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Good morning, ladies and gentlemen, thank you for standing by. Welcome to the Sherritt International Second Quarter 2019 Results Conference Call and Webcast [Operator Instructions] I would like to remind everyone that this conference call is being recorded today, Thursday, August 1, 2019.I would now turn the presentation over to Joe Racanelli, Director of Investor Relations and Communications. Please go ahead.
Good morning, everyone, and thank you for joining us today. We released our second quarter results last night after market close and all our disclosure materials, including MD&A, financial statements and press release are available from our website as well as on SEDAR.Before we begin, I'd like to point out that we will be making use of a presentation that is available from the IR section of our website and today's discussion and presentation will include forward-looking statements. And I'd like to refer everyone to Page 2 of the deck and the cautionary language and to the risk factors as well that are detailed in our annual information form that's been filed on SEDAR.With me are David Pathe, our CEO; Steve Wood, our Chief Operating Officer; and Andrew Snowden, our Chief Financial Officer. Each will provide some commentary on our second quarter results and performance. Following their discussion, we will have a Q&A session.And with that, I'd like to now turn the call over to David Pathe, Sherritt's CEO.
All right. Thank you, Joe. Good morning, everyone. Thanks again for joining us this morning. I know it's a busy day in terms of our earnings today, so I appreciate you taking the time. A busy quarter for us, with lots of moving parts, both inside and outside the company. So we're going to try and shed some light and a bit more context around a number of those for you this morning before we take your questions. A few highlights from the quarter to start on Page 4 of the presentation there, and, obviously, we got our receivables deal with our Cuban partners ratified and have started to receive some payments under that.Andrew will provide a little more context and detail as to how that works. We saw strong production in our Moa joint venture, following on from a much stronger Q1 compared to last year, we sustained that through Q2, and continue that. Despite higher production though, financial results are impacted by a severe volatility in the commodity prices and I'll provide a bit of context around that, but in particular, the year-over-year decline in commodity -- in cobalt prices was dramatic.I think we are down 60% -- 65% in cobalt price year-over-year, just as an example. We also in the quarter released a new 43-101 report. Steve will provide a little more context on that as well, but that shows us a path to significantly extend the mine life and our Moa joint venture, which is well aligned with our continuing belief that the nickel fundamentals over the longer term, despite near-term volatility here, are still solid for -- particularly for Class 1 nickel.Taking a look at the market, we've seen a number of headwinds in the commodity markets generally, and for Sherritt in particular over the course of this year. We've seen dramatic commodity price volatility. I touched on the cobalt price, where we've seen a lot of ups and downs in nickel and cobalt over the last 12 or 18 months, it's driven in part by fears on case of global growth, fears of trade wars, tariffs and positions and growth rates in China and elsewhere and the potential impact that has on demand for different base metals and nickel and cobalt in particular is continuing to affect us. Sherritt, in particular, is affected by ongoing increasing US sanctions against Cuba.We saw Title III implemented and spoke about that in the first quarter. Over the second quarter, the US is continuing to ramp up pressure on Cuba. Other actions such as some sanctions against companies shipping goods in and out of Cuba, we saw the US move to prohibit Americans from traveling on to Cuba on cruise ships, for example, that is impacting Cuba's access to foreign reserves, and these kind of growing geopolitical and economic tensions continue to be an issue in markets generally and us for in particular.Over on Page 7, you can see what nickel and cobalt prices have done over the last 18 months or in the 12 months, I guess, in this graph. Nickel has been volatile, had a nice run up. We planned to add nearly 20% in the course of a week over in July [indiscernible] a number of factors on that at the moment, but it did reverse the fairly steady decline we saw in nickel prices over the second half of last