Sherritt International Corporation (S-TSX), a leader in nickel and cobalt mining, reported its third-quarter earnings on October 31, 2024, revealing strong operational performance despite the lowest cobalt prices since 2016 and a 12% decline in nickel prices.
The company's net direct cash cost (NDCC) saw a significant decrease, and there was an increase in production and sales of mixed sulphides and fertilizers. However, challenges such as seasonal factors and logistical disruptions have affected finished nickel and cobalt sales. Looking forward, Sherritt focuses on the Phase 2 expansion of the Moa joint venture and cost optimization measures to navigate the tough market conditions.
Key Takeaways
- Sherritt reported a decrease in net direct cash cost (NDCC) to US$5.16 per pound, marking a 30% year-over-year reduction.
- The company's liquidity in Canada increased by 28%, reaching $71 million.
- Production of mixed sulphides and finished nickel rose year-over-year, with fertilizer sales up by 46%.
- Finished nickel and cobalt sales did not match production levels due to seasonal factors and the Canadian rail lockout.
- Sherritt is progressing with its Phase 2 expansion of the Moa joint venture with commissioning expected in 2025.
- Workforce reductions are part of cost-saving measures to achieve annualized savings of approximately $17 million.
- The company's strategy includes maximizing cash flows from inventory sales and securing downside protection through nickel put options.
Company Outlook
- Sherritt is cautious about its future guidance, especially regarding the Cobalt Swap, which is subject to market conditions.
- The company's focus remains on maximizing cash flows and managing liquidity effectively amidst low commodity pricing.
- The Moa joint venture's Phase 2 expansion is anticipated to commission in early 2024, aiming to enhance future growth.
Bearish Highlights
- Market challenges include a significant drop in cobalt and nickel prices, with cobalt prices at their lowest point since 2016.
- Sales of finished nickel and cobalt were impacted by seasonal trends and a Canadian rail lockout, resulting in lower sales compared to production.
Bullish Highlights
- Operational results showed an increase in production of mixed sulphides, finished nickel, cobalt, and fertilizers.
- The company has implemented workforce reductions that will contribute to significant cost savings.
Misses
- The company's finished nickel and cobalt sales were lower than production due to external factors.
Q&A Highlights
- Analysts expressed concerns about potential delays in receiving the full $57 million from the Cobalt Swap, with cash distributions possibly being back-end weighted.
- CEO Leon Binedell emphasized the goal to achieve a $57 million target annually from the joint venture, regardless of payment form.
- There are no mandatory redemptions of second reading notes this year, as cash generation is contingent on market conditions.
Sherritt International Corporation remains steadfast in its commitment to operational excellence and strategic cost management as it confronts the current market adversities. The company's ability to maintain strong operational results amidst challenging market conditions demonstrates its resilience and adaptability. Investors and stakeholders await the fourth-quarter results, which will be shared by Sherritt in the New Year, as indicated by Tom Halton at the conclusion of the earnings call.
Full transcript - None (SHERF) Q3 2024:
Operator: Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Sherritt International Corporation Q3 2024 Results Conference Call and Webcast. At this time, all participants are in a listen-only mode. I would like to remind everyone that this conference call is being recorded today, Tuesday, October 31, 2024 at 10 A.M. Eastern Time. I will now turn the presentation over to Tom Halton, Director, Investor Relations. Please go ahead.
Tom Halton: Thank you, Operator, and welcome everyone to Sherritt’s third quarter 2024 conference call. We released our third quarter results last night. Our press release, MD&A, and financial statements are available on our website and on SEDAR+. During today's call, we will be referring to our presentation that is available on our website and on today's webcast. As we will be making forward-looking statements and references to certain non-GAAP financial measures, please refer to the cautionary notes on Slide 3 of our presentation, as well as the material assumptions and risks associated with certain forward-looking statements and reconciliations of non-GAAP measures to the most directly comparable IFRS measures included in the appendix of the presentation. On the call today is Leon Binedell, President and Chief Executive Officer, Yasmin Gabriel, Chief Financial Officer, and Elvin Saruk, Chief Operating Officer. Following the review of our results, we will open the call to questions. It is now my pleasure to pass the call over to Leon.
