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Good morning, ladies and gentlemen, thank you for standing by. Welcome to the Sherritt International first quarter 2022 results conference call and webcast. [Operator Instructions] I would like to remind everyone that this conference call is being recorded today, Thursday, May 12, 2022 at 10:00 AM Eastern standard time. I will now turn the presentation over to Joe Racanelli, Director of Investor Relations. Please go ahead.
Good morning. Thank you. And thank you everyone for joining us today. Before we begin, I do want to make mention of a couple items. As you know, we did release our Q1 results last night and all of our disclosure materials, including the press release MD&A financial statements are available from our website as well as from SEDAR. As customary, we will be using a presentation that is available on our website on the IR section of our website and during today's conference, and discussion we've been making reference to certain non-GAAP financial measures, details of these measures and reconciliations to their most directive directly comparable IFRS measures are included in the appendix.
We will also, be making forward looking statements and those disclosure related items are found on Page 3 of our presentation. Now with me are Sherritt CEO, Leon Binedell; and Sherritt CFO, Yasmin Gabriel, who will be reviewing our results in detail. And following their discussion, we will open up the call to questions. Please go ahead, Leon.
Thank you, Joe. And good morning everyone. And thank you for joining us today. Q1 was particularly active quarter against the backdrop of commodity price volatility exacerbated by unprecedented market and geopolitical disruptions. Sherritt continued to make progress on a number of fronts. Most notably this quarter, we had strong, mixed sulphide production at Moa and solid performance at the Fort site, despite delays in feed deliveries, due to transportation disruptions. We generated our highest adjusted EBITDA for the quarter since 2014. We also, ranked in the lowest cost quartile of all producers, according to data collected by wood McKenzie. We saw a recovery in our power business, and very significantly, we started to build momentum on our expansion project, as Joe said, Yasmin and I will expand on these points before we turn the call over for questions. Slide 8. Yes, while it's unnecessary to review the market NGO political developments in the quarter in detail, given the amount of media attention each has received, I believe it would be useful to review the impacts of these developments on Sherritt and on our quarterly results. The chaos and disruption of coke trading in March on the LME did cause concern with our industrial customers. However, we experienced very limited impact on our sales volumes, largely as the result of our ability to shift the sale of limited volumes of product to the spot market in situations where our long term customers sorted defray shipments.
We do not foresee the events of March causing longer term impacts on our ability to price our product of the LME and did not see a negative impact on pricing in our Q1 results demonstrated by the high average realized nickel price of C$14.85 per pound, which was up almost 50% from the same period in the prior year. We successfully pivoted rapidly to find an alternative source for part of our sulphur supply to replace product previously sourced from Russia, given the recent sanctions against Russia and the impacts on supply chains. The significance of this action should not be lost. Given how strategic sulphur supply to operations is and how quickly the sulphur supply market became constrained due to sanctions against Russia. We are currently completing an assessment of the longer term supply opportunities for substitution of Russian supplied sulphur, which made up around 50% of our requirements. Our 2022 requirements are now all secured from non-Russian sources. From a broader supply chain perspective, we completed a risk exposure assessment and identified no other major risks. Our quick response to unprecedented developments over the span of a couple of weeks in March reflects the agility of our team and their ability to respond to unexpected circumstances and crisis. First of all, review the operations before handing over to Yasmin to cover our robust financial performance and to provide some context to the offer, to purchase our notes, which we launched last night, I'll then conclude providing an update on our expansion project. Turning to production at the Moa joint venture. As you can see from Slide 7 mixed sulphide production at Moa in Q1 2022 was up 5% from the same period of last year. In Q1 2021 mining conditions at Moa were adversely affected by heavy rains, resulting in lower ore quality. And by contrast, we were able to feed material much closer to our plan blending in 2022, resulting in improved metal recoveries at Moa. Finished nickel and cobalt production in Q1 2022 was down 7% and 6% respectively over the last year. The decline was attributable to delays in the delivery of mixed sulphides to the refinery in Fort Saskatchewan, from the port in Halifax, due to rail service disruptions.
These delays have since been resolved. Looking ahead, I should point out that Q2's finished nickel and cobalt production will be impacted by our planned annual maintenance shutdown at the refinery. This year's shutdown is expected to be up to 7 days and will occur in June consistent with previous years, but about half as long as last year. If you will recall, last year, we had a full facility shutdown in the third quarter lasting 13 days. The full facility shutdown occurs only once every 6 years, a schedule, which was made possible by our ongoing commitment to effective enterprise asset management. Turning to production costs on Slide 8. Prices for input commodities included in our mining processing and refining costs and our byproduct credits had significant impacts on our net direct cash costs or NDCC in Q1 of 2022. Despite the negative impact of higher input costs, our NDCC for Q1 this year was the lowest since Q4 of 2018 at USD 3.42 per pound of nickel sold, an 11% decrease from the first quarter of last year, due to the significant benefit of byproduct credits. As a result, Sherritt ranked in the lowest quartile of all nickel producers, according to annualized information tracked by wood Mackenzie.
