Sherritt International Corp

TSX:S

Earnings Call Transcript 2020-Q1

[Operator]

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Sherritt International First Quarter 2020 Results Conference Call and Webcast. [Operator Instructions] I would like to remind everyone that this conference call is being recorded today, Friday, May 1, 2020, at 10 a.m. EST. I will now turn the presentation over to Joe Racanelli, Director of Investor Relations and Communications. Please go ahead

[Joe Racanelli, Director of Investor Relations]

Thank you, and good morning, everyone. Due to COVID-19, all management is in separate locations, and I apologize in advance if we experience any technical issues. During today's call, we will be following a presentation, a copy of that is available on our website at sherritt.com. As customary, we will be making forward-looking statements, and those details are available within our presentation. With me are David Pathe, Sherritt's CEO; as well as Andrew Snowden, our Chief Financial Officer; and Steve Wood, Chief Operating Officer. And they will be in their sections reviewing financial and operating results for the quarter. Following the management discussion, we will have a Q&A session as customary. Thank you, and David, please go ahead.

[David V. Pathe, President, CEO & Director]

Okay. Good morning, everybody. Thanks, Joe. Well, obviously, a tremendous amount has changed in the world in the last couple of months since we spoke to you around the timing of our Q4 release in late February, a lot of developments both externally and internally. We wanted to tell you actually shed some light on a few of those this morning before we take your questions. As John mentioned, we're all speaking to you from our homes this morning. And as I imagine, many of you are listening from home this morning as well. A few highlights on the first main slide on Page 4 there. We obviously took a lot of actions in March to address the impact of COVID-19. And we took a lot of actions on our operating sites to address the health and safety of our employees by implementing new health and safety practices, new work processes. We have a lot of people working at home. As a result of all those measures, thus far, we have not had any instances of infection of COVID-19 in our employees, and we have not yet experienced any significant interruption to our production as a result of COVID-19. And as when Steve speaks, he'll give you a bit more insight into some of the steps we've taken to address the issue across our operations. I want to highlight liquidity. And you'll -- if you'll just take a look at the results, you'll see our Q1 liquidity was actually up over Q4. A number of factors driving that. We saw dividends from the Moa Joint Venture, but those were largely based on previous periods and higher times of higher commodity prices. We did also at the time, we mentioned, released our Q4. But during the quarter, we've signed an upgraded receivables deal with the Cubans to see greater cash flows flowing to us on our orderly receivables, and we did use that money flow in February and March, but we have seen the pace of collections from -- on our Cuban receivables slowed considerably in April here. We did also conduct a forward sale of nickel in the first quarter for delivery over the course of this year that brought in about $16 million. And we have continued to realize more savings from our ongoing efforts to reduce administrative expenses and some of the austerity measures that we put in place in March in response to the COVID-19 outbreak. So though we're starting to see some signs with the curve flattening, both in Canada and Cuba, and near-term visibility for customer demand, commodity prices, both for the products we produce and for -- commodities and Cuban energy payments remains unclear. We're still working through what that means for our liquidity over the balance of this year and beyond. Another key development in the quarter was the launch of our balance sheet initiative, and it was aimed at strengthening our capital structure and addressing our near-term debt issues. We've obviously delayed the meetings that were intended to be held, and we were able to approve that transaction, and Andrew will provide an update on the status of that when he speaks of the Q1 financial results. Overall production was marked by strong nickel and cobalt productions in the Moa JV, despite some of the transportation issues, which disrupted the delivery of mixed sulphides to the refinery in Fort Saskatchewan. But a solid production overall is indicative of the success of our operational excellence and issues that we've been working on over the last couple of years. I'll come back and speak to you at the end about our -- about nickel markets and a couple of outlook and a couple of things. But now, Steve is going to take over and speak about our COVID-19 response and some of the operating results. Steve, are you there?

[Stephen James Wood, Executive VP & COO]