year. Cobalt, as I mentioned, a continuous decline, a recent 12-month low $12.43, I think we bottomed out during the quarter.Looking at nickel volatility, there's a number of factors that are driving that. In some cases, they are working against one another. We did see continued strong stainless steel production, stainless steel and despite the attention paid to batteries and battery metals and nickel demand for batteries over the last couple of years, stainless steel is still the single biggest driver of nickel demand, consuming about 2/3 of global nickel production and that despite the overall concerns about the economic -- levels of economic activity going on in the world, stainless steel production has held up pretty well.The news came out of Indonesia about a potential implementation of the -- re-implementing the ban on the export of raw ore which could have an impact on Chinese nickel pig iron production beginning in '22 caused a bit of optimism in the short-term in the nickel price and that we believe caused some short-sellers that were speculating against the nickel price to cover some positions and that drove some of the jump that we saw over the course of July.I think it remains to be seen how that nickel price -- whether that jump that we saw in the nickel price can be sustained over the course of the year. It will be very much affected by what happens to global growth and expectations of growth and the continuing discussions between the China -- between China and the US on global trade and tariffs and whether or not there's any demand that comes out of this expected Indonesian ore ban, it can actually be sustained. But I think in the near term, we're expecting to see ongoing volatility in prices for our commodities.Just to give you a feel for a bit more of a context around how those changes in commodity price affect us. Slide 9 there shows the movement in nickel and cobalt prices over the last few years and the bars underneath depict the Moa JV's ability to generate EBITDA. You can see we had a strong year in 2018 on the back of high commodity prices, particularly in the first half of the year when cobalt got up to size, about $45 a pound and nickel move north of $7, but fell off significantly in the second half of the year.Just to put that -- the movement in context, in the first half of 2018, our nickel production and sales volumes were up about 20% over the same first half of 2018 because of the significant decline in cobalt price and to some extent nickel price as well, despite the 20% higher sales volumes, our EBITDA on those businesses was off by about 75%.Just a quick look at the longer term, nickel market -- and this is a graph we've used often on Page 10 showing the global nickel inventories, the significant decline that began really in 2016 and 2017 and picked up speed in 2018, has largely continued in 2019 with analysts generally forecasting a market continuing to be in deficit, particularly with respect to Class 1 nickel and that is without a significant impact yet of batteries. Battery demand as a portion of the overall nickel market or nickel demand is still only 2% or 3% of the nickel market but battery demand growth has so far grown at pace with most of -- with the forecast that are out there and we continue to see those inventories come down in global inventories.We've seen this somewhat bizarre phenomena over the course of the second half of last year where we had simultaneously declining prices and declining global inventories. We don't believe that is sustainable over the long term, but the macro concerns and volatility are in some ways swamping those fundamentals.Steve is now going to touch on a few operational highlights before Andrew comes and talks about finances and then I'll come back then and talk a bit about Block 10 before we take your questions.
Thanks, Dave, and good morning to everyone on the line. Before I speak on our operational highlights, I'd like to briefly comment on our health and safety improvement plan progress. We continue to see health and safety improvements across all of the operations as a result of the work that we've been doing over the last couple of years on physical health leadership and fatal risk prevention, as well in the quarter, we continue to increase our efforts in the field of process safety management, which will further improve our safety performance going forward.I will now turn to our production results, starting with the Moa joint venture on Slide 12. On a 50% basis, Moa produced 3,969 tons of nickel and 415 tons of cobalt in Q2 and that's up 6% and 7% respectively from last year's same quarter. The increased production was