Compared to the prior year quarter, Sherritt benefited from higher realized prices for cobalt where realized prices for cobalt was up 90% and fertilizer prices were up 110%. The benefit of higher fertilizer prices was further supported by a 16% increase in fertilizer sales volumes in the quarter over the prior year. The higher byproduct credits and higher fertilizer sales volumes partly offset by higher input costs in particularly sulphur costs were up 181%, natural gas prices were up 47% and fuel oil costs were up 35%, similar trends the industry as a whole is experiencing. Turning to our power division, on Slide 9, we produced 137 gigawatt hours of electricity in the first quarter of 2022, up 44% from last year when we produced 95 gigawatt hours. In Q1 2021 production was lower due to reduced capacity as the steam turbo at our broker plant was brought offline for major maintenance. As a result of high production and lower maintenance costs in Q1 2022 unit operating costs were down 39% over the prior year down to USD 15.70 per megawatt hour, from USD 25.89, in the prior year.
An important development in Q1 2022 for the power business related to extending our power generation agreement beyond its current expiry in 2023. We submitted a feasibility study, which represented the final step in the process to the Cuban government and we anticipate the final decision on the power agreement extension before the end of this year. Related to the extension of the power agreement, we continue to have discussions with our Cuban partners to increase the availability of natural gas needed to generate power. As a reminder, our Cuban partners to the inner gas joint venture are responsible to provide sufficient supply fuel for power generation. That concludes my remarks on our operational performance. And I will now hand over the call to Yasmin to review our financial results.
Thanks Leon. Good morning, everyone. I'll begin with the discussion on 2 of our key financial metrics, adjusted EBITDA and net earnings from continuing operations. You can see here on Slide 11, both metrics were significantly higher in Q1 2022, when compared to the same period in the prior year. We generated $58.5 million of adjusted EBITDA, nearly double the amount in the prior year quarter. The increase was driven primarily by higher realized nickel, cobalt and fertilizer prices at our Moa joint venture and Fort Site operations resulting in EBITDA of $81 million this quarter. This positive impact was also, reflected in our net earnings from continuing operations of $16.4 million marking our second consecutive quarter of positive earnings. The positive operational performance was partly offset by almost $27 million of non-cash share-based compensation expense driven by share price performance, which rose a 103% compared to a 33% increase in the same period in the prior year. Slide 12 illustrates the recent distribution history of amounts received by Sherritt from the Moa joint venture since the start of 2019. In Q1, we received USD 19 million as our share of distributions, reflecting improved nickel and cobalt prices. As a reminder, this amount includes USD 6.5 million in dividends that were deferred from Q4 2021 to assess the impact of delays in product deliveries caused by flooding in BC and congestion at the port in Vancouver in November of 2021. The amount of dividends to be distributed to each partner is decided by the Moa joint venture board on a quarterly basis.
And there are a number of factors that go into that decision making process. This includes available cash, prevailing nickel and cobalt and input commodity prices, expected working capital and other liquidity requirements, as well as planned CapEx, including growth capital, which we expect to fund primarily through strong Moa joint venture operating cash flows. When we take these factors into consideration, we continue to expect our dividends this year to exceed those of last year and expect dividends receipts to be higher in the second half of this year, compared to the first half.
Turning now to our liquidity position on slide 13. At the end of Q1, 2022, our total liquidity was 237 million up from 228 million at the start of the quarter. We further strengthen our cash since the end of Q1 and expect us to continue under the strong nickel, cobalt and fertilizer pricing environment. And with fertilizer sales being strongest in Q2. This will allow us to fund our growth strategy and take action to reduce our debt, which I'll turn to next. As we had mentioned, and as many of you would've seen yesterday, we were pleased to announce an offer to purchase our notes for an aggregate cash consideration of up to 50 million. As I touched on in the previous slide, recent market conditions, including high nickel, cobalt, and fertilizer prices, coupled with a strong performance, provided us with an opportunity to generate sufficient operating cash flow.
This will allow us to not only pursue our growth strategy, including this expansion of the Moa joint venture, but also, use our available cash on hand to reduce our debt and achieve balance sheet strength, which remains a key strategic priority. This offer also, provides a unique opportunity for near term liquidity to note holders, which may not be available otherwise. Under the terms of the offer, share or repurchase all tendered junior notes at a fixed price, 520 per thousand principle, an additional cash consideration of $30 for those tendered before the initial expiration date. After considering junior notes tendered and factoring in our maximum consideration, we'll have the option to purchase any secondary notes tendered by way of modified Dutch auction with a maximum bid price being 820 per thousand principle and any secondary notes tendered before the initial expiration date will also, be entitled to the additional cash consideration of $30 per thousand principle. Now we've included some of the key information for the offer on this slide, but we encourage you to review our press release and supporting documents available on our website and Cedar. For further details should you wish to participate. Now that concludes my remarks. I'll now turn it back to Leon for an update on our expansion strategy and closing remarks.
