Sherritt Reports Higher Nickel Production at Moa JV and Stronger Balance Sheet for Q4 2018

Sherritt International Corporation (“Sherritt” or the “Corporation”) (S), a world leader in the mining and hydrometallurgical refining of nickel and cobalt from lateritic ores, today reported its financial results for the three- and 12-month periods ended December 31, 2018. All amounts are in Canadian currency unless otherwise noted.

CEO COMMENTARY

“Sherritt ended 2018 with lower debt and more cash than we started the year with as a result of several initiatives designed to reduce expenses, buy back $130 million of outstanding debentures and improve production reliability at our operations,” said David Pathe, President and CEO of Sherritt International.

“Although concerns of international trade disputes and the impacts of tariffs have resulted in recent commodity price volatility, we expect to sustain our momentum through 2019 and beyond by capitalizing on the strong market fundamentals and outlook for Class 1 nickel, completing drilling on Block 10, and identifying opportunities where we can bring innovations developed by our Technologies Group to market,” added Mr. Pathe.

HIGHLIGHTS FOR Q4 AND FY2018

• Sherritt’s share of finished nickel production at the Moa Joint Venture (“Moa JV”) in Q4 2018 was 4,294 tonnes, up 4% from last year, while finished cobalt was 428 tonnes, down 8% from Q4 2017. Production for Q4 2018 was impacted by the disruption in the supply of hydrogen sulphide, a key reagent used in the production of finished nickel and cobalt at the refinery in Fort Saskatchewan, as previously disclosed.
• Q4 2018 Adjusted EBITDA [(1)] was $17.7 million, down from $49.6 million in Q4 2017. The decrease was due to a number of factors, including lower contributions from the Oil and Gas business, lower cobalt sales and higher input costs, including higher sulphur and energy prices, at the Moa JV.
• Received $6.7 million in distributions from the Moa JV in Q4 2018 for a total of $11.9 million in distributions for FY2018. Q4 2018 marks the second consecutive quarter that the Moa JV has made distributions, indicative of improved nickel prices over the past several quarters.
• Net direct cash cost (NDCC) [(1)] at the Moa JV for FY2018 was US$2.24 per pound of finished nickel sold, in line with the US$1.90 - $2.40 per pound guidance that Sherritt provided for the year. NDCC for 2018 ranked the Moa JV within the lowest cost quartile relative to other producers and ranked it as the lowest cost nickel HPAL operation according to annualized information tracked by Wood Mackenzie.
• Cash from continuing operations in FY2018 was $7.4 million compared to cash flow used of $9.6 million in FY2017. The improvement was driven largely by the receipt of distributions from the Moa JV, lower interest payments on debentures and increased fertilizer customer prepayments.
• Sherritt ended the year with cash, cash equivalents and short-term investments of $207.0 million, up from $203.0 million at the end of 2017. The increase was due to a combination of factors, including the receipt of distributions, working capital and advance repayments from the Moa JV totaling $47.7 million, reduced interest payments of $6.3 million and reduced administrative expenses of $6.1 million, excluding the reduction of share-based compensation. The lower administrative expenses were due to various cost-savings initiatives, including lower consulting fees, reduced employee costs and the relocation of the Toronto corporate office.

DEVELOPMENTS SUBSEQUENT TO YEAR END

• Reached an agreement in principle, subject to final approvals, with Cuban partner on a payment plan to reduce overdue receivables.

• Based on a decision to prudently manage drilling and exploration costs, drilling on Block 10 has been suspended to enable the completion of additional analysis of the geological conditions between the upper and lower target reservoir.

To date, third-party industry experts have completed detailed lab analysis of rock cuttings collected during previous operations on Block 10. Results of the lab analysis, which indicated that the rock formation between the upper and lower target reservoirs has unique characteristics, are currently being used with the assistance of other third-party experts to adjust drilling parameters, including modifying the drilling fluid and making use of casing while drilling technology that addresses the challenges of well-bore degradation and fractured zones experienced to date.

Drilling on Block 10 will resume at the end of March with the new drilling parameters, and is expected to be completed in the second quarter of 2019. The adoption of new drilling parameters will not result in any increases to planned capital spending previously disclosed for the Oil and Gas business. Any incremental capital spend at the Oil and Gas business in 2019 will be predicated on successful drill results on Block 10 and collections on receivables. Sherritt intends to explore partnerships for further investment in Block 10 following completion of the current drilling.

[(1) For additional information see the Non-GAAP measures section of this press release.]

Q4 2018 FINANCIAL HIGHLIGHTS

[(1) For additional information see the Non-GAAP measures section.] 
[(2) The amounts for the periods ended December 31, 2018 have been prepared in accordance with IFRS 9 and IFRS 15; prior year periods amounts have not been restated. Refer to note 3 in the audited consolidated financial statements for the year ended December 31, 2018 for further information.]

Cash, cash equivalents and short-term investments at December 31, 2018 were $207.0 million, up from $203.0 million at December 31, 2017. In Q4 2018, Sherritt generated $12.6 million in cash flow from operations largely as a result of $14.0 million in fertilizer customer prepayments and a $6.7 million distribution received from the Moa JV.

During the year Sherritt received dividends and distributions totaling $11.9 million from the Moa JV. These amounts were received subsequent to the Moa JV’s repayment of $25 million on a working credit facility and $10.8 million on advances previously made. Future dividends and distributions from the Moa JV will vary in amount based on available free cash generated, largely as a result of production totals and prevailing nickel and cobalt prices.

Combined operating cash flow in Q4 2018 included contributions of $50.2 million from the Moa JV and Fort Site, $13.1 million from the Oil and Gas business and $5.0 million from the Power business.

