Dynatec Corporation

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Dynatec Corporation

BREAKING GROUND

SEEKING NEW VENTURES

BEATING THE ODDS

PRINCIPAL SUBSIDIARIES

PRINCIPAL DIVISIONS

PRINCIPAL COMPETITORS

BREAKING GROUND

Three engineers, Bob Dengler, Bill Shaver, and Fred Edwards, founded Dynatec Mining Limited in 1980, concentrating on underground development work and shaft sinking. “Initial growth was slow,” the Canadian Mining Journal recalled. The 1988 acquisition of a drilling operation prompted a name change and broadening of business. The company began operating as Dynatec International Limited, consisting of two key divisions: Dynatec Mining Limited and Tonto Drilling Services.

In the early 1990s, the privately held Canadian company led by Dengler engaged in business in the United States, Mexico, South America, and the Pacific Rim. The company’s activities included mine contracting, construction, engineering consulting, diamond and rotary drilling, and mine equipment manufacturing and distribution, according to the Globe & Mail.

A big change came about in 1997. Dynatec merged with Sherritt International Consultants, Inc. (SICI), a metallurgical business. Sherritt’s Toronto-based parent company, the gas and oil drilling concern Sherritt International Corp., immediately spun off the combined businesses. Dynatec’s Dengler headed the new entity, with projected annual sales of CAD 150 million to CAD 200 million. The Fort Saskatchewan, Alberta-based SICI, armed with a half-century of metallurgy experience, opened new doors for Dynatec Corporation.

“During years of mining we have operated in virtually every commodity minable. As we expanded we began running small mining operations, gradually building up to larger, more comprehensive projects such as Inco’s Shebandowan nickel mine, the Ken Snyder gold mine in Nevada and Goldcorp’s Red Lake gold mine. From geology and mine development through to mine management, we can take on a project and bring it through to a producing mine. When we added our Metallurgical Technology division in the late 1990s we realized we could leverage our expertise to add greater value for our shareholders though mine ownership,” Dengler recounted in the Canadian Mining Journal.

SEEKING NEW VENTURES

Dynatec and FNX Mining Co. Ltd. formed a joint venture in 2002 to buy mining rights to five dormant Sudbury basin mineral properties from Inco Ltd. FNX embarked on a multimillion-dollar exploration project during 2002 and 2003. Formed as a result of the impact of an asteroid, the northern Ontario site had produced CAD 330 billion worth of minerals, primarily nickel, over its lengthy history, the National Post explained. Interest in the area was renewed when geologists discovered deeper deposits of copper. Because the site had already been heavily mined, infrastructure such as ventilation shafts, tunnels, and electric wiring was largely in place in many locations.

“We’re controlling our own destiny a lot more than in the past, and we’re able to take advantage of our expertise for ourselves and for the joint venture, as opposed to just for our clients,” Tony Makuch, operations manager for Dynatec, told theNational Post in March 2003.

Yet while Dynatec held a 25 percent and FNX 75 percent interest in the Sudbury area properties, Inco continued to play a role. The mammoth mining concern not only held the right to process the ore FNX and Dynatec produced but could buy back the properties if it chose to do so.

The November 2003 commencement of commercial production at McCreedy West propelled Dynatec and FNX into the ranks of base and precious metal producers, theCanadian Mining Journal reported. The venture continued to prepare other Sudbury basin sites for production.

Meanwhile, Dynatec was expanding outside Canada. Under an August 2003 agreement with a subsidiary of U.S.-based Phelps Dodge Corp., Dynatec would evaluate, develop, and operate the Ambatovy nickel project in Madagascar. Another move in 2003 banked on the successful transfer of Dynatec’s drilling knowhow to the energy sector. Dynatec leased coal-bed methane rights in West Virginia, on its way to becoming a natural gas producer.

Dynatec recorded 2003 revenue of CAD 151.9 million. Upon a subsequent decision to sell the Drilling Services and Mineral Products Divisions, the amount was restated to CAD 106.7 million. Restated earnings were a loss of CAD 1.1 million. In 1999, Dynatec had bought an interest in Canadian industrial mineral producer Highwood Resources. Full ownership followed in 2002, leading to the creation of a Mineral Products division.

In April 2004, the estimated size of Madagascar’s Ambatovy nickel project was increased by 20 percent, to 60,000 tonnes. The new projection boosted Dynatec’s stock price. The Ambatovy development was expected to rank among the world’s largest nickel mines when it began production.

Concurrently, several other big nickel projects were gearing up. Inco Ltd., the world’s second largest nickel miner, planned to begin commercial production at a Labrador deposit in 2006. BHP Billiton PLC was positioning itself for a run at third place with Australian nickel projects slated for 2007.

In the process of shifting from engineering firm to active investor, the company continued to derive the bulk of its revenue from contract mining and consulting work such as Goldcorp’s “blockbuster” Red Lake property, Drew Hasselback reported for theNational Post article.

Yet by building a mining asset portfolio through joint ventures, Dynatec’s revenue split was evolving. Company mines were expected to produce one-quarter and contract mining and engineering three-quarters of revenue by the end of 2004. Dynatec’s 2003 revenue was almost entirely from mining, drilling, and metallurgical services. Contract revenue supported development projects such as Ambatovy as well as mines in the Sudbury basin and a coal-bed methane venture in West Virginia.

COMPANY PERSPECTIVES

Dynatec Corporation is a growing mining company and a leading provider of mining and metallurgical services. Dynatec’s strategy is to create shareholder value by applying its mining and metallurgical expertise to ownership positions in attractive mineral projects.

