* Project supposed to be Europe's biggest nickel mine
* Mine is first to use bioheapleaching process for nickel
* Leak pushed up uranium levels in nearby lakes and rivers
* Shares down more than 90 pct from 2011 high
By Terhi Kinnunen
SOTKAMO, Finland, April 10 Talvivaara CEO Pekka Pera still has the one euro coin he used to buy the rights to ore deposits at the company's nickel mine in Sotkamo, eastern Finland, a decade ago.
While the previous owner saw no future for the site, Pera was so sure it would succeed with the help of a pioneering metals extraction process called bioheapleaching that he bought the coin back as a keepsake.
But after waste water leaked last year, pushing up uranium levels in nearby lakes and rivers, and repeated failures to meet production targets, the mine is now saddled with debt and burning through cash. Investors are uncertain whether they will ever see a profit from what is supposed to become Europe's biggest nickel mine.
A new leak from its waste pond last Sunday was the latest in a series of troubles which analysts say show the company has overestimated the benefits of the rarely-used bioheapleaching method, and underestimated its risks.
"During the last three to four years, there have been so many problems and they haven't had success in ramping up production," said Pohjola analyst Jari Raisanen. "I think nobody really knows what the future is."
On a recent Friday, Talvivaara opened the mine to several hundred mostly local people as part of a public relations drive following the spill last November. A harsh chemical odour hung in the air as they entered the snow-covered site.
Pera, a burly 48-year-old in an orange jacket and rubber boots, listened patiently to the visitors' complaints and queries before replying to each.
"We have become more humble," he said. The latest leak was contained in the mine by safety dams but last year's accident sent 200,000 cubic metres of waste water downstream, raising uranium levels in nearby waters and prompting a public outcry. Uranium is extracted along with other metals from the ore at Sotkamo, and is currently treated as waste.
Pera founded the company a decade ago, using his confident demeanour and experience that includes stints in Ireland, Australia and at steel maker Outokumpu, to persuade international investors to back his plans.
Outokumpu, the previous owner of the site around 500 km (300 miles) northeast of Helsinki, didn't see it as viable for mining and sold the rights for the symbolic euro.
But Pera believed it would be profitable with large-scale bioheapleaching. The company pitched this method as more cost-efficient and environmentally-friendly than traditional smelting as it takes advantage of natural microbial reactions to accelerate the process of separating metal from ore.
The method, which involves crushing the ore into small grains and sprinkling them with a solution containing sulphuric acid, had been used in gold and copper mines but Sotkamo was the first to try it with nickel.
Talvivaara shares listed in London in 2007, the year nickel prices peaked around $51,800 per tonne, and markets hailed the company as Finland's new star. Today nickel trades at not much more than $16,000.
NOT JUST BAD LUCK
Troubles started right away, however, with local people complaining of a rotten egg-like smell and of dust emissions. Some reported rashes after swimming in nearby lakes. Last year, a worker died after inhaling high levels of hydrogen sulphide.
The problems weren't just environmental. A crushing system required rebuilding in 2009, halting output for months. In 2010, problems at a hydrogen plant again stopped work, and the company has constantly missed production targets since then.
Last year Talvivaara repeatedly cut its target from an original 25,000-30,000 tonnes, and actual production was under 13,000 tonnes. It forecasts this will pick up to 18,000 tonnes this year, still far short of its full annual target of 50,000 which Pera says will probably be reached by 2017-2018.
Analysts say the frequency of the setbacks show Talvivaara's problems aren't just bad luck. Cailey Barker, mining analyst at Numis Securities, said the company was trying to achieve levels of nickel extraction possible only for bigger organisations.
"It is a 40 million pound company doing something a major should be having a crack at," Barker said. "It was very easy to look at the headline numbers and get fooled - 50,000 tonnes looks great on paper but it just doesn't work."
Some analysts say initial tests of the bioheapleaching process may have been too limited to reveal problems that are inevitable with such large-scale production.
Many also say Talvivaara lacked adequate back-up plans to deal with the unexpected, such as heavy rains that also disrupted production last year. The company says it has been improving operations, particularly around water management.
Talvivaara's fourth-quarter operating loss totalled 57 million euros ($74.4 million), including 23 million euros in costs related to the November leak. Such costs, along with the halts to production, forced it to make a cash call of 261 million euros from shareholders last month.
The cash, secured with backing from state investment fund Solidium and mutual pension insurance firm Varma, is expected to help lower its debt levels and allow the mine to keep running for the next year or so.
But analysts say its survival beyond that depends on being able to push up production and roll over around 225 million euros in bonds maturing in 2015. These 4 percent bonds now trade with a 27.4 percent yield, up from less than 10 percent a year ago.
Pera is contrite about the problems but remains optimistic.
Last month he told Reuters that cash flow will turn positive next year after a negative 32.7 million euros in 2012, even if nickel prices stay low. The company has not changed its outlook since the weekend leak which it says has been fixed.
Markets are sceptical. Talvivaara shares hit a record low on Monday of 13 pence in London and 0.1555 euros in Helsinki after the latest leak. Despite bouncing back on news it had been nearly fixed, they remain down more than 90 percent from their 2011 highs.
Investors who have stayed loyal say they were encouraged by Solidium's support. Quorum Fund portfolio manager Marko Kyyronen, who holds Talvivaara bonds in his portfolio, said such a project of "national importance" warranted a long-term stance.
But he also said the most recent leak had worried investors who took part in the latest rights issue, the company's third. "After this, it will be very difficult to organise new share issues," he said.