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Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Sherritt International Corporation Fourth Quarter 2017 Results Conference Call and Webcast. [Operator Instructions] I would like to remind everyone that this conference call is being recorded today, Monday, February 12, 2018, at 10:30 a.m. Eastern Time. I will now turn the conference over to Mr. Joe Racanelli, Director of Investor Relations and Communications. Please go ahead.
Thank you. Good morning, everyone. And before we begin, I'd like to remind everyone that we will be following a presentation that is available from our website, sherritt.com. We'll also be making a number of forward-looking statements, and the risks associated with these statements are detailed in our presentation. With me are David Pathe, CEO of Sherritt; Andrew Snowden, Chief Financial Officer; and Steve Wood, Chief Operating Officer of the company. In the interest of time, we're going to restrict our remarks, and we'll focus primarily on our Q4 results and performance. Please go ahead, David.
Okay. Well, thank you, Joe, and good morning, everyone. Thanks once again for joining us. Quite a lot going on at the moment, so a number of things to cover from Andrew, Steve and I. But we'll try and get through those and then take your questions. For the quarter, obviously, the closing of the restructuring joint venture was the biggest highlight from our perspective of the quarter. And with that, the elimination of the $1.4 billion in debt really is the key highlight. That restructuring really is the culmination of over 2 years of effort that began back with financial completion on the project financing down there in October 2015, which enabled us to stop funding the projects. The 40% work led subsequently to the renegotiation of the deferral and the amortization schedule of the project financing down there and ultimately, the renegotiation of the rest of the capital structure with our partners to get to an ownership level that more closely aligns with our economic interest. So it was a big accomplishment for us, a big part of our priorities for 2017, and it was nice to get that in the books. Other highlights for the quarter include our net direct cash cost at Moa, which is the lowest since Q3 of 2004, $1.80 a pound. It's the third consecutive quarter where Moa is in the lowest quartile relative to our peers. Higher commodity prices are helping us out, obviously, on that, but so is the benefit of that acid plant that's still delivering about $0.50 a pound in cost savings is really what's making the difference in our net direct cash cost at this point in time. Higher commodity prices are obviously helping us in Moa. And from a cash flow perspective, to that end, we received just under $20 million in cash flow from the Moa JV in the quarter. That's on the back of the commodity prices I mentioned. Nickel, while volatile and we'll look at it a bit more closely at the moment, but it was up, on average, for the year, up about 7% to $5.25. Cobalt is a big part of the story in the last 12 or 18 months. Cobalt was up 134% quarter-over-quarter, Q4 over Q4, to $31.60 a pound. We're seeing some strength on the oil side as well with GCF 6, which is the reference price we use in our oil business, was up 28% over Q4 the previous year to almost $53 a barrel. We, here, continue to be focused on trying to strengthen our balance sheet and the improving market fundamentals that can help us do that. We'll get a bit more into the Q4 results in a moment, and Andrew will take you through some of that as well. But I want to spend a couple of minutes just looking at the market environment. That's certainly been part of the story for us in the last couple of quarters and seems to be continuing into 2018. Slide 6 in the presentation shows you what nickel and cobalt prices did over the course of the year. Nickel, as no surprise, continued to be volatile. We saw a strong start to the year, but then declined through Chinese New Year and really took until the summer before we started to see it recover. Nickel bottomed out at about $4.25 a pound in July. And then with some volatility, you can see in the second half of the year, it