Sherritt International Q2 2024 Earnings Report

Sherritt International EPS Results

• Actual EPS: -C$0.03
• Consensus EPS: -C$0.07
• Beat/Miss: Beat by +C$0.04
• One Year Ago EPS: N/A

Sherritt International Revenue Results

• Actual Revenue: $51.40 million
• Expected Revenue: N/A
• Beat/Miss: N/A
• YoY Revenue Growth: N/A

Sherritt International Announcement Details

• Quarter: Q2 2024
• Date: 7/29/2024
• Time: N/A
• Conference Call Date: Tuesday, July 30, 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 Q2 2024 Earnings Call Transcript

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.

Presentation

[Operator]

Morning, ladies and gentlemen. Thank you for standing by. Welcome to the Sherritt International second quarter 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, July 30, 2024, at 10:00 A.M. Eastern Time. I will now turn the presentation over to Tom Houghton, Director, Investor Relations. Please go ahead.

[Tom Houghton, Director of Investor Relations at Sherritt International]

Thank you, operator, and welcome everyone to Sherritt second quarter 2024 conference call. We released our second quarter results last May. Our press release, MD&A, and financial statements are available on our website and on SEDAR+. During today's call, we'll 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. 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. 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 Binedell, President and Chief Executive Officer, Yasmin Gabriel, Chief Financial Officer, and Elvin Saruk, Chief Operating Officer.

[Tom Houghton, Director of Investor Relations at Sherritt International]

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

[Leon Binedell, President and CEO at Sherritt International]

Thank you, Tom. Good morning, everyone, and thank you for joining us today. Before discussing our results, I will provide a few remarks on the nickel market, given the significant volatility and the vast number of interventions and decisions that have and may likely continue to impact the nickel market. Beginning on slide four, nickel price averaged $835 per pound in the second quarter, an increase quarter-over-quarter. This was largely due to Western producers announcing future production cuts, the LME implementing restrictions on Russian-origin nickel, and news of tariffs on both Chinese EVs and nickel being evaluated or implemented by Western countries. Nickel prices reached 9-month high on May 20, as news of political protests in New Caledonia, third largest producer of nickel, caused concerns of additional supply disruptions.

[Leon Binedell, President and CEO at Sherritt International]

On June 11, however, prices slipped back to below $8 per pound on 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. Nickel prices have continued to decline, and today are slightly above $7 per pound. Despite these factors, demand for 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 mineral and EV supply chains. This was demonstrated by the U.S. announcing increased tariffs on Chinese EVs and component-related products in May, and further actions being evaluated in the EU and Canada. We also saw Australia offer incentives to their nickel industry.

[Leon Binedell, President and CEO at Sherritt International]

However, these were too long dated and minimal in its impact to mitigate BHP, the world's largest mining company, from suspending its nickel operations in Australia for the foreseeable future. We are monitoring and advocating for these counter actions by Western governments and the potential for premiums to be attributed to responsible sourced critical minerals, not linked to or operating through 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. When these midterm market uncertainties abate, we'll be in a stronger position to take advantage of our existing and future growth opportunities. Turning to slide five for an overview of our second quarter re- highlights.

[Leon Binedell, President and CEO at Sherritt International]

We achieved higher levels of MSP production from Moa again this quarter compared to both last year and Q1, as we continue to see the benefits of the new slurry, slurry prep plant commissioned earlier this year. Nickel production was strong in the quarter, and for the second consecutive quarter, 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 this trend to continue throughout the balance of the year, as production remains strong, yet sales are expected to exceed production and therefore inventories reduce. Second quarter net direct cash costs improved to $5.75 per pound, benefiting primarily from lower mining, processing, and refining costs per pound.

[Leon Binedell, President and CEO at Sherritt International]

Power continues to deliver high levels of production with the additional gas from two wells that came into production at the end of the second quarter of last year. We have another well scheduled for drilling 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 Sherritt. During the second quarter, we received CAD 5 million in dividends from Energas in Canada.

[Leon Binedell, President and CEO at Sherritt International]

Yasmin will give a more detailed overview of our liquidity, but including the dividend from Power and an outcool repayment this quarter of the short-term working capital advances we made to Moa JV last year, the company in Canada was CAD 56 million. Finally, during the quarter, we also released our sixteenth 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 a responsible supplier of critical minerals, which is increasingly important to our customers, particularly with our 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?

[Elvin Saruk, COO at Sherritt International]

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 separation 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 Fort site, our annual maintenance shutdown occurred during the second quarter, similar to last year. During this downtime, we purposely built our feed inventory at the site to strengthen our pipeline inventory to ensure reliable feed throughput at the refinery. Higher production results of the year, in line with our plan and which was factored into our production guidance. 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.