driven by a number of operational excellence initiatives that have been launched over the last 18 months to 24 months, including the deployment of new mining equipment and the successful operation of the new slurry prep plant that was commissioned in the first quarter of this year. The new mining equipment has delivered a number of benefits, including improved door access and reduced equipment downtime and the new slurry prep plant has reduced haul distances, while improving ore screening and processing effectiveness.The operational momentum puts us firmly on track to achieve our production guidance targets for this year and consistent with the previous year's, Q2's production was impacted by the annual maintenance shutdown of the refinery in Fort Saskatchewan that lasted approximately 10 days. The maintenance shutdown was completed on time and on budget and equipment inspection resulted in no unplanned repairs or replacements. The NDCC in the quarter was $3.83 a pound of nickel and that's up $1.68 from last year -- oh, sorry, up from $1.68 of last year. The increase was due to the 64% year-over-year decline in realized cobalt prices and the higher fertilizer prices and higher sales volumes coupled with third-party feed costs in Q2 helped to mitigate the impact of our lower realized cobalt prices. I should point out that Q2's NDCC was lower by more than 15% from the NDCC of Q1 in 2019, which is $4.53 -- or which was, sorry, $4.53 per pound.The quarter over year decline was indicative of more stable cobalt prices and you will recall that the cobalt prices experienced a rapid decline in Q1 of this year, resulting in negative adjustments to provisionally priced contracts and these adjustments increased the Q1 NDCC by $0.40 a pound, and because of the cobalt prices being fairly stable in Q2, our NDCC was largely unaffected by provisional pricing adjustments.I'll turn now to Slide 13 and discuss our oil and gas highlights, we produced 4,420 barrels of oil per day in Cuba on a gross working interest basis in Q2 that marked a decline of approximately 6% from last year when we produced 4,689 barrels of oil per day. The decrease was due to the natural reservoir declines and was expected and as also was to be expected, the decrease had a negative impact on unit cost. The unit costs in Cuba for Q2 were $19.93 per barrel, which is up from $16.10 per barrel for the same quarter of last year and the unit costs were negatively impacted by the depreciation of the Canadian dollar relative to the US dollar and our labor expenses are denominated in US dollars, hence the impact.I'll now turn to the power division on Slide 14, we produced 180 gigawatts of electricity in the quarter, down 12% from last year when we produced 204 gigawatts in the same period. The decline was largely due to reduced availability of the natural gas due to reduced availability of the natural gas that we use to produce the electricity and our unit operating costs in the quarter were $16.35, which was down 12% from the $18.57 of last year. The decrease was primarily due to our decision to limit operational spending to levels required to maintain certain plant operations, as we continue to work with our Cuban partners to collect on our Cuban energy receivables.The impact of reduced spending more than offset the impact of lower sales volume and a weaker Canadian dollar, in the quarter as power business costs are generally denominated in US currency.Finally, on Slide 15. I'd like to review our 43-101 Technical Report that we submitted in the quarter on SEDAR. The details are available on SEDAR should you be looking for some, but I'll cover off a few of the highlights. The report was prepared for us by CSA Global and includes a number of noteworthy findings. First, the report confirmed that the mineral reserves estimates that we published in our annual information form were correct. And second, and most important, the report increased the mineral resources estimates by almost 80%. As Dave mentioned, this increase paves the way for us to extend the mine life beyond its current 15 years and the increase in measured and indicated resources estimates was largely driven by the use of an economic cut off grade that was marginally lower than the fixed cut off grade that we use in our reserves and as currently mandated.There is work to be done in upgrading the resources estimates to the reserves category. But we are encouraged by the potential of extending the mine life more, well beyond 2033. That concludes my review of operational results and I'll now turn it over to Andrew Snowden, our CFO, who will review our financial results in more detail. Andrew?
