Sherritt International Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
July 30, 2024

There are 4 speakers on the call.

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Sherritt International Second Quarter 20 24 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, July 30, 2024, at 10 am Eastern Time.

Operator

I will now turn the presentation over to Tom Houghton, Director, Investor Relations. Please go ahead.

Speaker 1

Thank you, operator, and welcome, everyone, to share our Q2 2024 Conference Call. We released our Q2 results last May. Our press release, MD and A and financial statements are available on our website and on SEDAR Plus. During today's call, we will be referring to our presentation that is available on our website and on today's webcast. We will be making forward looking statements and references to certain non GAAP financial measures, but please refer to the cautionary notes on Slide 3 of our presentation as well as the material assumptions and risks associated with the forward looking statements on Slide 10.

Speaker 1

Reconciliations of non GAAP measures to the most directly comparable IFRS measures are also included in the appendix of the presentation. On the call today is Leon Binadel, President and Chief Executive Officer Yasmin Gabriel, Chief Financial Officer and Alvin Sarouk, Chief Operating Officer. Following a review of our results, we will open the call to questions. It is now my pleasure to turn the call over to Leon. Thank you, Tom.

Speaker 1

Good morning, everyone, and thank you for joining us today. Before discussing our results, I will provide a few remarks on the income market given the significant volatility and the vast number of interventions and decisions that have and may likely continue to impact the market. So beginning on Slide 4, oil price averaged US8.35 dollars a pound in the second quarter, an increase quarter over quarter. This was largely due to Western producers announcing crude production cuts. The Alamy implementing restrictions on Russian origin nickel and news of tariffs on both Chinese EVs and nickel being evaluated or implemented by Western countries.

Speaker 1

Nuclear crisis reached 9 months high on May 20th as news of political protests in New Smyrna, third largest by nickel, caused concerns for additional supply disruptions. On June 11th, however, prices fell back to below $8 a pound from profit taking, U. S. Dollar strength and weaker than expected Chinese manufacturing data. Today, despite continuing supply cut announcements, both nickel and cobalt remain oversupplied, largely due to China's continued actions to increase supply of these metals in order to dominate each stage of the EV supply chain.

Speaker 1

Nickel prices are continuing to decline and today are slightly above $7 per pound. Despite these factors, plant nickel and cobalt continues to grow and we remain encouraged by the Western governments recognizing the importance of strong domestic or non Chinese controlled critical minerals and EV supply chains. This was demonstrated that the U. S. Announced an increased tariffs on Chinese EVs and China related products in May and further actions being evaluated in the EU and Canada.

Speaker 1

We also saw Australia offering access to the nickel industry. However, these were too long dated and minimal in its impact to mitigate BHP, the world's largest mining company, from sustaining its nickel operations in Australia for the foreseeable future. We are monitoring and advocating for these counteractions by Western governments and the potential for premiums to be attributed to responsible source material not linked to core operating to the Chinese supply chains. Given this market backdrop, we continue to advance initiatives to lower our operating costs, improve our operations and position us to weather these midterm market uncertainties. However, recognizing that these uncertainties have a material negative impact on short term cash generation.

Speaker 1

On these better market uncertainties at bay, we will be in a stronger position to take advantage of our existing and future growth opportunities. Turning to Slide 5 for an overview of our 2nd quarter recent highlights. We achieved higher levels of MSG production from Moa again this quarter compared to both last year and Q1 as we continue to see the benefits of the new slurry pet plant commissioned earlier this year. Nickel production was strong in the quarter and for the Q2, we also saw nickel sales exceed production, reducing the inventory which was accumulated in the second half of last year under challenging market conditions. We expect the strength to continue throughout the balance of the year as production remains strong, yet sales are expected to exceed production and therefore inventories reduce.

Speaker 1

2nd quarter net direct cash costs improved to $5.75 per pound, benefiting primarily from lower mining, processing and refining costs per pound. Tower continues to deliver high levels of production with the additional cash from 2 wells that went into production at the end of the Q2 of last year. We have another well scheduled to be drilled this year, which we expect will increase our electricity output further during the second half of the year. As we indicated last quarter, these higher levels of production will begin to translate into increased dividends to share. During the Q2, we received $5,000,000 in dividends from Energas in Canada.

