2nd UPDATE: Sherritt To Buy Controlling Stake In Indonesian Nickel Project

Sherritt International Corp. (S.T) said Wednesday it will acquire a controlling stake in the Sulawesi nickel project in Indonesia from Rio Tinto Ltd. (RIO) for an undisclosed amount.

Sherritt, a Toronto-based diversified international mining company, will become the project's operator. The company said it plans to use its expertise in nickel laterite mining to exploit Sulawesi, which is considered one of the largest undeveloped nickel projects in the world.

For Rio Tinto, the sale represents a pulling back from its first ambitious estimate made in 2008 that the development of Sulawesi would allow it to enter the nickel market and be among the world's top 10 producers within a decade.

Instead, Rio Tinto spokesman Tony Shaffer said the company will focus on its smaller Eagle nickel project in Michigan, which is expected to producer 16,000 metric tons a year.

Rio says Sulawesi contains 162 million tonnes of nickel, and a first mine could yield 46,000 metric tons a year and eventually expand to more than 100,000 metric tons a year.

However, Sulawesi's nickel is embedded in laterite rock, which is more difficult and expensive to process.

"Rio Tinto has been considering next steps for its Sulawesi Nickel project for some time and has concluded that bringing in a partner on an earn-in basis is the best way of developing it," Rio Tinto said in a statement. "Sherritt is a very good partner for Rio Tinto. It has two active laterite mining and processing projects which make it ideally placed to lead this project."

After the Indonesian government uses an option to acquire a 20% interest in the project, Sherritt would have controlling interest and a 46% economic interest, with Rio Tinto maintaining a 34% economic interest.

A Rio Tinto executive has been quoted in Indonesian media as saying the project will cost $2 billion to develop. Shaffer said no official cost estimate has been released.

BMO Capital Markets analyst Tony Robson noted that Sulawesi has been under consideration since 1999 and warned investors to expect delays. "Development would take at least seven years to potential first production, based on the challenges of laterite projects generally and potential regulatory delays in Indonesia," Robson wrote in a note to clients.

Sherritt, which has operations across the world including in Canada, Cuba and Madagascar, said it has executed an earn-in and shareholders agreement in connection with the deal and has also committed to fund $110 million toward producing a feasibility study from which a development decision will be made.

Sherritt shares rose 2% to C$8.03 in recent trading on the Toronto Stock Exchange.

-By Edward Welsch, Dow Jones Newswires; 403-471-3855; edward.welsch@dowjones.com

(Carolyn King contributed to this article.)

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