Sherritt Reports Second Quarter 2018 Results
Jul. 31, 2018
TORONTO--(BUSINESS WIRE)--Jul 31, 2018--Sherritt International Corporation (“Sherritt” or the “Corporation”) (TSX: S), a world leader in the mining and hydrometallurgical refining of nickel and cobalt from lateritic ores, today reported its financial results for the three- and six-month periods ended June 30, 2018. All amounts are in Canadian currency unless noted.
“The effects of rising commodity prices and improved production at our Moa Joint Venture combined to produce our strongest quarterly financial results since Q1 2013,” said David Pathe, President and CEO of Sherritt International.
“Although commodity prices are expected to remain volatile in the near term due to the slower summer customer buying period and to speculation about the impact of tariffs on international trade, our prospects over the longer term are strong. With favorable supply-demand trends emerging as a result of the expected growth of the electric vehicle battery market, we are particularly encouraged by the positive outlook for nickel and cobalt prices.” 2018 Second Quarter Report
Q2 2018 HIGHLIGHTSAdjusted EBITDA was $49.5 million, up 70% from $29.2 million in Q2 2017. Growth was largely due to higher realized nickel and cobalt prices, offsetting the impact of lower oil production due to the expiration of a production sharing contract at Varadero West. Sherritt’s share of finished nickel production at the Moa Joint Venture (“Moa JV”) was 3,749 tonnes while finished cobalt was 388 tonnes. Q2’s production totals, which are consistent with Sherritt’s historical performance, indicate that the production challenges experienced in Q1 2018 that limited the availability of mixed sulphides due to the highest level of rainfall at Moa in more than 20 years and rail transportation delays to the refinery in Fort Saskatchewan, Alberta have been resolved. Net direct cash cost (NDCC) (1) at the Moa JV was US$1.68 per pound of finished nickel sold, marking the lowest unit operating cost since Q3 2004. Q2’s NDCC represents the fifth consecutive quarter that the Moa JV is in the lowest cost quartile relative to other nickel producers based on annualized information tracked by Wood Mackenzie. Average-reference prices for nickel improved 57% from last year to US$6.56/lb while average-reference prices for cobalt increased 66% to US$42.93/lb. Received $9 million from the Moa JV as a final repayment on a $45 million working capital facility provided by Sherritt. This working capital facility is now fully repaid and future available free cash flow from the Moa JV is expected in the form of dividends commencing in Q3 2018 Sherritt reduced its long-term debt to $730.5 million based on the book value of outstanding debt by purchasing for cancellation $10.7 million of outstanding debentures in Q2 2018. Combined with the results of its modified Dutch auction tender offer completed in Q1, Sherritt has eliminated $131.9 million of indebtedness in 2018 and approximately $2 billion since 2014. Sherritt ended the quarter with $197.2 million in cash, cash equivalents and short-term investments, down from $237.3 million at March 31, 2018. The decrease was due to a number of factors, including the timing of fertilizer receipts and the timing of interest payments on debentures. In addition, Sherritt purchased $10.7 million of the Corporation’s debentures for cancellation during Q2 2018. Net earnings for Q2 2018 totaled $2.8 million or $0.01 on a per share basis. In Q2 2017, Sherritt incurred a net loss of $101.9 million or $0.35 per share Announced the successful completion of a pilot-scale test of a proprietary process to upgrade Alberta bitumen at a lower cost. The pilot-scale test was based on Sherritt’s 60 years of experience developing hydrometallurgical processes and use of autoclaves.
HIGHLIGHTS SUBSEQUENT TO QUARTER ENDResumed drilling on the Block 10 concession through a sidetrack well from the existing wellbore. The drilling is targeting the Lower Veloz reservoir that previously tested at 3,750 barrels of oil per day in 1994, and will make use of additional technology specifically designed for drilling wells in lost circulation zones. Preliminary drilling results are anticipated when the Corporation reports its Q3 2018 results. Capital to complete the drilling is expected to be approximately US$14 million.
(1) For additional information see the Non-GAAP measures section of this press release.
Q2 2018 FINANCIAL HIGHLIGHTS
(1)For additional information, see the Non-GAAP measures section of this release.
(2) The amounts for the periods ended June 30, 2018 have been prepared in accordance with IFRS 9 and IFRS 15; prior period amounts have not been restated. Refer to note 4 in the condensed consolidated financial statements for March 31, 2018 for more information.
In Q2 2018, Sherritt used $30.4 million in cash flow from operations largely as a result of non-cash working capital changes totaling approximately $33 million related to the deliveries of fertilizer product pre-purchased in previous quarters. The impact of the negative working capital changes was partially offset by positive cash flow from operations of $10.5 million from the Oil and Gas division and $8.1 million from the Power division.
