CA - Sherritt International Corporation (SHERF) Q3 2023 Earnings Call Transcript

2023-11-04 15:33:01 ET

Sherritt International Corporation (SHERF)

Q3 2023 Earnings Conference Call

November 2, 2023 10:00 a.m. ET

Company Participants

Leon Binedell - President, Chief Executive Officer

Yasmin Gabriel - Chief Financial Officer

Tom Halton - Director Investor Relations

Conference Call Participants

Gordon Lawson - Paradigm Capital

Presentation

Operator

Welcome to the Sherritt International Third Quarter 2023 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, Thursday, November 2, 2023, at 10:00 a.m. Eastern Time.

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

Tom Halton

Thank you, Operator, and welcome everyone to Sherritt's third quarter 2023 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 sedarplus.

During today's call, we will be referring to our presentation that is available on our website and our webcast. As we will be making forward-looking statements and references to certain on-GAAP financial measures, please refer to the cautionary notes on slide three of our presentation. As well, reconciliations of non-GAAP measures to the most directly comparable IFRS measures are included in the appendix of the presentation.

On the call today is Leon Binedell, President and Chief Executive Officer; Yasmin Gabriel, Chief Financial Officer. Following a 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 thanks for joining us today. Before discussing our results, I want to begin by highlighting the progress we made during the third quarter, advancing in our strategic priorities and building the foundation for our future success.

For those following along, starting on slide four. We have sold virtually all of the Cobalt we received this year from the Cobalt Swap. In its first year of implementation, we have proven the effectiveness of this agreement. At the end of the quarter, we had $104 million of available liquidity in Canada, which sufficiently supports our strategic objectives.

In our Power division, we had our first full quarter receiving additional gas from the two new wells that went into production during the second quarter. The additional gas, along with better equipment availability, contributed to the strong performance, which we expect to continue.

Most importantly, during the quarter, we continue to advance our low capital intensity Moa expansion project. I'm proud to say that the expansion remains on track with Phase 1 of the project slated for operation early next year. Once the full expansion is complete, we'll see a 20% increase to Moa metal production from 2025 onwards over an expected mine life of more than 20 years.

Turning to slide six on operations. As we mentioned at the start of the year, we indicated 2023 would be a transitionary year in Moa's mine plan, and we expected lower production. In line with these challenges, our Moa mine had lower mixed sulfide production during the quarter due to lower ore grades from currently available mining areas and the exclusion of some high grade ore, which requires blending with better settling ore types not yet available to us. This was coupled with a period of downtime for maintenance in the ore thickeners.

We also had some logistical delays in receiving a delivery of sulfuric acids during the planned maintenance of the acid plant. This delay resulted in reduced ore processing towards the end of the quarter. These were only partly offset by better metal recoveries. Our 50% share of production for finished nickel was 3,841 tons, and 410 tons for finished cobalt. While production increased from last quarter, it was negatively impacted by the lower feed availability from Moa compared to the prior year.

We were expecting to receive third party feed during the quarter to help offset the shortfall from Moa, but a shipment was delayed due to Hurricane Lee. We now expect 650 tons of third party fee to be processed during the fourth quarter.

As mentioned last quarter, we indicated lower fertilizer production for the second half of the year from reduced availability of the ammonia plant due to unplanned maintenance challenges from early in the year. This was followed by a prolonged shutdown in Q3 to make the necessary repairs.

A major compressor replacement was also deferred to next year following an emergency repair during the quarter when the current unit failed and the rental units which were planned to be used also failed. This allows us to benefit – those repairs have been made. This allows us to benefit from the investment made in repair and while extensively differing capital for urgent repairs or replacements no longer required. I'm pleased to say the ammonia plant is now back up and producing at planned volumes.

On slide seven, our net direct cash costs were 7% higher year-over-year, primarily as a result of lower net fertilizer byproduct credits from the lower levels of production I just mentioned, and 27% lower average realized prices.

Mining, processing, and refining costs were 3% higher year-over-year with lower nickel production and higher maintenance costs, partly offset by lower input commodities, where we're seeing 65% decrease in global sulfur prices, 29% decrease in diesel and natural gas prices, and 19% decrease in fuel oil prices.