Leon Binedell: Thank you, Tom, and good morning, everyone, and thank you for joining us. I’ll begin today with an overview of the market conditions we observed during the quarter. On Slide 4. The current market conditions remain challenging. During the third quarter, the average reference price of nickel decreased by 12%, with prices reaching the low of the year on July 25th. The average reference price of nickel during the third quarter was the lowest since the fourth quarter of 2020, and for cobalt, it was the lowest since the second quarter of 2016. Several developments occurred that were supportive for prices, and without them, prices could have declined even further. During the third quarter, BHP (ASX:BHP) announced plans to suspend nickel waste operations in Australia. Russia made headlines with plans of restricting certain exports, including nickel, and in the U.S., the Fed lowered interest rates, and new tariffs against Chinese suppliers took effect. Longer-term fundamentals remain positive for nickel and cobalt as the energy transition advances. However, near-term forecasts remain oversupplied, primarily from the unprecedented increase in Chinese-influenced supply, and this is the environment that we must plan and navigate. We made a number of changes over the last year to improve revenue, reduce costs, and restructure our business to align to these market conditions and position the company for long-term success. While these changes take time to implement and fully realize the benefits, in our third quarter results released last night, you can see the significant progress we have made while we continually seek opportunities for improvement in all aspects of our business. Turning to Slide 5 for our third quarter highlights. Despite the challenging market conditions, we had an excellent quarter operationally. We delivered strong quarterly production of mixed sulphides, finished nickel and cobalt, and fertilizers. Our NDCC declined to US$5.16 per pound, positioning us well to navigate the challenging pricing environment and in line with our guidance for the year. At Power, electricity production reached a nine-year high. Our unit operating costs were higher this quarter, as we expected, due to planned maintenance to support the increasing production we are delivering. We anticipate these costs to decrease going forward with this work now completed, and our guidance for the year remains unchanged. A new gas wall was also completed during the quarter and began providing additional gas earlier this month, which will support further increases to electricity production. Lastly, available liquidity in Canada increased 28% during the quarter, driven by the strong operating performance, particularly at the port side. Slide 6 illustrates our continued journey to improving our business and highlights the success we achieved during the quarter. On the left two charts, both MSP and finished nickel production were higher year-over-year in each quarter of 2024. In the middle chart, our NDCC of US$5.16 per pound is the best quarterly results in two years, despite the lowest cobalt by-product price in almost a decade. As mentioned, electricity production at our Power division was the highest it's been in nine years. Although we faced another quarter of oversupplied market conditions with further decreasing nickel and cobalt prices, our available liquidity in Canada was the highest it's been in the last year. Overall, it remains a very challenging market environment, but we are finding ways to improve or maintain positive margins and cash flows. And with that, I'd like to congratulate Elvin and the team on a strong quarter, and will now hand it over to Elvin to provide more details on our operations.
Elvin Saruk: Thank you, Leon. Turning to Slide 8 for our metals results. Mixed sulphide production was strong during the quarter as we continue to see benefits from the additional processing capacity and efficiencies from the slurry preparation plan commissioned earlier this year. Finished nickel and cobalt production increased year-over-year, mainly because of the higher mixed sulphides availability at the refinery. Fertilizer production was also consistent with the higher nickel production and further operating improvements that we have made. Moving on to sales. Finished nickel and cobalt sales were below production for the first time this year. This was mostly due to seasonal factors typically observed in the third quarter, including summer shutdowns of steel mills, reducing demand and certain customers postponing sales to the fourth quarter. Apart from the seasonal factors, the Canadian rail lockout caused only a brief logistical disruption, but nevertheless pushed some of our sales into the fourth quarter. Sales of finished nickel were 24% higher year over year, and we expect stronger demand from customers in the fourth quarter. Finally, fertilizer sales increased 46% year-over-year, mainly because of higher production available for sale. Now turning over to Slide 9 to talk about our net direct cash costs or NDCC. NDCC during the third quarter was US$5.16 per pound, decreasing almost 30% year over year. This was largely due to 19% lower mining, processing, and refining costs per pound of nickel sold, more commonly called NPR. The lower NPR per pound was largely due to operational improvements, lower maintenance costs, lower input commodity prices, and the impact of higher nickel sales volume. The lower NDCC was achieved despite lower cobalt by-product credits, lower average realized pricing and lower sales volumes. Looking ahead, we continue to expect NDCC to be in line with our guidance range for the year. Now turning to our low-intensity Moa expansion on Slide 10. Phase 2 of the Moa joint venture expansion, which is the processing plant, continued to advance. During the quarter, piping installation continued and brick lining of vessels started. The Moa joint venture finalized and began utilizing its US$12 million of foreign currency financing from a Cuban bank to support international payments related to the construction of the sixth leach train. We continue to expect commissioning of Phase 2 of the expansion in 2025 with the ramp up in the first half of the year. Finally, on Slide 11, we talk about our Power division results. Power generation and sales volumes was 21% higher year-over-year. Last year, you will recall we had two additional gas wells going to production and this quarter, we completed another gas well which began production in early October. This will result in even higher levels of power generation going forward. To support the higher levels of production, we completed the annual planned maintenance program this quarter, which included bringing an additional gas turbine back online. The planned maintenance work contributed to higher unit operating costs in the quarter, but will improve efficiencies in equipment utilization. We expect maintenance costs to decrease for the remainder of the year. The planned maintenance cost was factored into our unit cost guidance range for the year, which remains unchanged. This time, I'll turn the call over to Yasmin to present the financial results.