Thank you. Yasmin. As we announced previously, Sherritt has embarked on a growth strategy focused on expanding our annual nickel and cobalt production while also, extending the life of mine at Moa. We made progress on our growth plans this quarter and are starting to build some momentum. Just to remind everyone as outlined on slide 16, accelerated growth of Moa is based on 3 key pillars that upon completion will grow our annual nickel and cobalt production between 15% and 20% over those of 2021. More specifically, this would represent an increase in annual nickel production of approximately 5,000 to 6,000 tons on a hundred percent basis.
Underpinning our growth strategy is completion of a new slurry preparation plant that will reduce ore haulage distances, reduce diesel consumption, improve ore sorting and reduce carbon intensity from mining activities. This part of the expansion project is already underway. The second part relates to the completion of expansion circuits at Moa and the extension of the life of mine should the conversion of measured and indicated resource into reserves by using an economic cut of grade methodology and through an optimized mine plan. The third pillar is focused on de-bottlenecking production at the refinery, through the installation and upgrading of equipment.
We continue to estimate these projects would require a low capital intensity typically associated with brownfield expansions further reduced by the fact that the Moa expansion includes completion of a previously suspended expansion. In Q1, we completed a preliminary assessment of capital costs required to complete the expansion project, and that was consistent with our initial guidance or be it at the higher end of the range provided between USD 20,000 and USD 25,000 per annual ton of nickel capacity. In light of a number of uncertainties relating to the current geopolitical developments, ongoing supply chain disruptions, the spread of COVID and lockdowns in China and the inflationary pressures on construction materials, equipment, and labor costs. We will further evaluate these estimates once greater certainty around global supply chains and consequential pricing is available and additional engineering and design work is completed. This approach would reduce the execution risk and the risk of cost overruns related to these projects as formal project sanction is not expected until the second half of the year. In addition to the cost assessment and analysis were completed in Q1, we continue to make progress on a number of elements to keep the overall project timelines moving forward. With respect to the slurry preparation plant or SPP, we continue to advance construction and commence civil works on site. We also, completed to the processing plant projects with Moa. We are near completion of a feasibility study for the sixth train of a leach plant, and we also, completed a de-bottlenecking study and started basic engineering on the asset plant at Moa. The addition of a 6 leach train and new asset plant capacity are necessary to process the increased ore volumes expected from the new SPP to produce more mixed sulphides at Moa.
With respect to reserves expansion, our internal—sorry, our external consultants conducted site visits and commence development of a new mine plan based on economic cut of grade methodology. The new plan mine plan is expected to be completed and submitted to Cuba's natural resource ministry for approval in the second half of the year as planned. Finally at the Fort site, we started basic engineering on several de-bottlenecking projects. Combined, the joint venture partners committed an additional USD 6 million on a 100% basis to advance these projects ahead of the full formal sanction outside of the USD 27 million already approved for the SPP. We expect to build momentum establishing Q1 through the rest of the year. As you can see on slide 18, we have a number of important milestones coming up in the second half of the year. Most notably we expect to complete basic engineering on the refinery de-bottlenecking projects in the asset plant as well as asset plant capacity testing. Formal project approval and go ahead will occur in the second half of the year and completion of a new life of mine plan and consequential release of a 43101 technical report in the second half of the year as well. Over longer term horizon, we expect completion of the SPP in early 2024 as planned and the remaining projects by the end of 2024, we will continue to provide updates on progress on our expansion at our regular quarterly meetings. Moving to slide 20 on the outlook for 2022. As mentioned, we expect to formally approve the remaining scope of the expansion projects in the second half of the year. To date the Moa joint venture expects to spend around USD 30 million on a 100% basis in 2022 relating mostly to the construction of the SPP and basic engineering work and the procurement of supplies. As such, we have updated our planned capital spend for 2022, adding our share of the growth capital spend, which represents C$19 million. On the strength of positive market fundamentals and nickel, cobalt prices, We expect that capital spend for Moa JV, both for sustaining and growth will be self-funded by the JV from cash flows from operations as Yasmin mentioned. Given our results and performance in Q1, prevailing commodity prices and our outlook for the balance of the year, we have made no other updates to our guidance for 2022 at this time. And I thank you for your time today. And as you've heard, Sherritt had strong quarter delivering solid results for operations and financial results on the back of strong nickel, cobalt and fertilizer prices. We also, made considerable headway with our expansion project. We expect to build on Q1's momentum through 2022 and beyond, given the outlook for each of our commodities we produce remains favorable. It is why we've decided to take a balanced approach towards growth. And de-leveraging our balance sheet and launch the offer to purchase notes as Yasmin referenced.
