Sherritt International Corporation (SHERF) Q1 2023 Earnings Call Transcript
Good morning, ladies and gentlemen, and welcome to the Sherritt International’s Q1 2023 Results Conference Call. At this time, all lines are in a listen-only mode. Following the presentation we will conduct a question-and-answer session. [Operator Instructions] This call is being recorded on Thursday, May 11, 2023.
I would now like to turn the conference over to Lucy Chitilian. Please go ahead.
Good morning, everyone, and thank you, operator, and thank you, everyone, for joining us today.
Before we begin, I just want to make mention of a couple of items. As you know, we released our Q1 results last night and all our disclosure materials, including the press release, MD&A, financial statements are available on our website as well as on SEDAR. As is customary, during today’s call and webcast, we will be using a presentation that is available on our website in the Investor Relations section.
In addition, we will be making forward-looking statements and references to certain non-GAAP financial measures. Cautionary notes on forward-looking statements can be found on Slide 3 and the non-GAAP measure discussions and reconciliations to the most directly comparable IFRS measures are included in the appendix to this presentation.
With me today are Sherritt’s Chief Executive Officer, Leon Binedell; and Chief Financial Officer, Yasmin Gabriel, who will be reviewing our results in detail. Following this discussion, we will open the call up to questions.
It is my pleasure now to pass the call along to Leon.
Thank you, Lucy, and good morning, everyone, and thank you for joining us today. We continue to make positive progress and delivered several significant milestones this quarter. Despite the well-recognized drop in cobalt prices year-over-year caused by a near-term oversupply, we were able to maintain positive earnings and cash generation this quarter on the back of solid nickel prices. The start of the year saw the successful implementation of our Cobalt Swap agreement, and we are tracking well to receive all the cobalt for the year by midyear. Yasmin will elaborate on this success.
In March, we published our updated NI 43-101 technical report for the Moa joint venture, which more than doubled our estimated reserves and extended the life of mine to 26 years. This technical report underpins and validates our long-term strategy for producing low-cost, high-purity nickel and cobalt to serve the growing energy transition markets. We also drilled a new gas well in the quarter and brought it into production successfully post quarter end, which will see our power production increase year-over-year.
Turning to Slide 5. We continue to focus on delivering on our strategic priorities. I highlighted some of these in my opening remarks on the successes in the first quarter and also highlighted on the slide. Some additional highlights that we’ve accomplished in 2023 so far include: we continue to execute on the Moa JV expansion, which remains on budget and on time for completion at the end of next year to see production of contained metal increase by 20%, and we’ve entered into new development agreements in our Technologies division.
Before I commence a discussion on our operations, I’d like to express our deepest sympathy to Victor Romeroz Figueredo’s family. As we announced on April 24, Victor was fatally injured in an incident involving heavy equipment on our site. The investigation remains ongoing to determine the root cause of the incident. However, we have already been implemented several safety improvements at Moa. Dan, our SVP for the Metals business, traveled to Moa immediately after the incident to oversee the initial internal investigation and to support the team, who was deeply impacted as I am, my leadership team and our Board by this tragedy. It is unacceptable to have a fatality in our operations, and we will make every effort to prevent such incidents. Safety remains our priority over all else, and this is incredibly disappointing to have suffered such a great loss and even more so to Victor and his family.
Turning to Slide 7 for our operating results. Operationally, the quarter saw a number of challenges for our Moa joint venture, particularly around our ability to be able to suitably blend available ores as we transition towards new mining areas and ahead of implementation of our new mine plan and the new Slurry Preparation Plant. Sherritt’s 50% share of finished nickel production was 3,483 tons, which represent a 10% lower than last year’s 3,875 tons produced in the first quarter of last year. This was primarily due to lower mixed sulfide feed availability at the refinery due to the challenges as Moa has mentioned, and as expected in this transitionary year.