Yes. I'm here. Thanks, Dave. Before I discuss our operational highlights, I'd like to briefly comment on our efforts to promote health and safety throughout our operations. Q1 was a strong quarter from a health and safety perspective. Overall, Sherritt had a recordable injury frequency rate of 0.26 and a lost time injury frequency rate of 0.09. And these numbers put us firmly in the first quartile of the benchmark peer set data. Moving on to Slide 6. The onset and spread of COVID-19 has had, as you can imagine, a significant impact on our mining operations. Around the world, all mining companies have felt the impact. A number of companies have had to limit or, in some cases, stop production entirely. To date, COVID-19 has had a limited impact on our production activities at each of our operations, including Moa and our refinery at Fort Saskatchewan as well as our power and oil production efforts. The limited impact is due in large part to the additional health and safety measures that we implemented starting in March. These measures include practicing social distancing and intensified hygiene practices and a ban on travel. Our employee health and safety are paramount at Sherritt, and we will take all measures to protect our employees. While the impact of COVID-19 on operations to date has been limited, we are withdrawing our guidance for 2020 given our limited near-term visibility on a number of factors. Now turning to our production results starting with the Moa JV on Slide 7. On a 50% basis, Moa produced 3,836 tonnes of nickel and 400 tonnes of cobalt in the first quarter this year. These totals represent declines of 13% and 6%, respectively, from the same period of last year. I should make clear that these declines were not driven by operational challenges, but rather by delays and disruptions in the delivery of mixed sulfides to our refinery in Fort Saskatchewan. These delays were caused by rail blockades in Canada that limited deliveries for a span of about 2 weeks in February, and by some shipping interruptions from Moa. The impact of these delivery disruptions was minimized by the success we've enjoyed over the last 24 months from our operational excellence initiatives that we've launched. These initiatives, you'll recall, include acquiring new mining equipment which has delivered a number of benefits, such as improved ore access and reduced downtime. The net direct cash cost in the first quarter was USD $4.33 per pound down -- and that's down 4% from last year. The decline was primarily due to higher realized cobalt prices and lower sulfur cost when compared to Q1 of 2019. I should point out that the sulfur cost had risen since the start of Q2 by approximately 50% largely as a result of the lower available supply. Next, turning to our oil and gas operations on Slide 8. We produced 3,277 barrels of oil per day in Cuba on a gross working interest basis in the first quarter. This total marked a decline of approximately 25% from last year when we produced 4,443 barrels of oil per day. The decrease was due to natural reservoir declines. And as is to be expected, the decrease in the number of barrels produced had a negative impact on our unit costs. Unit costs in Cuba for the first quarter were $27.28 per barrel, and that's up 29% from the $21.19 per barrel for the first quarter of last year. Unit costs are also impacted by the depreciation of the Canadian dollar relative to the U.S. currency, as labor expenses that we incur are denominated in U.S. dollars. Now turning to our power division on Slide 9. We produced 153 gigawatts of electricity in the first quarter. That's down 12% from last year in the same quarter when we produced 173 gigawatts. The decrease was due to reduced availability of gas supply. The unit operating costs in the first quarter of this year were $14.57, and that's down 28% from the $20.28 experience in the same period last year. That decrease was due to the timing of some maintenance activities and our decision to limit operational spending to levels required to maintain certain plant operations and in line with Cuban energy receipts. The impact of reduced spending was partially offset, however, by the decline in the Canadian dollar as power business costs are generally denominated in U.S. currency. So that concludes my review of our operational results. I'll now turn it over to Andrew Snowden, our CFO, who will review our first quarter financial results in much more detail. Andrew? Andrew, are you there?

[Andrew Snowden, Senior VP & CFO]