I'd like to remind everyone that we'll be hosting our annual meeting of shareholders tomorrow. The meeting will be held in a hybrid format, and I hope to meet many of you in person. Finally, I'd like to note that today, mark Joe Racanelli's last results call with Sherritt. Joe has accepted a new opportunity and will be leaving Sherritt shortly. I want to thank Joe for his contribution to Sherritt and for keeping our investor community well informed and engaged and wish him bode well in his new endeavors. Thank you, Joe. This concludes our prepared remarks, operator, we will now hand over the call for questions.
[Operator Instructions] Your first question comes to the line of Gordon Lawson from Paradigm Capital.
Congratulations on another excellent quarter. You just touched on this, but I want to make sure, am I correct in assuming that phase 2 now has the board approval, or should we wait for the feasibility to be complete before such a decision?
So, the feasibility study on the sixth leach train is a technical requirement for our joint venture partner to move forward with the approvals. However, it is not going to slow us down and we still anticipate to receive board approval in the second half of this year. And, and that is unlikely to change any views given our current perspective on total capital cost for the project.
Okay, okay, great. And just curious on a standalone basis what are additional operational benefits are expected from the completion of Moa slurry plant in terms of production and cash costs and what exactly is involved in the de-bottlenecking the Fort at Saskatchewan?
Sure. So, first of all, to respond to the slurry preparation plant, the new slurry prep plant is closer to future mining areas and allows us greater operating flexibility. Having 2 slurry prep plants to feed materials from, reducing impacts on any potential unplanned maintenance down times. So, that reduces the risk of operating losses if you will, from production and allows us to increase production by around 1700 tons of mixed sulphides as a result. From an operating cost perspective, it is a closer area to where we're mining and therefore we will reduce diesel consumption as well as the need for the size of the fleet—the trucking fleet we will be disclosing the impacts on those costs once the new mine plan has been delivered.
And we understand the mining sequence in more detail. With regards to the de-bottlenecking question, Gordon, it involves a number of steps when we looked at de-bottlenecking the refinery, as you can imagine in fixed plant once you remove one particular bottleneck, it moves to a next these relate to various circuits we have in the process technology that we use at the refinery and we will provide further details on the specific components of those as we move forward and disclose the approved capital later this year. But in essence, it covers off various parts of our process to remove impurities in the process or pump sizes, photo sizes and things of that nature to provide greater throughput capacity, ultimately.
Your next question comes to line of Greg Barnes from TD Securities.
Are you going to receive redirection of distributions or dividends from Moa from the Cubans in 2022, or are they going to keep that cash to fund their share of the expansion?
Thanks. So, we're currently in discussions with our partners in terms of Cuban over to receivables. We aren't expecting any dividend redirections in the current year. As we mentioned in terms of funding expansion capital, we do expect that to be funded through the operating cash flow.
Okay. And just to follow up on the sulphur supply, Leon, you said you've locked it up for 2022, what happens beyond 2022, obviously sulphur is pretty important to you in Moa.
Indeed, it is. We have longer term sulphur contracts that last beyond the current year. Around 50% of those contracts were sourced from Russia. And so, we've substituted all of 2022's volumes from non-Russian sources. We have the ability to continue to receive volumes from those sources, it comes at a higher cost, which we've reflected in our estimates. In terms of beyond 2022, we are looking at opportunities where we could find cheaper sources of supply potentially. But we don't foresee any challenges for us in actually finding a source of supply. We are looking at optimizing a long term supply structure that provides us a greater flexibility and cost position relative to our current situation.
Are there any other reagents or even components that you need for the expansion that you were going to get from Russia that now you'll have to find elsewhere or, or not?
No, our risk assessment has indicated that we have no other major risks associated with the current situation with Russia and sanctions. We do, however, find some challenges from a logistics perspective, supply chain perspective, given the lockdowns in China, as everybody is currently, with port challenges in the Chinese ports around deliveries for particularly around some of our sustaining projects. But those are being resolved and is going to impact timing of delivery within the calendar year. But not push things out beyond the year.
[Operator Instructions] There are no further questions at this time. I would now like to turn the conference back over to Leon Binedell for closing remarks.
Thank you, operator. Thank you everyone for listening to our results call today. We appreciate your interest and engagement and we look forward to seeing those of you who can join us at the annual general meeting tomorrow. Thank you. And we'll speak to you soon again.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.