exchange for reducing its debt. If the talks fail, a complete exit from the project is "potentially still on the table," Mr. Pathe said.

"So far, the conversations with our partners have been constructive," he said. "Our preference would be to remain involved. I'm still hopeful that there's a way that makes sense for us to stay involved. But at this point, getting certainty on our exposure to the project is important to us, and if exiting is the way we do that, we'd be prepared to do that."

As part of its current deal with its partners, Sherritt is to receive only 12 per cent of the distributable cash flow from the Madagascar project. So far, the project hasn't produced any cash to distribute.

"With the way those loans have been compounding interest and the low nickel price we've had for such a long time, we need a higher and higher nickel price to catch up with all the compounding interest on those loans," Mr. Pathe said. "It could be a very long time, if ever, that those loans ever get fully repaid."

Sherritt has spent nearly a decade developing the Madagascar mine in an impoverished country with a volatile political situation and a severe lack of infrastructure. The country endured a coup in 2009 and an attempted coup in 2010, leading to suspensions of foreign aid. The company had to build everything from power plants and roads to port piers and rail lines to serve the mine. It was also obliged to spend millions of dollars to protect forests and endangered animals in a country with a unique ecology.

"We still think the mine can be a good, long-life, low-cost asset with a 26- or 27-year mine life," Mr. Pathe said.

"The project is run well, it produces high-quality nickel, and the costs are coming down. It has the ability to be a really high-quality nickel-producing asset for a long time."

Sherritt has received good news on nickel in recent weeks, with prices rising after the Philippines announced plans to shut many of its nickel mines for environmental reasons. "The announced mine closures in the Philippines, coupled with improved stainless-steel demand, are both seen as near-term catalysts for continued strength in the nickel market," the company said in its results report on Thursday.

But the company is also watching to see if the world economy will be hurt by the protectionist promises of U.S. President Donald Trump. This could be a "wild card" for the global economy, Mr. Pathe said.

"If he really wants to start imposing tariffs and starting trade wars and currency wars, it's difficult to predict the impact," he said. "One of the biggest impediments to growth is short-term uncertainty, which causes investment to pause and wait, and I think, at the moment, some of that rhetoric coming out of the U.S. causes some uncertainty that people will want to see resolved."

In the end, he said, "I think there will be enough checks and balances in the system that cooler heads and saner heads will prevail."