[Elvin Saruk, COO at Sherritt International]

With the higher finished nickel inventory we began this year with, we have been focusing on reducing our inventory over the course of 2024. During the second quarter, we made further progress on this, with nickel sales volumes exceeding production by about 400 tons 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 cobalt stock distributions, which during 2023 we received earlier in the year. As for fertilizer sales, they were modestly lower year-over-year, which 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 second quarter was $5.75 per pound, decreasing 8%-10% year-over-year.

[Elvin Saruk, COO at Sherritt International]

This was largely due to 15% lower mining, processing, and refining costs per pound of nickel sold. The lower MPR per pound is largely due to increased operating efficiencies, lower sulfur and natural gas prices, lower purchase of sulfuric acid, lower maintenance costs, and the impact of higher nickel production and sales volumes. Lower average realized prices and lower sales volumes of cobalt and fertilizers resulted in lower by-product credits. Looking ahead, we expect to see NDCC remain within our guidance range. Now turning to slide 9 to talk about our Moa Joint Venture expansion project. Phase two of the Moa Joint Venture expansion project, a processing plant, continues to advance during the quarter. Civil construction and structural erection were completed, and piping installation commenced.

[Elvin Saruk, COO at Sherritt International]

In July, the Moa Joint Venture received approval for $12 million of foreign currency financing from a Cuban bank to support international payments for the completion of the construction of the Sixth Leach Train, which is the primary component of phase two expansion. We continue to expect commissioning of phase two expansion in 2025, with a ramp up in the first half of the year. Finally turning to slide 10 for our power results. Electricity production was 19% higher year-over-year as a result of the additional gas we began receiving at the end of the second quarter of last year from the 2 new wells that went into production.

[Elvin Saruk, COO at Sherritt International]

We have been pursuing further opportunities with our Cuban 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. Lastly, on costs, our year operating costs being higher this quarter due to the timing of scheduled maintenance activities, which was completed during the quarter. However, we continue to see full year costs within the guidance provided. At this time, I'll turn the call over to Yasmin Gabriel, who will provide an overview of the financial results.

[Yasmin Gabriel, CFO at Sherritt International]

Thanks, Elvin. I'll begin with our financial performance on slide 12. As we continue to manage through the challenging metal pricing environment we began last year, our financial performance this quarter has again been significantly impacted by lower average realized prices. Average realized prices for nickel, cobalt, and fertilizers were lower year-over-year by 17%, 12%, and 19%, respectively. Consolidated revenues for the second quarter, which does not include fair share of revenues from the Moa Joint Venture, was CAD 61.4 million, compared to CAD 93.5 million in the second quarter of 2023.... primarily due to lower realized prices and lower Cobalt Swap sales.

[Yasmin Gabriel, CFO at Sherritt International]

As previously explained, we received all of the cobalt swap volume in the first half of last year, and in the current year, we expect to begin receiving cobalt volume under the cobalt swap in the fourth quarter, which I'll detail on the next slide. Combined revenue, which includes the corporation's consolidated revenue and revenue from the Moa Joint Venture on a 50% basis, and more holistically reflects our performance with CAD 163.2 million, compared to CAD 197 million 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 CAD 13 million, only 8% lower than Q2 2023, as lower average realized prices were largely offset by higher nickel sales volumes and lower MPR costs per pound.

[Yasmin Gabriel, CFO at Sherritt International]

Net loss from continuing operations was CAD 11.5 million, or a loss of CAD 0.03 per share, and again, was lower realized pricing, driving lower year-over-year results. Adjusted net loss from continuing operations was CAD 10 million, or a loss of CAD 0.03 per share, which excludes a non-cash CAD 5.3 million revaluation loss on the net cobalt swap receivable and a CAD 3.4 million unrealized gain on our nickel hedging options. Turning now to slide 13. We ended the quarter with almost CAD 56 million of available liquidity in Canada, in line with our expectations.

[Yasmin Gabriel, CFO at Sherritt International]

Key changes in liquidity during the quarter included CAD 27 million of cash provided by the Moa Joint Venture to complete a full repayment of the short-term working capital advance, CAD 5.1 million of cash dividends from Energas, CAD 9.4 million used to pay interest on the Second Lien Notes, CAD 7.8 million used by Power for scheduled maintenance completed in the quarter and timing of working capital payments, and CAD 10.8 million used for rehabilitation and other costs related to legacy oil and gas assets in Spain. Looking ahead, with Moa JV having fully repaid the short-term working capital advance during the second quarter, as previously indicated, we expect to begin receiving distributions under the Cobalt Swap agreement in the fourth quarter this year.

[Yasmin Gabriel, CFO at Sherritt International]

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 nickel and cobalt in the first half of the year, we would expect to receive approximately $50 million in distributions, which would include Sherritt's share as well as GNC's redirected share. 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, with total dividends for 2024 expected to exceed $10 million based on 2024 guidance for production volume, unit cost, and spending on capital. An increased production expected next year will continue to expect dividends in future years to be significantly higher than 2024.