Great. Thanks, Steve and good morning everyone. So have a few financial slides to cover today. And I wanted to start by walking through the Cuban overdue receivable agreement, which we announced was ratified back in -- around the middle of June. This agreement did take longer than we had anticipated to finalize in large part because of the geopolitical developments that Dave discussed earlier. And the impact that had on Cuba's access to foreign currency and despite those difficult conditions, getting the agreement ratified is a testament to our Cuban partners' commitment to making good on their liabilities and an appreciation of the liquidity constraints that Sherritt's facing. Now there were a lot questions about the agreement since it was announced last month, so I want to take a couple of minutes to explain the deal to everyone. And if you turn to Slide 17, you can see the process for payments before the overdue receivable agreement was ratified and -- I mean, in simple terms, I think what this slide really highlights is that there was limited integration between our joint ventures in Cuba and despite the fact that the Moa JV transferred approximately $10 million in foreign currency into Cuba each month, our ability to collect receipts from Energas was dependent on the allocation of foreign currency to Energas by the Cuban government given that Energas did not generate any foreign currency of its own.Slide 18 then shows the process with the overdue receivable agreement now in place. I mean, as you can see from the slide, there's a lot more lines and arrows here. And so that's just to highlight how complex this agreement is. But ultimately it results in increased integration between the Moa JV and Energas with some foreign currency generated by the Moa JV can now be utilized by Energas. So this agreement has 2 main components. And the first consists of average payments of around USD2.5 million a month, which are made to Sherritt, and in simple terms the Moa JV pays the USD2.5 million a month to Sherritt on behalf of Energas and in return Energas transfers an equivalent amount in local currency to Moa JV for use within Cuba.The second component of this agreement is tied to dividend distributions from the Moa JV. So once each partner received a minimum threshold of $34 million in distributions for the year, Sherritt gets a 100% of available distributions. So in other words, Sherritt will receive every dollar of available distributions from the Moa JV USD68 million has been distributed to both partners in 2019.At that point and due to the commodity price environment we had experienced in the first part of the year, it's unlikely we'll reach the threshold in 2019. But the threshold is negotiated each year and expect the threshold will be lower for 2020.Although this agreement will not resolve our overdue receivable issue by itself, it is an important step in repatriating some of the cash currently held at Energas in Cuba. Just as a reminder as well, this agreement is effective for until USD150 million of overdue receivables are repaid under its terms.Turning now to Slide 19, you can see the impact of overdue receivables agreement or the contribution this agreement has had to our progress in collecting our receivables in Q2. And you can see on this slide that we received around USD5.4 million under this agreement during the quarter. The regular payments received from Power though continue to be slow and that's linked to the geopolitical developments, which Steve referred to earlier. And we only received USD6.5 million under regular payments from Power during the quarter. The most significant factor impacting our receivables in Q2 though was the receipts of around USD20 million from our oil and gas business during the quarter.I should point out though, and as you'll see in our press release and also on the banner on this slide, this did include around USD9 million in early payments on amounts that Cuba was scheduled to pay to Sherritt in Q3. So as a result of that, I am expecting limited oil and gas collections during Q3 and the overdue balance will likely increase as we approach September 30.So turning now to Slide 20. Just wanted to make a few comments on our adjusted EBITDA for the quarter and you can see from this slide, really that the key contributors to the increase in our EBITDA from $1.2 million negative in Q1 to the $9.5 million we've reported in Q2. There were 3 key factors contributing to that increase. I mean one was due to the higher realized cobalt prices, which you can see contributed around $5 million improvement. The main impact or the main driver behind that is really linked to the factors, which Steve highlighted earlier and as a result of the fact that Q1 was impacted by the negative provisional pricing adjustments, due to the rapid decline in cobalt during the first quarter.In addition, we did have higher revenues on fertilizer sales delivered in the quarter, and you'll recall these sales are generally recognized each year in May and October and so this was the kind of spring fertilizer season deliveries, while the revenue was recognized in Q2. And then the third key contributor was the lower operating costs, particularly at Moa that were achieved during the quarter, which Steve alluded to earlier.These factors were partly offset by lower nickel and cobalt price volumes at Moa, which was due to the shutdown again that Steve referred to.So turning now to slide 21. This slide really just highlights the changes in our cash balance over the past 12 months or so. And you'll see from this slide that we ended, most probably ended the quarter with a consolidated cash position of $177 million, of which, as I think every one's fully aware, $76 million