Sherritt running with nickel bulls on Dynatec bid
ANDY HOFFMAN
Saturday, April 21, 2007
Sherritt International Corp. jumped headlong into the consolidation wave coursing through the nickel industry, offering $1.46-billion in stock Friday for Dynatec Corp. and its stake in a Madagascar mine — a deal that has already shifted attention to the next likely takeover target in the frenetic sector — FNX Mining Co. Inc.
The bid marks a major bet by Sherritt and its young president and chief executive officer, Jowdat Waheed, on the long-term price of nickel, the metal used to make stainless steel. Sherritt, which produces 33,000 tonnes of nickel a year from operations in Cuba, saw its stock price plunge 12 per cent on the Toronto Stock Exchange as investors sold, wary of the offer's rich premium and the dilution caused by the 61 million shares expected to be issued to fund the purchase.
In an interview, Mr. Waheed defended the bid terms and the 29-per-cent premium his company is offering for Dynatec based on the closing share price before the bid was announced. The 44-year-old said Sherritt and its board of directors believe there has been a sea change in nickel market fundamentals that will keep prices above historical average levels for the foreseeable future. "There will be people who agree with us and I suspect there will be people who have a very different view... . We expect the global growth in stainless steel demand and non-stainless steel demand and the supply equation to have a fundamental mismatch for as long as we can project. Nickel, unlike any other commodity, does not have a new Sudbury lying around anywhere," Mr. Waheed said, referring to the rich nickel sulphide deposits in the Sudbury Basin that created Canadian nickel giants Inco and Falconbridge.
Dynatec's key asset is a 40-per-cent stake in the Ambatovy or "Hill of Fire" mine in Madagascar, a laterite nickel project that could produce up to 109,000 tonnes of nickel and 10,600 tonnes of cobalt a year once production at the $2.5-billion (U.S.) operation begins in 2010.
Laterite deposits are more common than nickel sulphide deposits, however they often have lower ore grades and are more difficult to process. The ore at Sherritt's operations in Moa, Cuba, is very similar to Ambatovy and Mr. Waheed said that will result in significant cost savings for the merged company.
Bruce Walters, Dynatec's president and CEO, said his company's board is recommending the deal to shareholders because it will continue to give exposure to the nickel price, which he also thinks will stay above historical levels.
"We see it as a positive that our shareholders aren't getting cashed-out," he said in an interview.
The bid for Dynatec marks the third major nickel takeover proposal in Canada in less than a month. In late March, Xstrata PLC offered $4.6-billion (Canadian) in cash for LionOre Mining International Ltd., a deal that was quickly followed by Lundin Mining Corp.'s $1-billion offer for Rio Narcea Gold Mines Ltd.
As part of the Sherritt offer, Dynatec's 25-per-cent interest in Sudbury nickel producer FNX Mining will be distributed to Dynatec shareholders. Industry sources said this has essentially "put FNX in play," by removing a major control block. Under a previously negotiated agreement, FNX had voting control over Dynatec's stake. Now Companhia Vale do Rio Doce (CVRD), which already has an "off-take" agreement to process and market FNX's nickel, is seen as a likely suitor. Some believe Xstrata, which has operations nearby, might be interested in FNX, as might HudBay Minerals Inc. of Winnipeg.
After more than doubling last year, the price of nickel has surged to record levels in recent weeks on dwindling inventories and continued strong demand from China and other developing countries. Nickel for delivery in three months was $22.18 (U.S.) a pound yesterday on the London Metal Exchange.
Analysts at UBS Securities recently raised their nickel forecasts, predicting an average nickel price of $17.43 a pound this year and $11.50 in 2008. But like many analysts on the Street, they use a $4.50-a-pound price for the long term.
Mr. Waheed said these so-called "rear-view mirror" forecasts are "fundamentally flawed" because they fail to account for the possibility of a boost in building material demand from developing countries other than China and India, as well as the fact that there are so few significant new nickel mines being built. It's a perspective he thinks he shares with Mick Davis, the burly head of Anglo-Swiss miner Xstrata, which bought Falconbridge for $18-billion (Canadian) last year and Roger Agnelli, the suave CEO of Brazil's CVRD, which won Inco with a $19.4-billion takeover bid.
"Nobody in Canada could figure out a way in justifying whether the valuation of Inco or Falconbridge made any sense. Yet people who perhaps don't have those rear-view blinders went ahead and basically depleted the Canadian industry of all of the blue-chip assets all of a sudden," Mr. Waheed said.
There is little doubt as to who will be the chairman of the merged company if the bid succeeds — Ian Delaney already holds that title at both Sherritt and Dynatec. In an interview, the 63-year old said he was completely recused from the negotiation process. "The conflicts for me were so abundant, I just stayed out of it," he said.
© The Globe and Mail
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