[Yasmin Gabriel, CFO at Sherritt International]

We'll provide further details on expected amounts after the release of our 2025 guidance. I now turn to slide 14, and with a few additional updates from the quarter, which outlines the actions we are taking to mitigate the impacts from lower nickel and cobalt prices. With a brief uptick in nickel prices in May, we purchased options on 3,876 pounds of nickel, or approximately 25% of expected nickel production from the Moa Joint Venture, at an exercise price of $8.16 per pound for a 6-month period starting June 1. Our nickel price hedging strategy provides Sherritt with protection against downward changes in nickel prices while maintaining full exposure to the asset. We completed a 10% workforce reduction at our corporate office to reduce corporate office-related costs in May.

[Yasmin Gabriel, CFO at Sherritt International]

This reduction was in addition to a 10% workforce reduction to our Canadian operations earlier this year, and we expect to realize annual cost savings of approximately CAD 15 million from the actions we have taken to date across the organization. We extended our Syndicated Revolving Credit Facility to April thirtieth, 2026, and received favorable amendments to certain covenants. There were no other significant changes to the terms, financial covenants, or restrictions. We opportunistically repurchased CAD 1.5 million principal of our PIK Note that were trading at a 60% discount. In subsequent quarter ends, we have elected not to pay cash interest and added PIK interest to the principal balance. If the current challenging market conditions experienced persist, we expect interest in January to also be paid.

[Yasmin Gabriel, CFO at Sherritt International]

Finally, we're currently under reclamation work for our legacy oil and gas assets in Spain, which we are contractually obligated to complete. While we have some near-term payments expected to be approximately EUR 13 million 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 these legacy assets. That concludes my comments. I will turn it back to Leon.

[Leon Binedell, President and CEO at Sherritt International]

Thank you, Yasmin Gabriel. Continuing on slide 15-

[Leon Binedell, President and CEO at Sherritt International]

... Although the 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 two 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 process flow sheet development, which yielded very positive results for metal recoveries and impurity removals during the quarter.

[Leon Binedell, President and CEO at Sherritt International]

We are focused on completing flow sheet design and conducting a small-scale continuous solvent 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 Cobalt supplements. 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 star followed by the number one on your touchtone phone. You'll hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press star followed by the number two. If you are using a speakerphone, please lift the handset before pressing any keys. Your first question is from the line of Gordon Lawson from Paradigm Capital. Please go ahead.

[Gordon Lawson, Analyst at Paradigm Capital]

Hey, good morning. Looking at your cash balance, particularly what's available in Canada, and I appreciate the hedging in current environment and the expected dividend payment. Can you provide some color as to your options for cash availability in 2026 when your second lien debt comes due?

[Leon Binedell, President and CEO at Sherritt International]

Thank you for the question, Gord. We have not provided guidance on 2025 or 2026 in terms of production volumes and, 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, and the end of 2026. 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.

[Leon Binedell, President and CEO at Sherritt International]

But what we can do and what we have done, Gord, is to create operational stability and reduce our operating costs, which we've done and demonstrated, that creates headroom, creates a margin for positive margin for us to continue to generate positive cash flows.

[Gordon Lawson, Analyst at Paradigm Capital]

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

[Leon Binedell, President and CEO at Sherritt International]

Those would be private conversations, Gord, and we've not publicly disclosed anything in relation to that. Obviously, we are proactive in understanding what these market conditions may hold for us over the coming years. And we're proactively engaged in any discussions with financing partners, and the debt holders as well. So, you can expect us to be actively dealing with the matter, but until there's something to publicly disclose, Gord, I won't comment.

[Gordon Lawson, Analyst at Paradigm Capital]

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, but can you provide any color as to what you're expecting for 2024 and any additional information you can provide on the pricing environment, given the performance on that front?

[Leon Binedell, President and CEO at Sherritt International]

Sure. We've managed to get stability in our fertilizer production, as Elvin 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 quite a bit on the fall season sales because of our issues in the ammonia plant. This year, we'll be much more attuned to what we saw in 2022, in terms of our volumes and the ability to sell into that market. The market is reasonably good. Pricing is off the peak of what it were in previous years.

[Leon Binedell, President and CEO at Sherritt International]

But where we are, at the end of the first half, I think we will be seeing similar levels of market action in the second half of this year.

[Gordon Lawson, Analyst at Paradigm Capital]

Okay, that's great. That's it for me. Thank you very much.

[Leon Binedell, President and CEO at Sherritt International]

Thank you, Gord.

[Operator]

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

[Leon Binedell, President and CEO at Sherritt International]

Thank you, operator. Just thank you, everyone, for joining us today.

Participants

Executives

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

Analysts

• Gordon Lawson, Analyst at Paradigm Capital