of that is our share of cash received from Energas is currently sitting in Cuba. So our corporate cash and available cash to Sherritt at corporate level is $101 million, you see in dark blue on that slide at June 30. During the quarter, we did receive good payments from our Cuban Energy receipts and also some dividends from Moa, which positively impacted our cash balance during the quarter. And these factors were offset by around $60 million of interest costs associated with our fertilizer business and our Oil & Power businesses and this included Block 10 capital spending and costs associated with the annual shutdown at Fort site [ , so all of those factors in essence offset the cash that came in from dividends and overdue receivables and kept our overall cash balance reasonably flat from Q1.Liquidity, though does continue to be tight and I will highlight in a couple of slides time and this was noted in our press release as well as around the implementation of austerity measures, which we implemented across the business during the quarter. So I'll come back to that in a couple of minutes.Before I do that, I wanted to briefly talk about the status of our credit facility and covenants and you can see some details there included on Slide 22. So as a reminder, we have a credit facility of CAD70 million with a syndicate of local lenders there in Canada. Roughly $53 million of that facility was utilized and you can see on the slide there that Q2 aligns with an $8 million draw and approximately $45 million of letters of credit related to reclamation obligations in our oil business. And that leaves around $17 million undrawn, which you can see in the green highlighting on the slide deck.Taking this undrawn amount into consideration, our minimum cash balance requirement of $100 million is reduced to $83 million at the end of the quarter and this compares to our actual cash balance, excluding Energas, of just over $100 million at June 30. Although, we were compliant with this minimum cash covenant at the end of Q2, we did need to seek relief from our syndicates on the minimum -- on the EBITDA and the EBITDA interest expense ratio covenants for Q2 and Q3 and that relief was received prior to June 30.And as you'll see on this slide, we've just highlighted that the EBITDA and calculation has been reduced from $100 million to $70 million and the interest coverage ratio from 1.75 to 1.35 and that's effective, as I mentioned, at June 30 and again in September. And so those changes ensured that we were compliant at June 30 on those 2 covenants. Just to quickly highlight as well those covenants and all, purely the EBITDA number that we report, there is a defined calculation under the credit facility, which dictates how those calculations are defined and it does include certain interest income. So as I mentioned earlier, given our liquidity position, we did implement a number of austerity measures in Q2 and that included a deferral of non-critical spending and limited hiring and elimination of discretionary spend. Slide 23 and 24 really will highlight some of the impacts of that austerity program.So first is on Slide 23, where we talk to administrative costs. As you can see from this slide, we reduced admin costs from Q1 by about $0.5 million and that was in addition to sustaining significant reductions which we achieved in 2018.This cost reduction was not as significant as initially planned and that was due to increased legal fees incurred to manage risks associated with the implementation of Helms-Burton and Title III back in May, which Dave referred to earlier.So finally, I just wanted to make a few comments on our updated guidance included on Slide 24. These updates largely centered on capital spending and unit costs, both of which were driven by the austerity program. I mentioned and also changes to the cobalt price assumptions embedded in our NDCC. Overall production guidance for the year is largely unchanged. The one change we did make to production guidance, you'll see the top pay relates to our oil business, while we lowered our net working interest production by about 200 barrels a day, and that change was really just a reflection of the sale of our interest in that -- for a gas field in Pakistan, which we closed in July.This sale or the Pakistan business produced immaterial margins for us. And so that sale will not impact our financial results going forward. I should point out that our gross working interest production guidance for Cuba is unchanged and we do remain on track to produce within that guidance. While production at the Moa JV was unchanged, our NDCC guidance at Moa did increase during the quarter and we increased that to a range of $50 [ per pound of nickel and that increase is purely due to the change in cobalt price in the past sold in Q1 and we were assuming a cobalt price of $12 [ a pound; embedded in these numbers now is a cobalt price of about $15 a pound. So that $10 decrease in cobalt is reflected in this new number and partly offset by some cost savings identified at Moa. We also did as a result of austerity and deferral of capital spending, which you saw on Moa JV CapEx guidance from USD40 million to USD30 million for the year, again, you'll see that on the slide. And the final update just to highlight here is the unit cost updates we've made to oil, gas and power during the quarter, which are meaningful updates and they reflect our decisions around cost reductions and austerity due to a broad range of measures undertaken and these measures are being undertaken as we work with our Cuban partners to continue to collect on our overdue receivables.So that concludes my remarks for today, I'll turn the call back to David for an update on Block 10.
