Sherritt International Q3 2024 Earnings Report

Sherritt International EPS Results

• Actual EPS: -C$0.03
• Consensus EPS: -C$0.03
• Beat/Miss: Met Expectations
• One Year Ago EPS: -C$0.05

Sherritt International Revenue Results

• Actual Revenue: N/A
• Expected Revenue: N/A
• Beat/Miss: N/A
• YoY Revenue Growth: N/A

Sherritt International Announcement Details

• Quarter: Q3 2024
• Date: 10/30/2024
• Time: After Market Closes
• Conference Call Date: Thursday, October 31, 2024
• Conference Call Time: 10:00AM ET

Sherritt is a world leader in using hydrometallurgical processes to mine and refine nickel and cobalt - metals deemed critical for the energy transition. Leveraging its technical expertise and decades of experience in critical minerals processing, Sherritt is committed to expanding domestic refining capacity and reducing reliance on foreign sources. The Corporation operates a strategically important refinery in Alberta, Canada, recognized as the only significant cobalt refinery and one of just three nickel refineries in North America. Sherritt's Moa Joint Venture produces cost competitive critical minerals while maintaining high sustainability standards and has an estimated mine life of approximately 25 years. The Corporation's Power division, through its ownership in Energas, is the largest independent energy producer in Cuba with installed electrical generating capacity of 506 MW, representing approximately 10% of the national electrical generating capacity in Cuba.

Sherritt International Q3 2024 Earnings Call Transcript

Key Takeaways

• Despite a 12% drop in nickel prices and cobalt at its lowest since 2016, Sherritt emphasizes that long-term fundamentals remain positive amid near-term oversupply driven by rising Chinese output.
• Operational improvements drove net direct cash costs (NDCC) down to US$5.16 per pound of nickel—30% lower year-over-year and consistent with full-year guidance.
• Production was strong across the board: mixed sulfides, finished nickel, cobalt and fertilizers were up, while the Power division hit a nine-year high in electricity generation, aided by a new gas well.
• Available liquidity in Canada rose 28% to CAD 71 million, combined revenue held steady at CAD 126 million, and Q3 adjusted EBITDA improved to CAD 10.5 million.
• The Phase 2 expansion of the Moa joint venture remains on track for 2025 commissioning, and Sherritt has secured hedges and expects up to ~CAD 50 million in cobalt-swap distributions, alongside ~CAD 17 million in annualized cost savings.

Presentation

[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 31st, 2024, at 10:00 A.M. Eastern Time. I will now turn the presentation over to Tom Halton, Director, Investor Relations. Please go ahead.

[Tom Halton, Director of Investor Relations at Sherritt International Corporation]

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 three 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.

[Tom Halton, Director of Investor Relations at Sherritt International Corporation]

Following a review of our results, we will open the call to questions. It's now my pleasure to pass the call over to Leon.

[Leon Binedell, President and CEO at Sherritt International Corporation]

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 four, 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 announced plans to suspend its Nickel West operations in Australia. Russia made headlines with restricting certain exports, including nickel, and in the U.S., the Fed lowered interest rates, and new tariffs against Chinese suppliers took effect.

[Leon Binedell, President and CEO at Sherritt International Corporation]

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 five for our third quarter highlights. Despite the challenging market conditions, we had an excellent quarter operationally. We delivered strong quarterly production of mixed sulfides, finished nickel and cobalt, and fertilizers. Our NDCC declined to

[Leon Binedell, President and CEO at Sherritt International Corporation]

$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 plant 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 well 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 Fort Site. Slide six illustrates our continued journey to improving our business and highlights the success we achieved during the quarter.

[Leon Binedell, President and CEO at Sherritt International Corporation]

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 $5.16 per pound is the best quarterly results in two years, despite the lowest cobalt byproduct 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 we'll now hand it over to Elvin to provide more details on our operations.

[Elvin Saruk, COO at Sherritt International Corporation]

Thank you, Leon. Turning to slide eight for our metals results. Mixed sulfide production was strong during the quarter as we continue to see the benefits from the additional processing capacity and efficiencies from the slurry preparation plant commissioned earlier this year. Finished nickel and cobalt production increased year over year, mainly because of the higher mixed sulfides availability at the refinery. Fertilizer production was also higher, 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.

[Elvin Saruk, COO at Sherritt International Corporation]

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 nine to talk about our net direct cash costs, or NDCC. NDCC during the third quarter was $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 MPR. The lower MPR per pound was largely due to operational improvements, lower maintenance costs, lower input commodity prices, and the impact of higher nickel sales volume.

[Elvin Saruk, COO at Sherritt International Corporation]

The lower NDCC was achieved despite lower cobalt byproduct credits from 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 II 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 U.S. $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 II of the expansion in 2025 with the ramp-up in the first half of the year. Finally, on slide 11, we'll talk about our power division results.

[Elvin Saruk, COO at Sherritt International Corporation]

Power generation and sales volumes were 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. 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 costs were 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, CFO at Sherritt International Corporation]

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.

[Yasmin Gabriel, CFO at Sherritt International Corporation]

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.

[Yasmin Gabriel, CFO at Sherritt International Corporation]

$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.

[Yasmin Gabriel, CFO at Sherritt International Corporation]

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 CAD 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've received approximately $6 million so far this year and are estimating another $4 million. In addition, we've received $1.6 million in October from the in-the-money nickel put options, bringing the total cash received this year to $5 million.