Yasmin Gabriel: Thanks, Elvin. I'll begin with our financial performance on Slide 13. While the metals pricing environment continues to be challenging, as Leon mentioned, we had considerable operational success, which drove our improved financial performance. Average realized prices for nickel and cobalt were lower year-over-year by 19% and 30% respectively, partially mitigated by our nickel put options, with $5 million received to date. Conversely, nickel sales volumes were 24% higher, and mining, processing, and refining costs per pound of nickel sold were 19% lower. Combined revenue, which includes revenue from the Moa Joint Venture on a 50% basis, in which more holistically reflects our performance, was relatively unchanged at $126.4 million, compared to $128 million in Q3 2023. The impact of lower average realized prices for nickel was offset by higher nickel sales volumes, and lower cobalt revenue was mostly offset by higher fertilizer and Power revenue. Q3 adjusted EBITDA of $10.5 million was significantly higher year-over-year, primarily driven by the reduction in mining, processing, and refining costs, and a stronger contribution from our fertilizer business with higher average realized prices, higher sales volumes, and lower maintenance costs. Net earnings from continuing operations improved to $1.8 million. Adjusted net loss from continuing operations was $11.5 million, and excludes a non-cash gain of $11.5 million, driven by updated valuation assumptions related to the Cobalt Swap. Turning now to Slide 14. We ended the quarter with $71 million of available liquidity in Canada, increasing 28% during the quarter. Key changes in liquidity during the quarter included $35.9 million of cash provided by operating activities at Fort Site, reflecting strong receipts from fertilizer sales and pre-sales. $3.4 million of cash received from in-the-money nickel put options, $900,000 of dividends from Energas, $10.8 million used in Power to support planned maintenance activities, and $5.4 million in payments and contractually obligated rehabilitation and closure costs related to legacy Oil and Gas assets in Spain. I'll now turn to Slide 15. Looking ahead, we still expect to receive distributions under the Cobalt Swap agreement in the fourth quarter of this year. These distributions are predicated on Moa JV's current and expected available liquidity. Following the second quarter, we indicated that, assuming the midpoints of our guidance ranges and the average reference price of nickel and cobalt from the first half of the year, we would expect to receive approximately $50 million in distributions. This would include Sherritt’s share as well as GNC's redirected share. With average prices of nickel and cobalt decreasing further and below the levels we assumed, we remain focused on efforts to maximize cash flows from sales of available inventories and thereby maximize the amount to be received under the Cobalt Swap, potentially up to the $50 million previously indicated. As defined by the agreement, any shortfall in the annual minimum payment amount is carried forward to the following year. We are also expecting to receive additional dividends in Canada from Energas in the fourth quarter. We have received approximately $6 million so far this year and are estimating another $4 million. In addition, we have received $1.6 million in October from the in-the-money nickel put options, bringing the total cash received this year to $5 million. As a reminder, with a brief spike in nickel prices in May, we purchased put options equivalent to approximately 25% of our expected nickel production from the Moa joint venture at an exercise price of US$8.16 per pound for a six-month period starting June 1st, providing downside protection while maintaining full exposure to the upside. We continue to evaluate and pursue hedging opportunities where it may make sense based on a number of factors, including market conditions. Finally, we continue to look for additional savings at all levels of our operations, and during the quarter we made further workforce reductions that are expected to result in $2.2 million in annualized savings. This will bring our total annualized savings from cost optimizations to approximately $17 million. That concludes my comments. I will now turn the call back over to Leon.