We anticipate the benefits of these lower input commodity prices to flow into our NDCC in coming quarters. However, the current quarter, these were offset by significant maintenance spend and asset purchases related to the matters I discussed, which negatively impacted production.

Lastly, cobalt byproduct credits positively impacted NDCC, with sales volumes more than offsetting the lower prices in the quarter.

Moving to slide eight, for an update on our Moa JV expansion project. When we embarked on this expansion program, we factored in various risks and market conditions. The expansion program was specifically designed to minimize the risk of capital overruns and project delays, which we anticipated following the COVID-19 pandemic.

While we are not immune to the challenges impacting projects that others have been reporting, we are pleased that our program remains on budget and schedule. Further, the low capital intensity and the low absolute spend for our expansion program minimizes the risk to our liquidity during volatile market conditions.

Phase 1 of the project, the Slurry PrepPlant, remains on track, nearing completion and commencement of operations in early 2024. During the quarter we completed the critical piping systems and began its pre-commissioning process. The electrical instrumentation work is continuing to proceed as planned. The second phase of the project remains on track for completion by the end of 2024.

During the quarter, we made a number of meaningful advancements though. We have now awarded 95% of procurement packages, including all long lead items, for the Sixth Leach Train. We have now committed 50% of the planned scope in line with budget, reducing our remaining exposure. We are scheduled to commence work in the second quarter of 2024.

Engineering for the Fifth Sulphide Precipitation Train has been completed and ordering of equipment and materials will commence next year. This is a smaller part of the overall scope.

The construction permit for the acid tanks has been granted by the Cuban authorities and the contract is being finalized with the vendor for supply of materials and erection of the tanks. Overall, we are very excited with the solid progress we have made during the quarter as we approach the final stages to complete Phase 1 of this project.

Turning to our Power division on slide nine, electricity production for the third quarter was 190 gigawatt hours, with unit operating cost at $27.06 per megawatt hour. As we discussed last quarter, Energas began receiving additional gas from two wells we drilled on behalf of Cubapet, the Cuban oil company.

This is driving the high production we are seeing and we expect this to have a significant positive impact on our power operations and its profitability for years to come. Beyond this, we continue to explore additional opportunities to further increase the gas supply for additional power production to maximize the use of our facilities.

And with that, I will hand it over to Yasmin to summarize our financial highlights and I will be back to discuss our outlook.

Yasmin Gabriel

Thanks, Leon. I'll begin today with our financial performance on slide 11. Our financial performance this quarter was impacted by lower average realized prices, delayed nickel sales, and lower fertilizer sales volumes. In addition, we had higher costs associated with significantly higher cobalt sales volumes related to the Cobalt Swap transaction and higher maintenance as Leon noted earlier.

For nickel, we saw lower demand from steel mills after summer shutdowns and higher intermediate availability, which led to lower metal purchasing in Asia. As well, the trend of declining nickel prices resulted in some customers delaying purchases in anticipation of further price reductions. Fortunately, we've seen improvements in sales volumes in October and expect Q4 sales to be higher than Q3.

For cobalt, we've seen demand generally improving with consumers restocking their inventories as prices stabilized.

Consolidated revenue for the third quarter was $36.4 million increasing year-over-year with higher revenue from Cobalt Swap sales and higher electricity production, which more than offset lower fertilizer revenue. Combined revenue, which includes the corporation's consolidated revenue and revenue from the Moa joint venture on 50% basis was $132.4 million.

Our adjusted EBITDA was also negatively impacted by an $8.9 million write down of fertilizer inventory due to lower realized prices, coupled with higher maintenance and lower production, and a $5.8 million increase in our environmental rehabilitation obligation for legacy oil and gas Spanish assets. If not for these items, our adjusted EBITDA would have been positive $5.6 million. Net loss from continuing operations was $24.8 million, similar to last year.

Despite a number of challenges impacting our financial performance during the quarter, we maintained a strong liquidity position sufficient to support our strategic priorities. At quarter end, we had $104 million of available liquidity in Canada as seen on slide 12.