Finished cobalt production for Q1 was 367 tons, down 18% from the 446 tons produced last year, consistent with low nickel production and higher nickel-to-cobalt ratios in the feed materials from Moa. The challenges with ore blending and available feeds will improve as the year progresses. We will not have access to all the planned new mining areas until late 2023, which will further enhance our ability to blend material. However, we already saw improved operating results at Moa in April following changes to the ore blend composition we made to overcome the challenges of Q1. Currently, we remain on track to meet our full year production guidance figures.
Turning to our net direct cash cost or NDCC as outlined on Slide 8. Mining, processing and refining costs were 23% higher in the current year quarter. This was primarily due to the impact of higher opening inventory costs on the back of elevated input commodity prices last year. Additionally, there was a 95% increase in diesel prices due to the direct purchase of international supply diesel versus Cuban supply diesel in early 2022. This was also coupled with lower production volumes this quarter, which negatively impacted our unit costs.
These were partly offset by lower input cost for sulfur and natural gas in particular, which were down 15% and 30%, respectively. Most of our sales in Q1 came from opening inventory, which reflected these high input commodity prices from last year. Commodity prices for natural gas, sulfur, fuel oil and even diesel were all lower in Q1 compared to Q4 last year, which we expect to have a positive impact on NPR going forward. Forecasts suggest that these input prices should remain lower than 2022 throughout the year.
Overall, our NDCC per pound of nickel sold increased to $6.46 in Q1 from $3.42 in Q1 last year, in part due to a 54% decrease in cobalt prices, which significantly reduced our cobalt credit to NDCC. With the volatility in cobalt prices, we continue to monitor the potential impact on NDCC and we’ll update our guidance when we have a clearer picture on the impacts of cobalt sales volumes and prices, in particular, but also the impact on fertilizer prices and volumes as the markets have shifted substantially from last year’s historic high price environment.
On Slide 9, as you would have seen in our press release at the end of March, we filed a new NI 43-101 technical report for the Moa joint venture. We were encouraged by the increase in proven and probable reserves and a 14-year increase in the estimated life of mine. As you can see from the slide, the economics appear very favorable. And just to be clear, this is for the Moa joint venture and does not include the impact of third-party feed through the refinery and our fertilizer sales or the potential upside from — on NPV from the Moa expansion, which is currently underway. Once completed by the end of 2024, the full expansion is expected to result in a higher NPV, but shorten the life of mine by three to five years.
This report is an important step for Sherritt as it underpins our strategy of establishing Sherritt as a stable leading green metal supplier for providing electric vehicle manufacturers and others involved in the energy transition with a reliable low-cost supply of nickel and cobalt from a long life of mine. If you would like additional information on these details, I would encourage you to review the report itself or review our press release from the March 31.
Turning to our Moa joint venture expansion program as outlined on Slide 10. We continue to make progress on the low capital intensity expansion program in the quarter. For the Slurry Preparation Plant, 80% of structural steel is now erected, field assembly of major equipment is near completion and piping electrical instrumentation installation is to commence in May. The slurry and water return pipelines are 25% complete and are expected to be finished by the end of the year.
In regards to the processing plant expansions, the JV received approval for the feasibility study from our Cuban authorities in Q1 for the full expansion program. All significant contracts for long lead items for the six leach train have been awarded or are in the process of being awarded at budget. A detailed project execution schedule for the six leach train is being finalized. We continue to advance engineering and Cuban approvals for the fifth sulfide precipitation train and the acid storage tanks. Overall, the program remains on schedule and on budget.
Turning to our Power division on Slide 11. Higher production in Q1 this year resulted in higher sales of 158 gigawatt hours compared to 137 gigawatt hours in the prior year period. Higher production was primarily due to greater equipment availability as a result of maintenance activities completed last year. Unit operating costs for the three months ended March this year were higher than Q1 2022 as a result of the timing of maintenance spend, partly offset by higher electricity production and sales volumes.
The Moa Swap has been beneficial in providing our Power business with a foreign currency liquidity required to effectively manage maintenance spend and the operations of this business. And most importantly, we successfully completed the drilling and testing of a new gas well for CUPET in the Puerto Escondido field and commenced drilling of a second well. The additional gas will be provided to Energas for use in power production starting in Q2. We are currently monitoring the flows and will advise of any positive guidance updates as the information becomes available.