Good. All right. Thanks, Andrew. Just before we get to your questions, and I want to just give you a quick sense of where we are at now on Block 10, couple of slides here on 26 and 27. I'm just going to focus briefly really on the diagram on Slide 27 that shows a model, a cross-section of what it is we're drilling through. Those of you who've been following this for the last few quarters know that this has been a challenging hole for us to drill, we've encountered some difficult geology that we haven't really seen before despite our 200 plus holes that we've drilled in Cuba over the 20 years or 25 years. You'll recall at the end of the first quarter when we last really had a chance to talk about this looking at that graph on Page 27, that we were having some issues getting through the geological zone between the upper and lower reservoirs.So the green areas, the lighter green at the top air represents the upper reservoir, sheets and the darker green represents the lower reservoir sheets, which is really our target zone and that vertical black line or newly vertical black line on the right hand side of the graph represents the trajectory of the wellbore that was drilled by us from a jack out in the bay 20 years ago into that lower reservoir where we had that oil strike and we are targeting that same zone.For the last couple of quarters, our issues have been actually traversing the brown and beige areas the Constancia and the Vega Alta between the 2 reservoirs where wellbore instability was causing us issues and having us to back up and rethink our strategy of getting through that. Drilling did recommence in the second quarter and we have now successfully traversed those zones that were causing us the instability in the past and they've been successfully cased so that the instability is now safely protected behind the steel casing and we were late in the quarter able to resume drilling down into the reservoir and that shows us now actually probably one sheet away from the target sheet, we are hoping to be able to drill now through on into those 3 or 4 reservoirs in the coming weeks here should finally be able to come back and report to you on what we are finding as we get into the reservoir. That is where we stand at the moment. It has been a challenging hole and a more drawn out process than certainly we were anticipating when we embarked on this drilling campaign but we are now, I think, through the worst of what we had to traverse and should hopefully be in a position to have some results soon.Just to summarize where we are overall, it, obviously, has been a difficult time for us, both from a macro condition and from the economic conditions in Cuba in the second quarter marked further progress on the items that are within our control. We do anticipate continued volatility and uncertainty from a geopolitical and a market perspective and are trying to manage our business conservatively in the face of that. We continue to work closely with our Cuban partners to manage our liquidity issues and there is a generous amount of goodwill there but it is a difficult time in Cuba unquestionably.Longer term, we still believe the nickel market, particularly for Class 1 nickel, is an area of promise in the future and we believe that ultimately we are well positioned to take advantage of that and our focus right now is dealing with these difficult times we face at the moment and to be able to see the benefit of that in the future. With that, we will take your questions. Operator, are there any questions?
[Operator Instructions] Your first question comes from the line of Greg Barnes from TD Securities.
I was just a little surprised by the $13.5 million dividend from Moa in the quarter. I'm surprised that was made given where nickel prices were and have been for the last 6 months or so. I know if they're up recently, but they were low.
Yes. Moa, as you recall, I can't remember whether this was a comment I made at Q1 or at year-end but Moa did end the year with a slightly higher cash balance than when we took hold of Moa. And through the first quarter Moa continued to hold on to some of that cash just given the volatility in cobalt prices as nickel prices starts to stabilize and we saw some -- a little bit of strengthening there, we did feel comfortable dividending out some of the cash that was being held at Moa up to the shareholders. And that was really the driver behind that
And how do you see that evolving over the next 6 months or so? I know it's dependent on nickel prices but cobalt prices are way down. So how is the balance going to work there in your view?
Look, it's difficult to sit here and feel confident that we'll be receiving dividends each quarter from Moa because it clearly is dependent on the commodity price environment. I mean, as Steve mentioned, production is strong and we're very happy with how production is going, the rule of thumb that I think I shared at, again I can't recall whether it was Q1 or year-end is, if the nickel price and particularly [indiscernible] nickel price of above $6 we should start seeing -- we should be seeing dividends out of Moa. So where nickel is today, I would expect that we will continue to see dividends through the balance of the year and as you highlighted, Greg, it's difficult to predict exactly what those dividends would be.