did definitely have a trend upwards and actually touched $6 a pound briefly earlier this year. The graph on the right illustrates the trajectory that we've seen in cobalt. That 134% reflected there from $15 or so, where we started the year, to well over $30, and that trend has continued. Just to put that into perspective, going forward here, every $1 in the nickel price, and this is ignoring Ambatovy for the moment but just cash flow out of Moa, every $1 in the nickel price is worth almost $40 a year -- $40 million a year in cash flow out of Moa, and every $1 in the cobalt price is worth almost $4 million out of Moa. Over on Page 7, you see what's driving the nickel price and cobalt prices. There are looming concerns about, particularly, for Class 1 nickel in the years ahead; and, certainly, concerns about security of cobalt supply and adequacy of cobalt supply, particularly that the majority of the world's cobalt supply comes from the DRC. Driving those concerns and the supply concerns really is this electric vehicle theme, and the pace of investments in electric vehicle seems to be accelerating. Ford, for example, at the recent Detroit Auto Show, announced an additional $11 billion investment in electric and hybrid vehicles and committed to having 40 new hybrid and electric vehicle models by 2022. Other automakers like Volvo and Volkswagen have made similar investments as well. I think this is all very positive for the industry. It's certainly driving demand for cobalt and, we think, in time, will continue to drive demand for Class 1 nickel. And we do continue to expect to see that differentiation between Class 1 pure nickel products that are more amenable for battery manufacturing and nickel contained in iron-type products. That differentiation in pricing should continue to emerge in the years ahead here. On Page 8, I wanted to just touch briefly on battery composition and what that means for cobalt and nickel supply. Certainly, a lot of effort is being expended on the cobalt content in batteries, driven in part by higher cobalt prices and the security of supply concerns. Here, you see an illustration of the composition of the cathode in the most common type of battery used for electric vehicles, the nickel-manganese-cobalt or so-called NMC battery. Today, the majority of those batteries are done using cobalt, manganese and nickel in roughly equal proportions, the so-called NMC 1:1:1 battery. And research towards that is trending to trend up the nickel content to diminish the importance of cobalt. So while we do believe that there is substitution risk in cobalt for -- for cobalt in electric vehicle batteries, the most likely uptake of that engineering out of the cobalt will be nickel because it's nickel that gives the batteries the ability to maintain that energy, stability and density. Certainly, the pace of that research, and we've kind of tracked it out there from today to 2025, but the pace at which that evolution from the 1:1:1 to the 8:1:1 composition for cathodes and electric vehicle batteries will play a big part in nickel and cobalt prices going ahead. On Page 9, you see the cost curves that we typically share for you. This shows the industry cost curve cumulative for year-to-date -- for 2017. Our net direct cash cost at Moa for year-to-date was $2.35 a pound, which actually came down just outside the lower -- the bottom 25%, bottom quartile on the cost curve. That $1.80, though, was well within the cost curve and was our third consecutive quarter inside the bottom quartile, and that is [indiscernible] not just the benefits of higher cobalt pricing but also the benefits of that acid plant. At Ambatovy, notwithstanding the production challenges there that we experienced through asset reliability and the cyclone, Ambatovy still put up a net direct cost near the 50th percentile; and, certainly, a lot of opportunities to see that cost come down as we get to more continuous and more constant production out of Moa. I'm now going to let Steve touch on a few operational highlights before we have Andrew then take us through some financial highlights. And I'll talk -- come back and talk about a couple of things that we're dealing with as we head into 2018 here. Steve?