Speaker 1

As noted, a more detailed overview of our liquidity, but including the dividend from Power and an outflow repayment this quarter of the short term working capital at the end of May to Moa JV last year, liquidity in Canada was $56,000,000 at quarter end. Finally, during the quarter, we also released our 16th annual sustainability report, outlining our commitment to enhancing safety performance across all of our operations, further reducing our carbon intensity and making a lasting positive impact on our communities. Our ongoing commitment to sustainability positions Sherritt as responsible supplier of critical minerals,

Speaker 2

which is

Speaker 1

increasingly important to our customers, particularly with the key European markets leading these expectations. With that, I will now hand over to Elvin to provide more details on our operations during the quarter. Elvin?

Speaker 3

Thank you, Leon. Turning to Slide 7 for our metals results. As Leon mentioned, production of mixed sulfides benefited from additional capacity and efficiencies from the Slurry Corporation plant commissioned earlier this year. During the quarter, nickel and cobalt production increased year over year as a result of higher mixed sulfides availability. At our foresight, our annual maintenance shutdown occurred during the second quarter, similar to last year.

Speaker 3

During this downtime, we purposely built our feed inventory at the site and strengthened our pipeline inventory to ensure reliable feed throughput at the refinery. For higher production per gallons of beer in line with our plan and which was factored into our production studies. Fertilizer production was also higher, in line with the higher nickel production, but also from operational improvements we have recently established. Now moving to sales. With the higher finished nickel inventory we began this year with, we have been focusing on reducing our inventory over the course of 2024.

Speaker 3

During the Q2, we made further progress on this with medical sales volumes exceeding production by about 400 tonnes from strong spot sales that we expect to continue in the second half of the year. Cobalt sales were lower year over year due to the timing of the Cobalt spot distributions, which during 2023, we received earlier in the year. As for fertilizer sales grew modestly lower year over year, which still reflected a strong sales quarter in line with our historical seasonal trends. Moving on to Slide 8 to discuss our net direct cash costs, NDCC. Our NDCC during the Q2 was US5.75 dollars per pound, decreasing 20% year over year.

Speaker 3

This was largely due to 50% lower mining, processing and refining costs per pound year to date. Lower NTR per pound is largely due to increased operating efficiencies, lower sulfur and natural gas prices, lower purchased sulfuric acid, lower maintenance costs and the impact of higher equal production and sales volumes. Lower average realized prices and lower sales volumes for coke and fertilizers resulted in lower byproduct credits. Looking ahead, we expect to see NDCC contain the trend within our guidance range. Now turning to Slide 9 to talk about our Moa joint venture expansion project.

Speaker 3

Phase 2 of Moa joint venture expansion project a processing plant, continued to advance during the quarter. Civil construction and structural erection were completed and piping installation commenced. In July, the Moa joint venture received approval for US12 $1,000,000 of foreign currency financing from a Cuban bank to support international payments for the completion of the construction of 6 East Trent, which is the primary component of Phase 2 expansion.

Speaker 2

We continue to expect

Speaker 3

the positioning of Phase 2 expansion in 2025 and ramp up in the first half of the year. Finally turning to Slide 10 for our results. Electricity production was 19 percent higher year over year as a result of the additional gas we began receiving at the end of the Q2 of last year from the 2 new wells of MENTI to production. We have been pursuing further opportunities with our turbine partners to increase gas supply through drilling new wells to support additional power generation, and we now have another well set to be drilled and commence production later this year. Our higher levels of production have resulted in dividend payments in Canada and we have already received the first of those during the quarter.

Speaker 3

Lastly, fund costs, our unit operating costs came in higher this quarter due to the timing of scheduled maintenance activities, which was completed during the quarter. However, we continue to see full year cost within the guidance provided. At this time, I'll turn the call over to Esiase, who will provide an overview of the financial results.

Speaker 2

Thanks, Alex. I'll begin with our financial performance on Slide 12. As we continue to manage through the challenging metal pricing environment as we began last year, our financial performance this quarter has been significantly impacted by lower average real life prices. Average real life prices for NGL, OPPO and fertilizers were lower year over year by 17%, 12% and 19%, respectively. Consolidated revenues for the Q2, which does not include share of revenue from the Mogo joint venture, was $61,400,000 compared to $93,500,000 in the Q2 2023, primarily due to lower realized prices and lower credit swap sales.