Turning to our Technologies division as outlined on Slide 12. During the quarter, Technologies continue to provide technical support, process optimization and technical development services to our Moa joint venture and continue to support the JV expansion strategy. These activities include establishing the updated mineral reserve estimate and life of mine plan using the economic cut-off grade, which finalized into the 43-101 report already mentioned, and supports ongoing process plant improvements and debottlenecking work at Moa and at our Fort Site locations.
Technology has also continued to progress its commercialization activities around its proprietary technologies and innovative industry solutions. Additionally, this quarter, Technologies received a natural resource Canada funding commitment for $800,000 to evaluate the possibility of using mix hydroxide precipitate or MHP as an additional feed material to our refinery in support of the Canadian strategic raw materials processing avenues for electric vehicle battery manufacturing in Canada. Technologies also signed an agreement with Aurora Hydrogen to support the development of turquoise hydrogen production technology including Aurora building, a demonstration plant at Sherritt Technologies’ facility. Hydrogen is used as a reagent at Sherritt’s refinery and has broader energy transition applications.
Finally, Technologies signed an agreement with a major mining company to conduct batch testing on specific laterite opportunities to test the applicability of Sherritt’s new next-generation laterite processing technology and advance the proposal on potentially jointly developing this technology. These are encouraging advancements, however, none of these are expected to contribute near-term cash flow, but create strategic opportunities for the energy transition future.
And with that, I will hand over to Yasmin to summarize our financial highlights.
Thank you, Leon. I’ll start with our key financial metrics on Slide 14, adjusted EBITDA and net earnings.
As you can see on this slide, in the quarter, we had positive adjusted EBITDA of $40 million and net earnings of almost $14 million, despite materially lower realized cobalt prices. A 54% decrease in the average realized cobalt price had a $21 million negative impact on both adjusted EBITDA and net earnings, which were also impacted by the higher NPR costs and lower production volumes that Leon noted earlier. These decreases were offset by $22 million lower stock-based compensation expense and lower income taxes at the Moa joint venture, which positively impacted net earnings.
Shifting to Slide 15 for an update on our Cobalt Swap agreement. As Leon said, we are very pleased with the successful implementation of Cobalt Swap. In only four months since implementation, the Moa joint venture distributed almost 75% of the annual maximum cobalt volume of 282 tons with an in-kind value of $67.4 million. Half of this amount representing GNC share was redirected to Sherritt to settle the outstanding Cuban receivable.
To date, we have sold more than half of the inventory for $37 million, have received $32 million in cash from those sales and continue to sell inventory into the market. The remaining 25% of cobalt volume is expected to be distributed by midyear. All cash receipts from the sale of the annual cobalt volume are expected to be received prior to the end of the year with the majority received by midyear.
As a reminder, the agreement includes downside price protection if the total value of the cobalt is less than $114 million. In which case, GNC’s share of any cash dividends will be redirected to Sherritt until the annual dollar threshold is met. Given actual and expected cobalt prices, we expect to receive a cash make whole distribution midyear once all of the cobalt volume is distributed. Normal course cash distributions from the Moa joint venture partners are expected to review midyear once the corporation has received the annual dollar limit through cobalt and cash distributions.
Finally, turning to our liquidity position on Slide 16. At the end of Q1, our available liquidity in Canada was $82 million compared to $75 million at the end of last quarter. The $7 million increase reflects $19 million from the sale of cobalt that we received under the Cobalt Swap, $16 million from strong Fort Site fertilizer pre-buys and that was offset by payment of share-based compensation obligation. Our available liquidity will continue to improve with the success of the Cobalt Swap. And as I mentioned earlier, the majority of the $114 million or CAD155 million is expected to be received midyear and the remaining cash before the end of the year.
As you would have seen in our Q1 results, strong operating cash flow has led to a buildup of cash within the joint venture. Once the cobalt volume and the annual dollar thresholds are met, the JV is expected to be in a position to begin normal course monthly cash distributions to each partner. Subsequent to quarter end, we made a $9 million semiannual interest payment on the second lien notes. And on that interest payment date, we were not required to make a mandatory redemption of second lien notes as the minimum liquidity threshold was not met.
