* Project now expected to produce first metal in Q1 2012
* Capital expenditure costs rise 16 pct to $5.5 bln
* Shares down 6.13 percent at C$6.58 on TSX (Adds analyst's comment, shares. In U.S. dollars unless noted)
TORONTO, June 14 (Reuters) - Shares of Sherritt International (S.TO) fell more than 7 percent on Tuesday morning after the Canadian company said it expects a roughly six-month delay and a 16 percent increase in costs at its Ambatovy nickel-cobalt project in Madagascar.
The company had expected to start production at the mine this summer, but said it now expects first production in the first quarter of 2012.
Shares tumbled 7.33 percent, or 51 Canadian cents, to C$6.50 on the Toronto Stock Exchange shortly after the open, but later recovered slightly to C$6.58.
Sherritt also said it expects capital spending on the project to increase 16 percent to $5.5 billion, largely due to inaccurate estimates for piping and electrical materials, along with costs tied to the delay.
In a note to clients, Desjardins Securities analyst John Hughes called the news "negative" and put his earnings estimate and share-price target for the diversified miner under review.
Sherritt owns a 40 percent stake in Ambatovy, while Japan's Sumitomo Corp and South Korean investor Korea Resources Corp, each own a 27.5 percent stake.
The project's engineering contractor, SNC Lavalin (SNC.TO), owns a 5 percent interest in the project, which is expected to produce 60,000 tonnes of nickel and 5,600 tonnes of cobalt annually over an estimated 30-year mine life.
Sherritt said the scope, technology, and capacity of the project remain unchanged. It will fund its 40 percent share of the capital cost increase directly from funds on hand. ($1=$0.98 Canadian) (Reporting by Euan Rocha and Julie Gordon; Additional reporting by Aftab Ahmed in Bangalore; Editing by Peter Galloway)