Yes. Thank you, Steve, and good morning, everyone. I'd like to begin this morning just on Slide 11 with a review of our quarter-end liquidity position. As you can see in our cash waterfall here, we ended the first quarter with a consolidated cash balance of around $193 million, which is up from the 166 million we ended the year with. Excluding the consolidated cash held at Energas, the quarter end liquidity available to Sherritt at the end of March was $107 million. The increase in liquidity from [indiscernible] as Dave mentioned earlier, was driven by a number of one-off initiatives. Some of these in response to COVID-19, and these have temporarily supported the improved liquidity position at the end of March. These initiatives include positive changes in working capital, which you can see totaled $8.9 million during the quarter, and this is a result of fertilizer sale prepayments and also the -- some higher Cuban energy payments. And I'll discuss these energy payments in more detail shortly. Also we received $13.3 million in distributions from the Moa JV, and that was a result of us drawing down Moa's cash balance to lower levels. In addition, again, as Dave mentioned earlier, we did receive $60 million in prepayments against future nickel deliveries through the course of -- which are expected to be delivered through the course of 2020. And finally, our cash balance at the end of March did benefit from $7.4 million in lower interest payments, and that was a result of the launch of our balance sheet initiative earlier in the quarter. Now although these items have supported the higher liquidity balance in March, many of these items have nearly brought forward cash flow from later in the year, and so I would expect our consolidated cash balance to decline through to the end of 2020. Turning now to the next slide, Slide 12. This -- I want to provide a bit more detail on the status of our Cuban energy receivables. So in Q1, we did announce our Cuban partners made a commitment to increase their monthly payment by $5 million a month, which, coupled with the overdue deal we reached in June of 2019, would take monthly receipts to $7.5 million. This agreement was effective February 1 of this year. As you can see on the slide, the increased collections in Q1 as a result of this deal did pave the way for a modest reduction in the amounts of overdue receivables owed to Sherritt at the end of March. Although this payment commitment was met in February, the energy payments in March and April, as you can see on this slide, were lower than expected, which was disappointing. We are currently in ongoing discussions with our Cuban partners to try to resolve these underpayments. Turning now to Slide 13. I wanted to make -- take a few moments to talk through some of the austerity measures that we've implemented in response to COVID-19. As you can see from the slide, approximately $90 million of savings, and this is savings against budgeted expenses, have been identified. And these savings are noted on 100% basis. Most of these savings were achieved within the Moa JV, and this was to ensure it continues to be self-sustaining in a period of low nickel prices. And so these -- so most of these savings will not directly impact Sherritt's liquidity. Examples of these initiatives include reduced maintenance activities at Moa JV and also at Energas, while, of course, ensuring the employee health and safety is protected. And also the deferral of capital spend of approximately $20 million at the Moa JV was identified. And in addition, the deferral of any future drilling on Block 10 within our oil and gas business. We believe these austerity measures will collectively help us to address near-term uncertainty arising as a result of COVID-19. Turning now to Slide 14. Another update from the quarter is the extension we agreed to our $70 million revolving term credit facility, and that extension was through to August 31. Now the extension is shorter than the typical annual renewal we would agree, and it's to allow for our balance sheet initiative to complete in appropriate covenant thresholds, so that then be agreed based on our revised capital structure. The key terms of the extension are listed on this slide, and I won't kind of repeat everything on the slide, but this has brought some short-term flexibility to the company with a number of key financial covenants. Most significantly, we did negotiate a reduction in our minimum cash balance to $65 million, which provides some marginal additional capacity. I should point out the financial metrics identified on this slide are against the credit facility covenants, which are marginally different to those which are disclosed within our financial statements, and so they are not directly tied to our IFRS financial statements. Turning now to Slide 15. I wanted to conclude my remarks just by making a few brief comments on the balance sheet initiative we launched in Q1. And following our most recent announcement confirming the deferral of the April 9 debtholder meeting, we have continued discussions with a number of our network with the goal of achieving a consensual transaction for the benefit of all stakeholders. We don't have anything substantive to share today, but we will continue to provide updates to you on the process and announce a new schedule once that has been determined. So that concludes my remarks today, and I'll turn the call back over to David for his closing remarks.

[David V. Pathe, President, CEO & Director]

Okay. Thanks, Steve and Andrew. A couple of things I just wanted to touch on before we take your questions. Quick update on commodity prices on Page 17 here. You can see that in the chart of nickel and cobalt prices moved over the course of the quarter. A lot of volatility, particularly in the nickel market. Nickel prices came off about 20% in the quarter driven largely by the slowdown in demand as COVID-19 took hold first in China and then spreading beyond. We expect to see that volatility continue in the near term. It's obviously come back up a little bit in April, as there have been some supply side responses to the demand shocks driven by COVID-19 shutdowns. And we'll see where we go from here. Cobalt prices by comparison have been relatively stable through the quarter, though we're seeing a bit of softness in the cobalt market now. In terms of the outlook for nickel over the page -- on Page 18. We are, I think, now going to see a fair amount of volatility as we see how demand response as countries start trying to come out of COVID and how those -- how demand picks up relative to some of the supply. They'll likely be coming back online as well. As operations emerge from lockdown, they can get back up and produce again. There's certainly some analysts out there. I think we're going to see some surpluses in 2020 and potentially into 2021 as a result of supply potentially coming back online more quickly than demand coming back. And we are seeing inventories rising a bit over the course of the quarter and through the past month or so, as some stockpiles and inventory are being returned back to the exchanges. But overall, the long-term outlook for nickel still seems positive in terms of the drivers of nickel demand, particularly the Class 1 nickel over the next few years around the electrification and transportation. Those underlying things continue to be true. Lastly, just a quick update on Block 10, and frankly, not very much to tell you. We did obviously complete the drilling and then reached our target depth. The works on the well earlier by our drilling equipment was done. We did get the rig off the well, and we're getting to the point where we're beginning to do some testing. Frankly, we got just held up by the COVID-19 outbreak, and interprovincial transportation restrictions in Cuba made it more difficult to get the testing that needs to be done to figure out where we go next from the testing. We can see that we actually have their perspective. And as a result of that delay, we have actually suspended all operations at Block 10, and we hope to be able to resume that testing and go from there once the travel restrictions are eased. And hopefully, that will be in the coming weeks here. So that gives you a sense, I hope, of how we've responded to COVID-19 and where we are at as we deal with some of the issues we were dealing with before COVID-19 break -- broke out and how COVID-19 has added to that. In the short term, we remain focused on protecting our employees and trying to contain the spread of COVID-19, while maintaining safe and reliable production, and we remain focused on working out our balance sheet initiative transaction. That is what we wanted to tell you about this morning. And so now, operator, if there are any questions, we would be happy to take them.