Cash, cash equivalents and short-term investments at June 30, 2018 were $197.2 million, down from $237.3 million at March 31, 2018. The decrease was due to a number of items, including the purchase for cancellation of $10.7 million of outstanding debentures, the timing of interest payments totaling approximately $15.8 million related to outstanding debentures, and working capital changes related to fertilizer sales from the Fort Site.
Cuban overdue scheduled receivables at June 30 totaled US$136.9 million, up from US$126.7 million at March 31, 2018. In Q2 Sherritt received US$25.2 million of Cuban energy payments. Sherritt has experienced variability in its Cuban receivables over the years but has not incurred any losses related to any scheduled Cuban receivables.
Adjusted earnings (loss) from continuing operations (1)
(1)For additional information, see the Non-GAAP measures section of this release.
Sherritt generated net earnings from continuing operations of $2.8 million, or $0.01 per share outstanding, in Q2 2018. These compare to a net loss from operations of $101.9 million, or $0.35 per share, in Q2 2017.
On an adjusted basis, Sherritt incurred a net loss from operations of $8.7 million, or $0.01 per share outstanding, in Q2 2018 after the effect of an unrealized foreign exchange loss of $11.0 million. These compare to an adjusted net loss of $99.8 million, or $0.34 per share, for the same period of 2017. In Q2 2017, Sherritt recorded a foreign exchange gain of $4.4 million.
Nickel prices extended their rally into Q2 2018, sustaining the momentum established in the second half of 2017. The average reference price in Q2 2018 was US$6.56/lb, up 57% from US$4.18lb in the second quarter of 2017. The average reference price for Q2 2018 was the highest since Q4 2014 when it was US$7.17/lb.
The continued increase in nickel prices is being driven by a number of factors, including the ongoing drawdown of available inventory. Combined LME and SHFE nickel inventories at the end of Q2 2018 totaled 298,803 tonnes, down 19% from 367,694 tonnes at the end of Q1 2018. As demand continues to exceed available supply, the nickel market is expected to be in a structural deficit in the coming years.
According to market research by CRU, stainless steel demand is expected to grow at an average annual rate of 4% through 2022 with production emanating largely from China and Indonesia. Demand for nickel -- particularly Class 1 Nickel -- from non-stainless steel sectors is also expected to accelerate given the growth of the electric vehicle battery market. Class I nickel, along with cobalt, are key metals needed to manufacture electric vehicle batteries.
Beyond 2018, a shortage of high purity nickel is anticipated over the coming years since current market prices are below incentive levels needed to develop new nickel projects.
Cobalt prices rose in Q2 2018, marking the eighth consecutive quarter of higher reference prices. The average-reference price for Q2 2018 was US$42.93/lb, up 66% from US$25.87/lb for Q2 2017.
Cobalt prices started to soften in Q2 due to a number of factors, the most notable being increased availability of physical metal and growing market sentiment that cobalt prices had risen prematurely in advance of actual demand increases. As the prices started to decline in Q2, consumers began to delay purchases waiting for prices to bottom. The recent softening of prices is expected to be temporary due to the growing demand emanating from the electric vehicle battery market and persistent supply risk concerns linked to the Democratic Republic of Congo, which is currently the world’s largest source of cobalt supply.
As cobalt prices have a limited impact on overall battery pack costs, high prices are not expected to cause supply-chain disruptions or delay the growth of the electric vehicle market. As a result, the risk of cobalt substitution in electric vehicle battery production in the near term is relatively low given cobalt’s unique energy transference properties. While battery manufacturers continue to explore alternatives to cobalt, the likely beneficiary of any substitution is expected to be Class I nickel.
REVIEW OF OPERATIONS
Moa Joint Venture (50% interest) and Fort Site (100%)
(1) For additional information, see the Non-GAAP measures section of this release.
(2) Average low-grade cobalt published price per Metals Bulletin.
The Moa JV produced 3,749 tonnes of finished nickel in Q2 2018, relatively unchanged from 3,739 tonnes produced in Q2 2017. Although production challenges experienced in Q1 2018 that limited the availability of mixed sulphides due to highest levels of rainfall in more than 20 years and rail transportation delays to the refinery in Fort Saskatchewan, Alberta by the service provider were resolved, production in Q2 2018 was impacted by the planned annual maintenance refinery shutdown in June, consistent with previous years.
Finished cobalt production in Q2 2018 was 388 tonnes, down 11% from 436 tonnes produced in Q2 2017. The decline was due to a higher nickel to cobalt ratio in the refinery feed when compared to Q2 2017. Moa’s nickel to cobalt ratio in Q2 2018 was within range of historic norm.
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