Speaker 2

As previously explained, we received all of the cobalt spot volume in the first half of last year, and in the current year, we expect to begin receiving cobalt volume through the cobalt 4th in the 4th quarter, which I'll see Q on the next slide. Combined revenue, which includes the Corporation's consolidated revenue and revenue from the Moa joint venture on a 50% basis, more holistically for Flexo performance, was $163,200,000 compared to 1 $197,000,000 in Q2 2023 and was also impacted by the lower nickel realized prices mentioned earlier, partly offset by higher nickel sales volumes. Despite significantly lower revenue, adjusted EBITDA was $13,000,000 only 8% lower than Q2 20.3 as lower average realized prices were largely offset by higher vehicle sales volumes and lower share cost per ton. Net loss from continuing operations was $11,500,000 or a loss of $0.06 per share, again with lower realized stripping driving lower year over year results. Adjusted net loss from continuing operations was $10,000,000 or a loss of $0.03 per share, which excludes a non cash $5,300,000 revaluation loss from the net cobalt loss receivable and a $3,400,000 unrealized gain on our nickel hedging cut options.

Speaker 2

Turning now to Slide 13. We ended the quarter with almost $56,000,000 of build on liquidity in Canada, in line with our expectations. Key changes in liquidity during the quarter included $27,000,000 of cash provided by the mortgage and cash to complete the full repayment of the short term working capital advance, dollars 5,100,000 of cash dividends from Energas, $9,400,000 used to pay interest on the 2nd lien notes, dollars 7,800,000 used by Tower for scheduled maintenance completed in the quarter and timing of working capital payments and $10,800,000 used for rehabilitation and closure costs related to legacy oil and gas assets in Spain. Looking ahead, the Moa JV having fully repaid their short term working capital advance during the Q2, as previously indicated, we expect to begin receiving distributions under the corporate swap agreement in the Q4 this year. As a reminder, dividend distributions are predicated on the Moa JV's current and expected available liquidity, but assuming the midpoint of our guidance ranges and the average reference prices for Midland Coal mulch in the first half of the year, we would expect to receive approximately $50,000,000 in distributions, which would include share at share as well as GNC's redirected share.

Speaker 2

As defined by the agreement, any shortfall in the annual minimum amount minimum payment amount is carried forward to the following year. At Power, we also anticipate receiving additional dividends in Canada from Energas. Total dividends for 2024 expected to exceed $10,000,000 based on 20 24 guidance for production volume, unit costs and spending on capital. With increased production expected next year, we continue to expect dividends in future years to be significantly higher than 2024. We'll provide further details on expected amounts after the release of our 2025 guidance.

Speaker 2

I'll now turn to Slide 14 and with a few additional updates from the quarter, which outlines some of the actions we are taking to mitigate impacts from lower nickel and cobalt prices. With a brief uptick in nickel prices in May, we purchased our options on 3,876 tons of nickel or approximately 25 percent of expected nickel production from the Molar joint venture. And adjusted by price of US8.16 dollars per pound or $0.06 period starting June 1. Our initial price hedging strategy provides Sherritt with protection against downward changes in nickel prices while maintaining full exposure to the upside. We completed a 10% workforce reduction at our corporate office to reduce other corporate office related costs in the day.

Speaker 2

This reduction was in addition to a 10% workforce selection through our Canadian operations earlier this year, and we expect to realize annual cost savings of approximately $15,000,000 dollars from the actions we have taken to date with proxy organization. Investors indicated revolving credit facility at April 30, 2026 and received favorable amendments to certain covenants. There are no other significant changes to the terms, financial covenants or restrictions. We opportunistically repurchased the $1,500,000 principal of our book note that will also add a 60% discount. And subsequent to quarter end, we elected to not take cash interest and add a quick interest to principal.

Speaker 2

As the current challenging market conditions experienced persist, we expect interest in January to also be hedged. Finally, I'll comment on the reclamation work for our legacy oil and gas assets in Spain, which we are too structurally obligated to complete. While we have some near term payments expected to be approximately $13,000,000 over the next 12 months, we are continuing to work with our partner to find opportunities to contain some of the reclamation costs associated with the legacy assets. That concludes my comments. I will turn it back to Liat.