[Yasmin Gabriel, CFO at Sherritt International Corporation]

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 $8.16 U.S. 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 this year to approximately $17 million. That concludes my comments. I will now turn the call back over to Leon.

[Leon Binedell, President and CEO at Sherritt International Corporation]

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 the 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 have 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.

[Leon Binedell, President and CEO at Sherritt International Corporation]

Our growth projects remain on track with our low-cost phase two 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 of 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. Should you have a question, please press the star followed by the number one on your touch-tone phone, and you will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press the star followed by the number two. If you are using a speakerphone, please lift the handset before pressing any keys. One moment, please, for your first question. Your first question comes from Tony Robson from Global Mining Research. Please go ahead.

[Tony Robson, Director and Senior Mining Analyst at Global Mining Research]

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 in Fort Saskatchewan, in the quarter, which you noted partially or mostly on low sulfur prices, natural gas, and diesel. So the first question is, how are those input costs looking as we go into quarter four, given that we're already a month in? I'll come back with my second question. Thanks.

[Leon Binedell, President and CEO at Sherritt International Corporation]

We do provide our assumptions, although the year-over-year key input pricing, and we expect similar levels of pricing going into quarter four 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, Director and Senior Mining Analyst at Global Mining Research]

Okay, thank you. Howard, 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, President and CEO at Sherritt International Corporation]

In terms of full year production and cost guidance?

[Tony Robson, Director and Senior Mining Analyst at Global Mining Research]

Yes.

[Leon Binedell, President and CEO at Sherritt International Corporation]

Or cost specifically?

[Tony Robson, Director and Senior Mining Analyst at Global Mining Research]

The cost.

[Leon Binedell, President and CEO at Sherritt International Corporation]

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, negative impact, that is, that we've been able to offset with input commodity prices, improved operating results, and generally overall improved operations and lower maintenance cost. So we still expect our guidance to be relevant given all circumstances to date.

[Tony Robson, Director and Senior Mining Analyst at Global Mining Research]

Okay, thank you. A second question was for Elizabeth now. You noted that the CAD 50 million 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 pro-rata today spot price of $11.20 divided by $13.50 a pound U.S. times a CAD 50 million, I get CAD 41 million. Again, I'll note that's clearly more complex than that, but would CAD 40 million be a reasonable starting point for investors and the analysts looking for the numbers in the fourth quarter? Thank you.

[Leon Binedell, President and CEO at Sherritt International Corporation]

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 follow-on impact of cash early in the new year given the sales cycle and recovery from receivables.

[Leon Binedell, President and CEO at Sherritt International Corporation]

We're more likely focused on cash than cobalt distributions in the fourth quarter to ensure that cash gets accelerated to share it.

[Tony Robson, Director and Senior Mining Analyst at Global Mining Research]

Thank you. Looks like I failed to tease out a guidance from you or you're unwilling to give one at this stage. I'll ask a subsequent question if you don't mind then. As you note, reduce third-party input costs as you de-bottleneck the Moa JV from mid next year. What roughly would that say in terms of cents per pound in cash costs looking for the second half of 2025 and into 2026? Thank you.

[Leon Binedell, President and CEO at Sherritt International Corporation]

Tony, we'll defer to our guidance in January next year when we provide our 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 of plant components to tie in to ensure the commissioning ties in with those, so 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, Director and Senior Mining Analyst at Global Mining Research]

I look forward to it. Thank you. No further questions.

[Leon Binedell, President and CEO at Sherritt International Corporation]

Thanks, Tony.

[Operator]

Thank you. The next question comes from Shane Nagle from National Bank Financial. Please go ahead.

[Shane Nagle, MD and Senior Mining Equity Analyst at National Bank Financial]

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're delivered, you try and sell as much as possible, so you may not actually fully receive the 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, under the deliveries next year being, again, kind of more back half weighted, just given that's kind of a lot of liquidity from your partners to kind of come out at the end of this year and into early next?

[Leon Binedell, President and CEO at Sherritt International Corporation]

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.

[Leon Binedell, President and CEO at Sherritt International Corporation]

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 2025, but we're still anticipating over the life of this instrument to have recovered the full quantum.

[Shane Nagle, MD and Senior Mining Equity Analyst at National Bank Financial]

You may see a bit of a delay in that. Some of that, I guess, U.S. 57 guarantee may spill over into future years, and if we get a price recovery, you'd expect to kind of receive more at that period of time.

[Leon Binedell, President and CEO at Sherritt International Corporation]

Exactly. If there's a price spike in 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, MD and Senior Mining Equity Analyst at National Bank Financial]

Okay. And then just a quick follow-up, if I may, on how this ties into the second. Any notes in any kind of 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, President and CEO at Sherritt International Corporation]

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, meeting the minimum thresholds at the time when it needs to be paid. It is a tough market out there, and it is entirely going to be driven by the 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.

[Shane Nagle, MD and Senior Mining Equity Analyst at National Bank Financial]

Good talking to you. Thanks, guys.

[Operator]

Thank you. I'll hand the call over back to Tom Halton for closing remarks.

[Tom Halton, Director of Investor Relations at Sherritt International Corporation]

Thank you, Operator. We look forward to updating everyone again in the new year with their 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.

Participants

Executives

• Tom Halton, Director of Investor Relations
• Yasmin Gabriel, CFO
• Leon Binedell, President and CEO
• Elvin Saruk, COO

Analysts

• Shane Nagle, MD and Senior Mining Equity Analyst at National Bank Financial
• Tony Robson, Director and Senior Mining Analyst at Global Mining Research