Your next question comes from the line of Tony Robson from Global Mining Research.
I guess a follow-up to Andrew. Andrew, could you give us a little bit more color on the $70 million plus of cash of your $177 million total held in Cuba? As an adjunct to that, and how sort of easy is it to get out or not? And [indiscernible] and secondly following that, your debt repayment schedule, if you could remind us of that please? I see your 8% senior unsecured debentures mature in 2021, that's about $200 million, when in '21 please? And is there any chunky amounts of debt due prior to that? Thank you.
On the debt reschedule payments, you're right, our first debenture maturities during 2021 and that's at November of that year. So it's late '21, prior to that, there is no other significant amount due, the only item that we do renew on an annual basis, as you'll see in our disclosure, is our syndicated revolving credit facility, which we currently utilize and we've currently drawn about $8 million on that. And then utilized a electrical credit on that. So that's currently being utilized by about $53 million, the expiry of that facility is currently April of 2020, but that is a facility which we renew each year and haven't had any issues renewing in the past. Just addressing your first question about the $70 million, $75 million in Energas. So, no, I'm not sure if you were on our Q1 call, we [indiscernible] and in short, we do in our financial results consolidate a third of Energas and that third represents our ownership interest in the Energas business. Energas currently sits on around -- just over $200 million of Cuban cash in its Cuban bank account and so as part of our accounting processes, we do consolidate and include on our balance sheet 1/3, which is that $70 million of Energas cash. I mean that cash is in Cuba and it's not readily accessible by Sherritt or at the Sherritt corporate level, and that's really part and parcel of the overdue receivable issue that we talked to. In reality, Energas should not be sitting on that amount of cash, that cash should be transferred to Sherritt. Because of foreign currency constraints within Cuba, Energas has not been able to transfer that cash to Sherritt of late, and the overdue receivable deal we talked about is in part a solution to try and resolve that issue.
[Operator Instructions] Your next question comes from the line of Matt Farwell from Imperial Capital.
I guess I want to ask about the austerity measures. You've announced them, there hasn't been a large impact on admin expense. However, you're still in, kind of, an undefined point with the oil and gas business, if you know what kind of changes could a go or no-go decision on Block 10 affect your admin expense, perhaps in the 2020 time frame?
Yes. So some of the austerity measures that you've seen, Matt, are reflected in the costs and Andrew mentioned that that was offset by some incremental legal spend in the quarter related to Title III, some of that is also reflected in the changes to the guidance for the second half of the year in terms of reductions in costs in the oil and the power business and the reduction in capital at the Moa joint venture, and some of the offsets to the increase in guidance on net direct cash costs that are not as great as the proportionate impact of the decline in the cobalt price and the effect of the byproduct credit.With respect to your question on potential impact of Block 10 and go or no-go, that will turn on obviously what we -- success we can show once we finished the drilling of this campaign, the ideal scenario will be that we in the coming weeks here have a successful oil hit and we'll put that well on production, in fact, we will run it for several months to see how production stands up and what the decline rate looks like. In the absence of that, it does play into our conversations with our Cuban partners around collections but, obviously, in the scenario where there is not a success in Block 10, that would be the catalyst for a look at what the cost structure of our oil business is going forward in terms of the new steel business in the absence of the Block10 success.
And on the syndicated revolving credit facility, you obtained certain waivers from the lenders for 2 quarters buying you some time. I mean, you have a fairly substantial cash balance, how important is it to keep this facility rather than, I guess, cash collateralize the letter of credit and simply repay the balance. What's the thinking behind keeping this facility and what kind of flexibility does it provide you?
Pretty much exactly that, it gives us added flexibility in our liquidity because in the absence of that facility, the biggest impact would be having to cash collateralize the letters of credit that are currently outstanding for asset reclamation, obligations and our sort of cash in Canada balance is just over the $100 million mark right now. And in the absence of the credit facility, we'd be down $8 million on the repayment and another $40-odd million to substantiate that, to collateralize the reclamation obligations. And so that would leave us $50 odd million. And we've got $46 million here in interest expense, so it would have a fairly significant impact on our ability to maintain liquidity and see ourselves through to 2021.