That concludes my remarks. I will pass it back to Leon to discuss the 2023 guidance.
Thank you, Yasmin. Moving to Slide 18. To date, our 2023 guidance for production volumes, unit operating costs and spending on capital remain unchanged. We continue to monitor the volatility in cobalt prices and its impact on NDCC, as I mentioned earlier. To give a sense of the magnitude, NDCC guidance is based on a $23.50 reference price for cobalt. If the Q1 reference price of $17.56 per pound were to persist through the remainder of the year, NDCC guidance could increase by approximately $0.85 per pound, assuming all other assumptions remain constant. We’ll continue to monitor the cobalt impact in relation to other changes that also impact NDCC. As mentioned before, we are also advised of any positive impacts of additional gas on power production once we confirm the well characteristics, as these are being put into production.
To conclude with Slide 19. In summing up, we continue to focus on meeting our strategic objectives within the confines of current market conditions, but understanding that the long-term fundamentals remain very positive. We’ll continue to focus our attention on building a stronger and expanded operating profile, while managing our balance sheet effectively.
And with that, I’d like to thank everyone for their time today, and operator, hand the call over to questions at this time.
Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] And the first question is from Gordon Lawson at Paradigm Capital. Please go ahead.
Hi, good morning. And congratulations on the great quarter. It looks like this is easy to back out from your Slide 15. But could you please clarify the cobalt payments in terms of how much of the 731 tons of sales reported at Moa were related to these payments? And how much revenue from the swaps you expect to realize on a quarterly basis?
Thanks for your question, Gordon, and joining us today. The Cobalt Swap sales are all related to the joint venture sales as we would normally to our existing customers. So all the sales in the quarter is principally from the Cobalt Swap and will continue to be until the Cobalt Swap volumes are fully exhausted at which point the joint venture inventories or cobalt production will then be sold to those customers. Does that make sense?
Yes, that makes sense. I was just trying to back out how much of the sales were or would have been completed without the swap versus with the swap. It’s just a number I was hoping to get a head around.
We have no intention to have separate sales for the Cobalt Swap versus what would have occurred in the ordinary course of the joint venture. These are just redirected essentially to Sherritt and become Sherritt exclusive or Sherritt 100% sales ultimately versus joint venture sales for the first 2,082 tons of cobalt produced every year.
Okay. Fair enough. And for the quarterly sales, I mean, I get that you’ve received 75% in the first quarter, but the sales are expected to be a little drawn out, are they?
Yes. So the sales will continue to flow. We had some opening inventories. We — if you recall, in Q4, we indicated that we ended the year last year with elevated inventory levels. And so, we distributed all that inventory to Sherritt in January and then continue to distribute additional production volumes. And Sherritt is busy making sales from those volumes to our existing joint venture customers, and we’ll continue to draw that down over the course of the year. We anticipate that we would have received all the volumes under the swap by midyear, and the sales will conclude shortly thereafter and the cash following in our normal working capital cycle thereafter.
Okay. Fair enough. And you mentioned the Canadian government’s investment for your battery commodity production. The usage of the money, would that be largely slated for debottlenecking efforts at Fort Saskatchewan or is there another priority?
So that particular grant is focused on MHP or mixed hydroxide precipitate processing specifically, as Canada is seeking to find processing avenues for a variety of potential nickel and cobalt feeds going forward in support of the broader energy transition and battery manufacturing in Canada. We’re using Sherritt’s extensive technical capabilities in the core processing to study how those could ultimately be processed into batteries. And particularly, this focus of this study is around treating of MHPs through our existing refinery as an alternative feed source relative to the Moa MSP, for example.
Okay. That’s great. Thank you very much.
Welcome, Gordon. Thank you.
Thank you. [Operator Instructions] We have no further questions. You may proceed.
Thank you, operator, and thank you, everyone, for your time today. This concludes the call.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating, and we ask that you please disconnect your lines.