In 2004, about a third of the $128.4 million in Mining Services revenue was from the Sudbury Basin Joint Venture (SBJV). Another $16.1 million in revenue was related to its SBJV ownership position. Metallurgical Technologies brought in $4.4 million, bringing total revenue to $148.9 million.

BEATING THE ODDS

Bruce V. Walter succeeded Dengler as president and CEO on January 1, 2005. Walter, former Sherritt Inc. president, ascended to leadership during a mining boom driven by high metal demand, strong prices, and willing investors. Dynatec, now both contract miner and mine owner and operator, also celebrated a quarter century in business during 2005.

Dynatec sold its Drilling Services to a subsidiary of Major Drill Group International for $17 million in February 2005. Following the sale, Dynatec employed 1,100, a majority working on the SBJV and Red Lake projects.

Capital cost of the Ambatovy nickel project, Dynatec’s largest property, was projected to come in at CAD 2.25 billion. The agreement with Phelps Dodge, who needed a partner with nickel metallurgy expertise, initially allowed Dynatec a 53 percent interest for a $20 million expenditure on the project and the contribution of its commercial licenses for hydro-metallurgical technology. In January 2005, Dynatec’s ownership climbed to 100 percent. Phelps Dodge received 20.9 million shares, or nearly 10 percent equity in Dynatec, and 100 preferred shares of a subsidiary, according to the Canadian Mining Journal.

A feasibility study projected a project life of 27 years. Expected to operate at below average cost, Ambatovy, a laterite ore project, was likely to earn money even when nickel prices dropped off. Although more than 50 percent of nickel production came from sulfide deposits, three-quarters of the world’s known nickel resources were in laterite ore. Dynatec’s work on Ambatovy positioned the company for the future. Still, as a company with market capitalization of about CAD 240 million, Dynatec needed additional equity partners to get the big project off the ground.

Stable partnerships looked anything but certain for a time and many forecast doom for the project situated off the east coast of southern Africa. Dynatec shares fell 17 percent upon the late 2004 news that Impala Platinum had pulled out of its short-lived agreement to buy 37.5 percent of Ambatovy. However, in August 2005 Sumitomo Corporation joined the Ambatovy Nickel project as a 25 percent partner.

On another front, in February 2005, the SBJV announced news of a significant mineralization discovery. In the summer, Dynatec acquired indirect interest of Aurora Platinum Corporation, enhancing its Sudbury position. In October, Dynatec exchanged the Aurora holding and its 25 percent interest in the Sudbury Basin Joint Venture for 20.5 million common shares of FNX. With a 24.6 percent stake in FNX, Dynatec was the mining company’s largest shareholder. Nevertheless, it was the mining and metallurgical technologies services that drove Dynatec’s record operating earnings in 2005.

Meanwhile, work progressed on the U.S.-based coal-bed methane project. Site evaluation, completed in March 2004, led to pilot well gas production on the leased 42,053 acres in West Virginia during 2005. Testing continued into 2006.

Dynatec hit another speed bump in September 2006, when U.S. hedge fund Amaranth Capital Advisors LLC, Dynatec’s largest shareholder, was forced to liquidate most of its holdings after a bad bet on natural gas prices.

However, the news brightened considerably the next month, when a group of Korean investors joined the Ambatovy project. Bringing in $852 million in financial support, according to theNational Post, the Korean Resources Corp. consortium consisted of Daewoo International Corp., Keanganam Enterprises Ltd., and STX Corporation. Under the new partnership configuration Dynatec maintained a 40 percent share as mine operator. Sumitomo Corporation and the Korean group each held a 27.5 percent share. The Canadian-based designer and builder of the mine, SNC Lavalin Inc., agreed to buy 5 percent at the closing of the project debt financing.

KEY DATES

1980:: Dynatec Mining Limited is founded by three engineers.
1988:: Acquisition leads to name change and creation of two operating divisions.
1997:: Company merges with metallurgical firm Sherritt International Consultants; goes public as Dynatec Corporation.
2002:: Joint venture propels move toward mine ownership.
2003:: Dynatec begins expanding internationally.
2005:: Company sells drilling services business.
2006:: Construction plans for Ambatovy nickel venture are back on course.

Mining was expected to begin in 2010, producing 60,000 tonnes of nickel and 5,600 tonnes of cobalt annually. At a late October 2006 price of $14.34 on the London Metal Exchange, nickel was trading at three times the average price from 1990 to 2005. The Korean investors had committed to buying at least half the mine’s output for the first 15 years of production. Nickel, used in production of stainless steel and batteries, for example, was increasingly demanded by rapid growth economies, including China and India.

Yet Dynatec was competing in an industry controlled by companies valued in the tens of billions. Consolidation continued in 2006. Brazil-based CVDR, which was developing two nickel projects of its own in its home country, bought Inco for $17.5 billion. Inco, in turn, had a New Caledonia nickel project in development. Switzerland-based Xstrata PLC paid more than $20 billion for Falconridge Ltd., which was also developing a New Caledonia project. The giants had mines scheduled to go into production ahead of the Ambatovy.

Dynatec reported record revenue of $211.4 million for 2006. Anticipating the year ahead, the company said construction was on track to begin at Ambatovy around midyear. Also slated for 2007 was a decision on the future of the coal-bed methane initiative. As for the third ownership interest, Sudbury, contract mine production, development, and construction work continued.

Kathleen Peippo