I guess my point is the minimum liquidity covenant in this facility is really what's restricting your liquidity and maybe this is something that the lenders will provide some flexibility around as well. But I don't see the net result of repaying this facility being much different than the liquidity that you have today taking into account that minimum liquidity covenant of $100 million.
Yes. The impact is the same when you net that out, you can see what all is kind of true, net liquidity is after the reclamation obligation if we were forced to cash collateralize.
And then last question on the Mao cash balance, you indicated that there was a higher than average cash balance been allowed for the Moa dividend. What kind of level is a cash balance that is kind of a minimum amount that you would need at Moa just for working capital purposes, et cetera? Would it be at this range now around $48 million or would it be a little bit lower than that?
So a couple of factors that drive that, one is an agreement with the Cuban government, we have agreed that Moa will have to ensure it has available a minimum of $60 million of available liquidity. $45 million of that is provided by via their access to working capital facility and so the actual minimum cash balance they need is they are only kind of around what $15 million to $20 million.The other factor that kind of drives into that is it's just looking forward at the timing of capital spending to, obviously, the goal is not to relieve Moa of all the cash it has and then when capital may be required, if it doesn't have the cash to be able to meet those capital requirements and has to draw down on its credit facility. So there is a judgment call made based on the forecast, which then results in a cash number that's normally higher than that $15 million.But right now, I think Moa does have some available cash and I expect through the course of the year, we will see some incremental dividends coming from Moa as I mentioned earlier.
Your next question comes from the line of Tony Robson from Global Mining Research.
Thank you. Apologies for coming back again. Actually, David, I think you answered a lot of my question regarding Block 10 production assuming success. Assuming success, would you be following up with further production wells or -- and what sort of time frame assuming all goes well would you see the forward actually hit sustainable production levels, are we talking -- Is that is latest 2021 or '22 or could you -- probably closing new wells in the short term, cash permitting, of course to pick up the production rates? Thank you.
Yes, Tony. So the cash permitting qualifier is really the driving factor on that. Assuming success in that we can put a well on production in the coming weeks here and run it in rough terms for the balance of this year in an ideal scenario, there would be a second well drilled in 2020. The timing of that -- there's some work to be done to plan how that would be done based on all the learnings over the course of drilling this well so that we optimize the drilling plan for the second well, with the last well, obviously, to be very much tied to the pace of receipts in the oil business because our objective for the oil business is that would be able to support itself from a cash perspective rather than cash coming off the balance sheet to support further drilling. The other opportunity we'll be looking at is we have a successful well here as we've talked about in the last few quarters and we haven't been able to do much on beyond some expressions of interest until we have some technical data and some track record collections in the oil businesses, the potential to bring in a partner that would fund some capital spending for incremental drilling and exchange for an equity interest in the Block to be determined.So once we have, you can actually show people some production data and some reservoir pressure data and we think will be an opportunity to have some of those conversations over the balance of this year and into next year that could be an alternative way of finding some development. But at the moment in our liquidity position in the absence of some improvement in collections on those overdue receivables or our third party source of capital, there won't be a lot of it, incremental capital spend. Ultimately, we do think this block has the potential to support a significantly sized oil business, which is why we've made the investment and given the kindle knowledge and infrastructure that we have in Cuba, and the timing with the expiry of other blocks. But beyond proving up the concept with this well, our ability to develop that will be dependent on finding a fresh source of cash
There's no further questions at this time, I will now turn the call back over to David Pathe for closing remarks.
Alright, well just to thank you once again for taking the time to join us this morning. You see there is a lot going on. We are all around to the extent do you have other questions and interest as you work through this or anything we can do to help over the quarter. Otherwise, we will speak to you all again in October with our Q3 release. Until then, enjoy the rest of the summer. Thanks, everyone,
This concludes today's conference call. You may now disconnect.