Sherritt International Corp. is the latest in growing list of mining companies to report double-digit cost increases and project delays resulting from surging prices for energy and raw materials.
Toronto-based Sherritt said the total cost of its 40-per-cent owned Ambatovy nickel-cobalt project in Madagascar is expected to rise 16 per cent to $5.5-billion (U.S.). Production, set to begin this summer, is now delayed until the first quarter of next year.
"We find this embarrassing and painful," Sherritt chief executive officer Ian Delaney told investors on a conference call Tuesday.
Sherritt's stock fell 6 per cent on the Toronto Stock Exchange on Tuesday, its lowest level since last summer.
Rising costs are becoming a huge hurdle for miners as they rush to boost production and capitalize on global demand and metal prices while they remain strong. The reaction to Sherritt's outlook shows how skittish investors are right now in these volatile commodity markets, where certain metal prices have dropped sharply from record highs and some forecasts call for a cooling off of the current red-hot commodities cycle.
The softening of prices is due to concerns that demand from China, the world's largest metals consumer, will weaken as it takes measures to prevent its economy from overheating.
Sluggish economic growth in the United States and Europe is also weighing on the price of key industrial metals such as copper and nickel, considered a barometer of global economic growth.
Nickel has dropped by more than 20 per cent from highs reached earlier this year. The metal, used to make stainless steel, is now trading just above $10 (U.S.) per pound and is expected to fall further over the next few years as new mines and an increase in substitute products adds supply to the market.
In fact, nickel supply may be headed for the "biggest glut in four years," according to a Bloomberg News survey this week of 17 analysts and traders. Nickel surpassed $20 per pound in 2007, before falling to as low as five dollars during the global recession in 2008.
A further drop in metal prices will create major problems for miners who have been ramping up production and pushing ahead with projects - and paying much higher costs - to keep up with demand driven by rapid infrastructure growth in China.
Investors fear a repeat of the last time costs got out of control, just ahead of the global economic meltdown. Back then, commodity prices crashed and some projects were shelved because they were no longer economically viable.
While Sherritt's Mr. Delaney acknowledged "the odds are stacked against us" when it comes to building a large-scale nickel laterite project, based on history of other similar projects that "have never lived up to their potential." However, he tried to reassure investors Ambatovy will be done right.
"This is a business that we know," he said. "We are not at all happy, or even a little bit complacent with the numbers that we are presenting today. … However, we don't believe in the long run these numbers will be consequential."
Sherritt said a large chunk of the cost increase is due to inaccurate estimates of how much material was needed to build the project, as well as costs to buy, ship and install the extra materials, as well as "poor performance by certain contractors."
Ambatovy is expected to produce 60,000 tonnes of nickel annually and 5,600 tonnes of cobalt over a 27-year mine life.
Japan's Sumitomo Corp. and Korea Resources each hold a 27.5-per-cent interest in the project, while Montreal's SNC-Lavalin owns 5 per cent.
Sherritt is also the largest producer of thermal coal in Canada and is Cuba's largest independent energy producer, with oil and power operations in the country.