February 25, 2009 / 2:08 PM / in 9 years

UPDATE 2-Sherritt raises Ambatovy costs, posts big loss

* Loss C$592 mln, or C$2.03 per share, on charges

* Raises Ambatovy cost estimate to $4.5 bln

* Shares fall 19 percent (In U.S. dollars, unless noted)

By Cameron French

TORONTO, Feb 25 (Reuters) - Sherritt International S.TO raised the cost estimate for its Ambatovy nickel project in Madagascar by more than $1 billion on Wednesday, and said it is in talks with its project partners on ways to fund its share.

Sherritt warned of the higher Ambatovy costs as it reported a steep C$592 million ($474 million) quarterly loss, largely on a writedown of Ambatovy, and said it might soon be in violation of a debt covenant, all of which prompted a 19 percent selloff in the company’s already hard-hit shares.

Sherritt owns 40 percent of Ambatovy and is its operator. The company said the project will now cost $4.5 billion to build, up from a previous estimate of $3.4 billion. Ambatovy is expected to one day produce 60,000 tonnes of nickel a year.

“We do not have the capacity to finance our share... so we are looking at alternative financing in a way that won’t stress our balance sheet,” Ian Delaney, the company’s chairman and acting chief executive, said on a conference call.

Delaney, who took over as CEO after Jowdat Waheed took a leave of absence in January, said Sherritt is negotiating funding options with project partners Sumitomo Corp [SUMTMS.UL], Korea Resources Corp, and SNC-Lavalin SNC.TO.

“We will have an answer probably in the next two months as to how that will be financed,” he said.

Shares of Sherritt, which is based in Canada but focused on Cuba, fell 49 Canadian cents to C$2.10 on Wednesday.

REACHES CUBA DEAL

Sherritt also said it had come to an agreement with Cuba on $162 million in outstanding receivables as well as for guarantees for future payments owed to the company.

The $126 million in oil and gas receivables and $36 million in power receivables will be paid through the maturation of Cuban certificates of deposit over five years.

In a research note, RBC Capital Markets analyst Robin Kozar said uncertainty over Cuba’s ability to pay Sherritt still remains, and also noted the need to raise funds for Ambatovy.

“Based on these factors, combined with our outlook for the nickel markets, we believe the shares will remain range-bound in the near term,” Kozar said.

The company lost C$592 million, or C$2.03 a share, in the fourth quarter, compared with a profit of C$83.5 million, or 36 Canadian cents a share, a year earlier.

Excluding C$571 million in charges, it lost C$20.8 million, or 7 Canadian cents a share. Analysts had expected, on average, a profit of 9 Canadian cents a share.

Sherritt said that due to its rising debt-to-earnings ratio it may not be in compliance with a covenant on short-term credit facilities that provides up to C$200 million of liquidity.

The facilities mature in the second and third quarters, and Sherritt said it will try to renegotiate the covenant. If it is unsuccessful, it may have to repay the amounts outstanding, which totaled C$97 million at Feb. 20.

$1=$1.25 Canadian Reporting by Cameron French, additional reporting by Susan Taylor in Ottawa and Marc Frank in Cuba; Editing by Peter Galloway

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