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Site of Sherritt's Ambatovy mining project in Madagascar

Geoffrey York

Sherritt International Corp.'s troubled nickel project in Madagascar faces a major stumbling block after a legal firm hired by the country's new president said the certification for the $4.5-billion (U.S.) mine may be invalid.

The Ambatovy project, which has already been sideswiped by massive cost overruns, environmental concerns and financing difficulties, is now facing a review by Andry Rajoelina, the media owner and former disc jockey who won power in a March coup d'état backed by the military.

Sherritt disclosed Wednesday that a French law firm engaged by Mr. Rajoelina is claiming that the Ambatovy project's certification under Madagascar's Large Mining Investment Act may not be binding.

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"We are in a very strong legal position and we are very comfortable with our position in Madagascar. But there is uncertainty in how this will develop over time," Dean Chambers, Sherritt's senior vice-president and chief financial officer said in an interview.

Sherritt's problems in the troubled African island nation are just the latest example of the difficulties facing the global mining industry as it tries to build mines in developing countries. A severe dearth of discoveries in traditional mining regions has forced miners to seek out deposits in challenging locations in Africa and Asia. In many cases, fractious political battles have erupted as governments try to balance the short-term investment and employment gains the foreign mining firms would provide with the long-term environmental and economic consequences of allowing such projects.

Vancouver's Ivanhoe Mines Ltd. was recently dealt a significant setback in mineral-rich but cash-starved Mongolia, where it has been trying to win an investment agreement to develop the Oyu Tolgoi copper and gold project for more than five years. The Mongolian parliament refused to ratify the deal and sent it back to the government with the stipulation that an agreement be negotiated that follows the country's laws.

In Guinea, Rio Tinto PLC , the London mining firm that is also a partner with Ivanhoe on Oyu Tolgoi, has been stripped of a 50-per-cent interest in a major iron ore deposit. The Guinean government said that Rio Tinto was not developing the $6-billion project fast enough and gave half the deposit to another company.

The industry's challenges have been compounded by the global recession, which has seen metal prices decline while financing costs have surged. Many large-scale mining projects have been put on hold as mining firms wait for the markets to stabilize.

In response to the market crash, Sherritt slowed down work late last year on Ambatovy, of which it owns 40 per cent and which represents the largest foreign investment ever in Madagascar. Full-scale construction has since resumed and the Toronto-based company recently secured financing to cover its share of the project's increased costs from its partners, Japan's Sumitomo Corp., South Korea's Korea Resources Corp. and SNC-Lavalin Group Inc. of Montreal.

Construction is expected to be completed by late 2010. Once in production, Ambatovy could annually produce 60,000 tonnes of nickel per year and 5,600 tonnes of cobalt during a 27-year mine life. Under an agreement struck with the previous government, the company created by the partners to process the ore will pay a tax rate of 10 per cent.

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"It looks like political risk in Madagascar is real. The project has been granted a 10-per-cent tax rate and it sounds like the government may want to renege on this," said an analyst who spoke on the condition of anonymity.

Sherritt, however, believes the review of its agreement for Ambatovy is political posturing by Mr. Rajoelina.

"As you might expect with any new government whether it is transitional or permanent, they are trying to achieve some things. Obviously we are high-profile and we are attracting some attention," Mr. Chambers said.

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