Leon Binedell: Thank you, Yasmin. Before we conclude, I'd like to take a moment to thank our teams for their hard work and dedication in restoring our operations in Cuba to full capacity after a particularly challenging set of circumstances, with a nationwide power outage in Cuba coinciding with the impact of a hurricane-turned-tropical storm. You would have seen our press release on Monday that our operations have returned to full capacity and that we've maintained our guidance for the year. The efforts of our team in working around the clock to achieve this has been nothing short of extraordinary and have shown what we can accomplish. Now, turning to Slide 17 to conclude. Although near-term market conditions remain unfavorable, our operations delivered a strong quarter. Our growth projects remain on track with our low-cost Phase 2 of the Moa JV expansion still expected to ramp up in the first half of next year. We remain focused on our efforts to maximize cash flows from the sale of available inventories and other options in order to maximize the amount that we receive under the Cobalt Swap this year. And now, Operator, I'd like to open the call to questions.
Operator: Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions]. Your first question comes from Tony Robson from Global Mining Research. Please go ahead.
Tony Robson: Good morning, all, and thank you for the presentation and thank you for taking my questions. I'll limit myself to two initially. You noted obviously great cost control in Moa bay and Fort Saskatchewan in the quarter, which you noted partially or mostly on low sulphur prices, net gas, and diesel. So the first question is, how are those input costs looking as we go into quarter 4, given that we're already a month in? I'll come back to the second question. Thanks.
Leon Binedell: So we do provide our assumptions over the year-over-year key input pricing, and we expect similar levels of pricing going into quarter 4 as what we've achieved year-to-date. There's slight movements up or down depending on which one you're looking at, but on a basket of goods, we're expecting similar levels of input pricing.
Tony Robson: Okay, thank you. How are -- despite that, you're still not adjusting your year guidance, at least in U.S. dollars, are you being a touch conservative there, do you think?
Leon Binedell: In terms of full-year production and cost guidance?
Tony Robson: Yes.
Leon Binedell: Or cost, specifically?
Tony Robson: The cost, cost.
Leon Binedell: There's clearly been a number of factors that come into play when we consider cost, and most negative for us has been the Cobalt byproduct credit. As Elvin mentioned, in the quarter, it was a significant impact year-over-year, a negative impact, that is, that we've been able to offset with improved commodity prices, improved operating results, and generally overall improved operations and lower maintenance costs. So we still expect our guidance to be relevant, given all circumstances to-date.
Tony Robson: Okay, thank you. A second question, or as short as it is now. You noted that the $50 million Canadian due in the fourth quarter on the Cobalt Swap was subject, obviously, to a variety of inputs, including nickel and cobalt prices. Now, I understand, but you haven't guided, interestingly, to a range where you think the receipts will be in this fourth quarter. Principally, I guess it's due to the Cobalt price, or at least that's a large input. If I simply prioritize today's spot price of $11.20 divided by $13.50 a pound US times the $50 million, I get Canadian $41 million. Again, I'll note that's clearly more complex than that. But would $40 million Canadian be a reasonable starting point for investors and the analysts looking for the numbers in the fourth quarter? Thank you.
Leon Binedell: Thanks for that question, Tony. It's obviously a lot more complicated than purely what happens in the volume of sales, particularly in a quarter. What transpires into the Cobalt Swap ultimately is driven by the overall liquidity position and need for liquidity within the Moa joint venture. And so, financing does play a role in that as well. As Yasmin mentioned, we are looking to maximize leveraging our existing inventories to sell that down or to do pre-sales from that in order to maximize the available liquidity within the joint venture. And that ultimately will determine the quantum of what we can distribute. It's not particularly relevant whether it's in cobalt or in cash. Any distributions in cobalt late in the year would have a fall-on impact of cash early in the New Year, given the sales cycle and recovery from receivables. And so, we're more likely focused on cash than cobalt distributions in the fourth quarter to ensure that cash gets accelerated to Sherritt.
