I was watching the development of SM64 2 very closly these past couple of years, and here's what I saw. Soon after SM64 (1996), Nintendo announced that its sequal is in development. Nintendo gave us little tid bits of info concerning the game through the next two years (1997-1998). Two years later, (1999-2000), not a word has come out of that same development team. However, in a news article (Early 2000), a news reporter askes Miyamoto if SM64 2 will be released. He said: "We are developing that game for another console." SM64 2 was never spoken of after that. So here are my thoughts. Either:
1) Miyamoto ported the game to Dolphin.
or
2) Miyamoto canned the game.
There you have it. This is just my opinion, so...