Speaker 1

Thank you, Yacob. Exceeding on Slide 16, although near term market conditions remain challenging, our operations have returned to stability and we expect further improved results in the second half of the year with higher production from metals and lower NDCC. Our growth projects remain on track with Phase 2 of our Moa joint venture expansion expected to ramp up in the first half of next year. With the expected positive impact on our margins from the expanded volumes of our own MSP feed and the forecast medium term demand growth for our metals remaining strong, we continue to believe in the value of this low cost expansion. Our MHP refinery project is also making positive advancements with the commencement of an engineering study and continued batch test work on positive flow sheet development, which yielded very positive results for metal recoveries and inferior heat removals during the quarter.

Speaker 1

We are focused on completing flowship decline and conducting a small scale continuous pollen extraction pilot for the second half of the year. External engagement is also continuing with governments and potential customers and funding partners. Finally, as mentioned, we are expecting cash inflows in the second half of this year with additional dividends from Energas and distributions from our global stock management. 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. Your first question is from the line of Gordon Lawson from Pareto Capital. Please go ahead.

Speaker 3

Just looking at your cash balance, particularly what's available in Canada and I appreciate your hedging and environment and the expected dividend payment. Can you provide some color as to your options for cash availability in 2026 when your 2nd lien debt come to?

Speaker 1

Thank you for the question, Bart. We have not provided guidance on 2025 or 'twenty six in terms of production volumes and operating costs. And so, obviously, those would have a material impact on what our cash generation will be over the coming years. Nickel prices and cobalt prices will have a profound impact. And so, on the current market environments, clearly, we'll generate less cash flows between now and end of 2026.

Speaker 1

But we do see that there's a significant number of market interventions that hopefully will have a positive impact on pricing, which will see us return to even higher levels of profitability. But what we can do and what we have done is to create operational stability and reduce our operating costs, which we've done and demonstrated that creates headroom and creates a margin positive margin for us to continue to generate positive cash flows.

Speaker 3

And are your debt partners, are you in conversations at this point for rolling it over or other options?

Speaker 1

Those would be private conversations, Gord, and we've not publicly disclosed anything related to that. Obviously, we are proactive in understanding what these market conditions may pose for us over the coming years and we're collectively engaged in any discussions with Prime Minister and partners and the stakeholders as well. So you can expect us to be actively dealing with the matter, but until there's something to publicly disclose, we'll refrain from the comment.

Speaker 3

Okay. Understood completely. Just switching over a little more softball here. Your fertilizer production was certainly improving. And given the year to date volume, I understand you don't give guidance.

Speaker 3

But can you provide any color as to what you're looking for 2024? And any additional information you provide on the pricing environment given

Speaker 1

the performance from that front? Sure. We've managed to flexibility in our fertilizer production, as Alvin had mentioned. And so, we have continued to produce good volumes of fertilizer, and we expect to have a good ability to sell into the fall season. Last year, we missed out a little bit on the fall season sales because of our issues in the ammonia part.

Speaker 1

This year will be much more akin to what we saw in 2022 in terms of volumes and the ability to sell into that market. The market is reasonably good. Pricing is off the peak of what it were previous years. But where we are at the end of the first half, I think we'll be seeing similar levels of market action in the second half of the year.

Operator

There are no further questions at this time. I'll hand the call over to Tom Hoffman for closing remarks. Please go ahead.

Speaker 1

Thank you, operator, and just thank you everyone for joining us today.

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Key Takeaways

  • Sherritt achieved higher mixed sulfide (MSG) and nickel production in Q2, with sales exceeding production to draw down inventory, and lowered its net direct cash cost to $5.75 per pound.
  • The nickel and cobalt markets remain oversupplied due to China’s supply expansion, but Western tariffs on Chinese EVs and critical-minerals interventions could create premiums for non-Chinese sources.
  • Phase 2 of the Moa joint venture expansion is on track, with civil and structural works complete, $12.1 million in financing approved, and a ramp-up expected in the first half of 2025.
  • While Q2 revenues fell to $61.4 million on lower realized metal prices, Sherritt reported a resilient $13 million adjusted EBITDA, ended the quarter with $56 million of liquidity in Canada, and anticipates about $50 million of distributions in Q4.
  • Cost-mitigation actions include hedging roughly 25% of expected nickel output at $8.16/lb, two 10% workforce reductions saving ~$15 million annually, and ongoing initiatives to drive further NDCC improvements.
A.I. generated. May contain errors.
Earnings Conference Call
Sherritt International Q2 2024
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