Tony Robson: Thank you. It looks like I failed to tease out a guidance from you. I’m willing to view one [ph] at this stage. I'll ask a subsequent question if you don't mind then. As you noted, reduced third-party input costs as you do bottleneck Moa bay into what from mid-next year. What roughly would that save in terms of cents per pound in cash costs looking for the second half of ‘25 and into ‘26? Thank you.
Leon Binedell: Tony, we'll defer to our guidance in January next year when we provide 2025 guidance for production and cost. Obviously, we're going through that cycle right now where we're finalizing what we expect for next year from a budgeting perspective and operating outcomes and finalizing our commissioning plans. And there's a number of factors that go into that with various shutdowns and planned components to tie in to ensure the commissioning ties in with those. It's quite a complex set of factors that go into that, so we would defer. But we did indicate that we do expect to see benefit from increased volumes. Obviously, it has a fixed-cost dilution impact. So, we expect those to come to fruition. Once we get to January, we'll be able to share that with you.
Tony Robson: I look forward to it. Thank you. No further questions.
Leon Binedell: Thank you.
Operator: Thank you. The next question comes from Shane Nagle from National Bank Financial. Please go ahead.
Shane Nagle: Yeah. Thanks operator. Just to follow on the Cobalt Swap. So, I guess you won't receive the full $57 million that was agreed upon initially with the annual top-ups. So, the assumption would be, I guess, any cobalt that you delivered you try and sell it as much as possible, so you may not actually fully receive up to $50 million, I guess, in hard cash as of Q4. And then the top-up payment and additional sales would kind of follow through in early next year. Is there any concern, I guess, on the deliveries next year being, again, kind of more back-half-weighted, just giving up kind of a lot of liquidity from your partners to come out at the end of this year and into early next year?
Leon Binedell: Thanks for the question, Shane. As I mentioned, it is all driven by the liquidity within the joint venture, which is very much coupled to both nickel and cobalt pricing. The Cobalt Swap mechanism is quite tied to the cobalt price, but overall, in terms of receiving the $57 million, it's somewhat irrelevant whether it comes in cobalt or in cash. We want to make sure we get to that $57 million U.S. target each year to keep the velocity of repayments happening as planned. If one of those commodities are higher, it drives the higher liquidity in the joint venture, and it's not really relevant which one, whether it's nickel or cobalt. It does facilitate the ability to pay dividends, and the preference is cobalt, but if there's no cobalt available because of ordinary sales through the JV, then it will revert to cash. So, I think from an overall picture, it is really driven around the overall liquidity and the overall profitability of the Moa joint venture on a combined nickel and cobalt basis that will drive that. In these very low pricing environments, it is our focus to drive down our unit cost and manage our liquidity in an appropriate manner to try and maximize how much can get delivered in ‘25. But we're still anticipating over the life of this instrument to have recovered the full quantum.
Shane Nagle: Okay, yeah. So, you may see a bit of a delay in that some of that U.S. 57 guaranteed may spill over into future years, and if we get a price recovery, you'd expect to kind of receive more at that point in time?
Leon Binedell: Exactly. If there's a price spike in the early part of the year, it accelerates some liquidity early in the year, but on a sort of flat basis, it's probably more back-end weighted.
Shane Nagle: Okay. And then just a quick follow-up, if I may, on how this ties into the second reading notes and any potential mandatory redemptions there. The increased liquidity coming in the first half of the year, would you see some potential redemptions based on your calculations through those notes before they come current sometime mid-next year?
Leon Binedell: So, what we have said in our materials that came out at the end of the third quarter is that there were no mandatory redemptions this time around. And it will be fully dependent on the cash generated by the business and the available liquidity within the business, meaning the minimum thresholds at time when it needs to be paid. It is a tough market out there, and it is entirely going to be driven by commodity price environment, whether there will be sufficient cash generated in a particular six-month window in order to be able to see any of that mandatory redemptions take place. We haven't seen it this year in this price environment, and it would be difficult to see much of that happen based on the current pricing environment in the current six months as well.
Operator: Thank you. I’ll hand the call over back to Tom Halton for closing remarks.
Tom Halton: Thank you, operator. We look forward to updating everyone again in the New Year with our Q4 results. Feel free to reach out if you have any further questions in the meantime. Thank you for joining us today and for your continued support.
Operator: Ladies and gentlemen, today's conference call has concluded. Thank you for your participation. You may now disconnect.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.