[Operator]

[Operator Instructions] Your first question comes from Tony Robson from Global Mining Research.

[Anthony Robson, Executive Chairman]

Two questions, if I may, please, one operational. A lot of us are probably not aware of what the government regulations are in Cuba in terms of social isolation and distancing across in a coronavirus world. So just a brief overview of what the Cuban requirements are, please? And then how that especially is impacting Moa Bay production. You'll obviously, over the last months, have put figures. So given that first quarter was impacted more by Canadian rail and whether it was in January at Moa, just wondering whether we'll see an improved quarter 2 where COVID restrictions will mean it's even lower. That's the operational question. The financial question, and I can understand this is probably going to be commercially sensitive, but in terms of the debt restructuring, is the delay with negotiations, not pushing back over the time frame, due more to COVID, again, restrictions in Canada as you can't meet people? Or is there a greater gap, if you like, between what the bondholders think is a fair head cut on what has been proposed? Those are the 2 questions.

[David V. Pathe, President, CEO & Director]

Thanks, Tony, and nice to hear from you. So I'll try and give a bit of context around each of those for you. I don't have definitive answers for you on either one, but I can give you a bit of a sense of the dynamic. In terms of impact of COVID in Cuba, Cuba took a pretty significant action once they had a few cases. The cases initially began, where they were brought to the island by tourism. And within a couple of weeks, they had to shut down the country to foreigners, and there's very little to no transportation in and out of the country as well. At this point now, everyone's definitely have had instances of community transmission. And so there are cases in the country, in Havana and cities around Havana, particularly in areas concentrated around some of the tourist areas. To try and prevent the spread of the disease across the country, they have put in quite heavy restrictions on intra-country travel, so there's very little travel between the provinces of Cuba to prevent the moving beyond the cities where it is now, and that seems to have been reasonably effective so far. There had been a few isolated cases in the Moa area, but they've been successful so far in isolating those cases. And we haven't seen any significant spread mostly, although there are some areas of the country where they are dealing with outbreaks. The Moa area itself, thus far, does not have any significant impact. So what that means operationally for us at the moment is we're actually running pretty well at the moment. We've had a decent April. And at this point in time, we expect to be able to continue that, but there is obviously greater vulnerability just as we continue to track the disease. And there are lots of steps and measures being taken both in Moa and in Fort Saskatchewan in terms of limiting the number of people on site, made changes to the number of shift changes over the course of the week to limit the interaction between people coming on and off shift, a lot of changes into social distancing and all the other measures that you hear so much about from around the world. But obviously, we do have that same vulnerability that everybody is placed in today. I feel the risk of an outbreak causes us to slow that we're going to have to shut down at some point in time. But as of today, we are running and running pretty well. On the financial side of things, we did have some issues around COVID-19 just in terms of getting packages out to the shareholders and bondholders in response, and that was part of what was behind some of the extensions to our early consent dates. And now then we did publish the meeting results close to the deadline of our meetings. I mean we are now in conversations with a number of bondholders. And you frankly understand that there's not a lot of context I can provide to you on that really until we have something to announce. It's obviously a big priority for us given the impact on our liquidity and the debt levels that we were trying to address, even in a pre-COVID world. And so all I can really tell you today, Tony, is it's obviously a big focus of the company and the management team. And as soon as we have something to announce, we'll be sure to announce that.

[Operator]

[Operator Instructions] Your next question comes from Andrew Ginsburg from R.W. Pressprich. We have no further questions in queue. I will turn the call back over to management for closing remarks.

[David V. Pathe, President, CEO & Director]

All right. Well, if there are no further questions, all I can say then is thank you very much for taking the time to join us this morning, everybody, including all of you, who have been through a lot of upheaval and uncertainty in the last couple of months. So we look forward to updating you further on some of the things that we told you about today that we have underway. And until we can't just do that, I hope everybody is able to stay safe, stay sane, and we will speak to you soon. Thanks very much.

[Operator]

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.