During Q4 2018, Sherritt received US$17.4 million on its Cuban overdue scheduled receivables. At December 31, 2018 total overdue receivables were US$152.5 million, up from US$147.8 million at September 30, 2018. Sherritt has experienced variability in its Cuban receivables over the years but has not incurred any losses related to any scheduled Cuban receivables.

Adjusted earnings (loss) from continuing operations [(1)]

[(1) For additional information see the Non-GAAP measures section.]

Net loss from continuing operations for Q4 2018 was $69.1 million, or $0.17 per share, compared to earnings of $552.9 million, or $1.85 per share, for the same period of last year. Sherritt incurred a net loss from continuing operations of $80.2 million, or $0.21 per share, for FY2018 compared to earnings of $308.9 million, or $1.04 per share, for FY2017. Earnings generated in the three- and 12-month periods ended December 31, 2017 were primarily related to the gain recognized on the Ambatovy restructuring, which offset operating losses.

Adjusted net loss from continuing operations was $20.8 million, or $0.05 per share, and $50.5 million, or $0.13 per share, for Q4 2018 and FY2018, respectively. In 2017, Sherritt incurred an adjusted net loss from continuing operations of $50.2 million, or $0.17 per share, for Q4 and $317.1 million, or $1.07 per share, on a full-year basis. Significant adjustments to earnings or losses in the reporting periods include the gain on the Ambatovy Joint Venture (“Ambatovy JV”) restructuring in Q4 2017, a non-cash loss on the revaluation of the Ambatovy JV subordinated loans receivable in Q4 2018 resulting from changes in expected repayment schedule, and unrealized foreign exchange gains and losses in both FY2018 and FY2017.

METAL MARKETS

Nickel

Nickel prices softened in Q4 2018, slowing the momentum established over the past year when nickel reached a high of US$7.26/lb. The average-reference price in Q4 2018 was US$5.20/lb, down from US$6.01/lb in the preceding quarter.

The downward price pressure was driven by a number of developments. The most notable being ongoing concerns that the international trade dispute between the U.S. and China would weaken global demand for nickel. Initial market reaction to news of a planned facility in Indonesia that is expected to produce 50,000 tonnes per year of battery-grade material also contributed to softening nickel prices. Market reaction to the construction timelines and funding requirements to build the high pressure acid leach facility has since become skeptical. Increased availability of nickel pig iron supply was another contributing factor in weakening nickel prices.

The softening of prices belied the strong underlying nickel fundamentals. Combined nickel inventories on the London Metals Exchange and the Shanghai Futures Exchange at the end of Q4 2018 totaled 219,804 tonnes, down 8% from the combined total of 240,066 tonnes at the end of Q3 2018. The Class 1 nickel inventory decline in 2018 was even more dramatic at 55%. As demand continues to exceed available supply, the nickel market is anticipated to be in a structural deficit in the coming years. Since the start of Q1 2019, nickel prices have risen approximately 12%.

Demand for nickel will continue to be driven by the stainless steel sector. According to market research by CRU, stainless steel demand is expected to grow at an average annual rate of approximately 4% through 2022 with production emanating largely from China and Indonesia. Demand for nickel – particularly Class 1 nickel – from non-stainless steel sectors is also expected to accelerate given the growth of the electric vehicle battery market. Class I nickel, along with cobalt, are key metals needed to manufacture electric vehicle batteries.

Beyond 2018, a shortage of Class 1 nickel is anticipated over the coming years since current market prices are below incentive levels needed to develop new nickel projects. As a result, no new Class 1 nickel supply is expected to come on stream in the near term.

Cobalt

Cobalt prices experienced continued softness in Q4 2018. Consistent with developments earlier in the year, the price decline was driven by increased supply of intermediate product from the Democratic Republic of Congo as well as by the destocking of inventory by Chinese consumers. The average-reference price for Q4 2018 was US$32.23/lb, down from US$35.21/lb in the preceding quarter.

Low physical demand and current cobalt oversupply is likely to keep market conditions relatively volatile in the near term. The recent softening of prices is expected to be temporary due to the growing demand from the electric vehicle battery market and persistent supply risk concerns linked to the Democratic Republic of Congo, which is currently the world’s largest source of cobalt supply.

High cobalt prices are not expected to cause supply-chain disruptions or delay the growth of the electric vehicle market given that cobalt prices represent a relatively small percentage of the overall battery pack costs. As a result, the potential for removing cobalt from electric vehicle battery production in the near term is relatively low especially since cobalt’s unique properties give batteries energy stability. While battery manufacturers continue to explore alternatives to existing electric vehicle battery chemistry, particularly to increase the battery’s energy density, the likely beneficiary of any changes is expected to be Class I nickel.

REVIEW OF OPERATIONS

Moa Joint Venture (50% interest) and Fort Site (100%)

		For the three months ended										For the years ended
				2018				2017						2018				2017
$ millions, except as otherwise noted		December 31				December 31				Change		December 31				December 31				Change
FINANCIAL HIGHLIGHTS
Revenue		$		120.0		$		122.9		(2%)		$		498.1		$		417.0		19%
Earnings from operations				5.4				19.9		(73%)				78.9				31.3		152%
Adjusted EBITDA [(1)]				17.4				32.1		(46%)				128.4				80.5		60%
CASH FLOW
Cash provided by operations		$		50.2		$		32.5		54%		$		90.7		$		58.3		56%
Adjusted operating cash flow [(1)]				13.4			About us|Contact us|Subscriber Terms|Advertisement CopyRight©2024 Mining-Bulletin www.mining-bulletin.com All Rights Reserved.