The Long Case for Dynatec

Mar. 1.07 | About: Dynatec Inc. (DYTCF)

Metal mining related stocks are attracting attention again. Precious metals are in increasing demand because of the US Dollar’s weakness and because of worldwide Central Bank gold reserve build-outs. For industrial metals the demand vs. supply situation is tight because of what J. Cramer of ‘Mad Money’ fame calls the ‘BRIC Factor’ (Brasil, Russia, India and China).

This may be a good time to take a look at Dynatec Corp. (OTC:DYTCF), a Canadian nickel, copper, platinum, palladium and gold miner. The emphasis here is on nickel, an important component of stainless steel. In addition to metals mining, the company is also involved in a pilot project to produce coal-bed methane on a 42,000 acre lease in West Virginia. The stock has doubled in value in the last 12 months. Last week it broke through $2 for the first time, which is Jim Cramer’s critical value for low priced stocks to become possible buy-candidates. 2006 earnings are projected to be 7 cents, 2007 earnings are expected to be 10 cents. The final quarterly report for 2006 as well as the year-end report are due any time now.

An important fundamental reason for the most recent price movement of the stock was undoubtedly the announcement by FNX Mining Co. of Ontario, Canada, a company for which Dynatec performs the actual mining operations and in which it also has a 24.5% ownership interest, of the discovery of a new nickel deposit in the Sudbury mining district of Ontario, Canada.

The underlying, long range interest in Dynatec is quite different from its mining operations in Canada, however. It is related to its planned nickel and cobalt mining operations in Ambatovy on the island of Madagascar (off the East coast of Mozambique in Africa), one of the largest nickel projects under development in the world.

The Ambatovy nickel/cobalt ore mining and metals production project has been in the planning stage for more than five years, ever since the acquisition of the property by Dynatec from copper miner Phelps Dodge and is just now moving from the technological evaluation to the financing and construction stage. In January of this year the Ambatovy Project sponsors reached agreement in principle with a syndicate of international project lenders on a term sheet for the provision of not less than US$1.7 Billion of project debt financing. The total project cost is projected to be US$2.5 Billion. Ambatovy is currently owned 45% by Dynatec, the project leader and operator and 55% by a syndicate of lenders as follows: 27.5% each by Sumitomo Corporation of Japan and Korea Resources Corporation (leading a consortium of Korean enterprises including Daewoo International Corporation, Keangnam Enterprises Ltd. and STX Corporation).

SNC-Lavalin Inc., the engineering, procurement and construction company for the Ambatovy project, has agreed to acquire a 5% interest in Ambatovy from Dynatec coincident with the closing of the project debt financing. Construction is schedules to begin by mid-year. Nickel production is projected to commence in the 2009/2010 timeframe. In December of 2006 Dynatec received environmental approval from the Madagascar government to proceed with the project. The Ambatovy Project is evidently the shining star this tiny mining company, a veritable flea among giants, is dreaming about. By giving up a large percentage of the proven mineral wealth of the future mine Dynatec has been able to attract the kinds of highly reputable, deep pocketed international lenders who will finance the construction phase of the project, while it is still keeping a very substantial interest in the future output of the mine. DYTCF.PK should be worth many times its present value in the not too distant future.

Disclosure: Author holds a long position in Dynatec.