Notable changes to our cash in Canada during the quarter include $24 million received from the sale of cobalt under the Cobalt Swap, $40 million used to repay a revolving credit facility, which included the amounts drawn in Q4 of last year to upsize our oversubscribed note offers, $15 million to provide short-term advance to the Moa joint venture related to the delayed sales of nickel noted earlier.

This advance will be repaid as cash from sales is received. $12 million used for operating activities at the fort site, including maintenance noted earlier, $7 million for property, plant and equipment, and $3 million of cash interest paid on our PIK notes.

Subsequent to the quarter, we paid our semi-annual interest of about $9 million on our second-lien notes and received an additional $1.5 million from the sale of cobalt under the Cobalt Swap. Finally, we were not required to make a mandatory redemption of second-lien notes as a minimum liquidity threshold was not met.

That concludes my remarks. I'll pass it back to Leon to discuss our 2023 guidance.

Leon Binedell

Thank you, Yasmin. Slide 14 outlines our updated guidance for 2023, reflecting the impacts of our results to-date. We are modestly adjusting our production forecast for the year, now expecting finished nickel production to be within 29,000 to 30,000 tons, which implies a midpoint slightly less than 5% below the midpoint of our original guidance. For cobalt, we expect ‘23 production to be between 2,900 and 3,100 tons, in line with a revision to nickel production.

For spending on capital, we now see $50 million for sustaining and $15 million for growth. For sustaining capital, we deferred certain spending in response to market challenges and lower sales as part of our regular prudent approach to capital management and timing of spend.

For growth capital, the lower spending this year will not impact construction timelines for our expansion. Capital spending is expected to be sequenced later than originally forecast, while the overall project timing and budget remains unchanged. Our guidance for metals NDCC and for Power production costs remain unchanged.

Concluding on slide 15, we continue to make advancements progressing our strategic priorities, setting the foundation for future success. We are maintaining our balance sheet strength, increasing production over the near term through our low capital intensity expansion program, and finding opportunities for value enhancement in power.

We look forward to providing further updates on these initiatives, while we expect to begin delivering improving results in the quarters ahead. I'd like to thank everyone for their time today.

And operator, I'd like to now open the call for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions]. The first question comes from Gordon Lawson of Paradigm Capital. Please go ahead.

Gordon Lawson

Hi, good morning. For the nickel sales catch-up, could you provide some color as to the situation in terms of current demand, and if you expect this to be recovered in a single quarter or more spread out?

Leon Binedell

Hi, good morning Gordon. Thanks for your question. The current market conditions that we're seeing does indicate to us as Yasmin mentioned, that October sales returning more to normalized levels. We don't anticipate catching up the sales from Q3 and Q4. That's sort of our current expectations, but we do see that stabilize and recover in the New Year.

Gordon Lawson

So, I mean, are customers holding out, waiting for nickel prices to fall, or is there more nuance to this?

Leon Binedell

There's a number of factors likely at play. Speculating on customers holding out for lower pricing seems to follow a similar trend as we've seen in Cobalt earlier in the year, and as prices stabilize, volumes tend to pick up.

We've also seen some delays in sales due to inventory levels that customers hold, and generally availability of intermediate in the marketplace. We see some of that likely to stabilize in the coming months, and we anticipate to be able to unwind that position in ‘24.

It's important to note that we continue to believe in the value of our inventory. It is valuable finished nickel that we're holding, and we have the ability to liquidate that into the market as opportunities arise.

Gordon Lawson

I see, great, thanks for that. And on the fertilizer, sounds like you got it back to full production ahead of what we're expecting. Does that mean we should expect Q4 to remain to be a seasonably high quarter in terms of sales as we've seen in the previous years?

Leon Binedell

Operations have returned to normal levels, and so we should expect similar operations as we had in the past during the fourth quarter.

Gordon Lawson

Okay, fair enough. Thank you very much, that's it for me.

Leon Binedell

Thanks, Gordon.

Operator

And there are no further questions at this time. So I'll hand the call back to Tom Halton for closing comments.

Tom Halton

Thank you, operator, and thank you everyone. Please feel free to reach out to us if there are any further questions, and we look forward to speaking with you again next quarter.

Operator

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating. We ask that you please disconnect your lines.

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