Okay. Thanks, Dave, and good morning, everyone, on the line. As always, I will start with a few points on safety. We continue to work on fulfilling our commitment to all employees going home safely every day without injury by implementing some fatality prevention standards, visible thought leadership program and process safety across the sites. As a result, we continue to see significant improvement in safety performance in the operations. Unfortunately, in Q4, we reported a fatal accident in Cuba involving an Energas employee. Following an investigation by the authorities there, the cause of the accident was deemed to be nonindustrial, and therefore, it's not classified as a fatality. That said, we've done our own investigation and did find some areas for improvement, and we continue to work on those diligently to fulfill our commitment.Also, as previously announced, Cyclone Ava landed in Ambatovy in January. I would like to make a point now of thanking the people at Ambatovy for their efforts before, during and after the storm, which resulted in no serious injuries and damages being kept to a minimum. But I'd like now to turn to our production results, and I'll start with the Moa joint adventure. On a 50% basis, Moa produced 4,134 tonnes of nickel and 465 tonnes of cobalt in the quarter, and that's up 9% and 22%, respectively, from the same quarter in 2016. The higher number is due to the fact that in Q4 of 2016, production was impacted by Hurricane Matthew. I would like to point out that production totals in Q4 2017 also allowed us to reach our guidance that we had issued for 2017. Having said that, Q4 2017 was impacted by abnormally heavy rainfalls that limited mining and required a drawdown of inventory stockpile. And now over to cost. NDCC was $1.80 per pound, and that's the lowest we've experienced since Q3 of 2004. The low NDCC was driven by cost savings from the third acid plant, as Dave mentioned earlier, and a cobalt credit of about $3.54 per pound. If I turn over to the Ambatovy slide now, I'll point out that nickel production in the quarter was 3,111 tonnes, while cobalt production was 245 tonnes. As you can see from the slide, that being Slide 12, these totals were down from our results for Q4 of 2016. Let me put this into perspective. First, I would like to point out that our production in the quarter -- sorry, in quarter 4 of 2016 represented the highest quarterly production ever at Ambatovy. And second, the production in Q4 of 2017 was impacted by reliability issues at the acid plant that are being addressed. I should also point out that our production totals at Ambatovy are presented on a 40% basis through December 10 and 12% basis thereafter. This reflects the impact of the restructuring of the Ambatovy JV on our ownership interest and resulted in a modest impact on our production totals for the quarter. Despite the reliability issues experienced at Ambatovy, NDCC was only moderately higher in Q4 compared to the same quarter in 2016. Higher maintenance and operating costs in the quarter were largely offset by the cobalt by-product credits of about $2.66 a pound. Now turning over to our Oil & Gas operations on Slide 13. We produced just over 6,100 barrels of oil equivalent per day on a net working interest or approximately about 25% lower than the same quarter in the previous year. The decrease was due mainly to 2 factors: the natural decline of the mature fields and the expiration of the Varadero West production sharing contract in November. As one would expect, this decrease in the number of barrels produced had a negative impact on costs; and our unit costs for the quarter were $12.24 per barrel, up from the $10.95 per barrel for the same quarter in 2016. Now over to the Power highlights on Slide 14. We've produced 201 gigawatts of electricity in Q4, and that's down marginally from Q4 of 2016. The lower number is due to reduced supply of the natural gas that is used to produce the electricity. Despite the decline in production, we were able to lower our unit cost per megawatt of electricity from $24.73 to $23.43 partly due to the deferral of some maintenance activities.Now before I hand over to Andrew to talk about the financial highlights, I'd like to review a couple of developments subsequent to year-end. More of the heavy rains of November and December have continued into Q1 of this year, and that's limiting our ability to mine and resulting in a drawdown from our ore stockpile. This impacts the mixed sulphide production for the quarter. However, I'd like to point out that we did take this into account when we put together our guidance for 2018. And now turning over to Ambatovy. As previously disclosed, this first quarter has been impacted by Cyclone Ava, and that's a category 2 hurricane that occurred in January. Ava caused damage to equipment and resulted in a temporary halt in production. We've since completed a number of repairs and have restarted the acid plant -- or one of the acid plants, and production is now at about 50% capacity. And we expect this to ramp up through the end of the second quarter. As we did with Moa, the forecast for Ambatovy for 2018 reflects the impact of this cyclone. That concludes my remarks on our operational results. And I'll now hand it over to Andrew, who will review the financial highlights. Andrew?
Thank you, Steve, and good morning, everyone. I'd like to begin my remarks by discussing the impacts of the Ambatovy Joint Venture restructuring on our financial results. So turning to Slide 16. I'll just make a few comments on the impact of this restructuring on our balance sheet. And this slide clearly highlights the changes to our balance sheet from September 30 to year-end December 31. The most significant impact, which is highlighted on this slide, is the elimination of approximately $1.4 billion of debt. The balance was $1.3 billion at September, and that climbed to $1.4 billion by the time the restructuring ended or was finalized in December. And this elimination of debt was a key driver in our decision to restructure the Ambatovy Joint Venture and reduce our ownership from the 40% to now 12% interest. This slide also highlights how significantly we have strengthened our balance sheet whilst, at the same time, now maintaining exposures for long-life nickel and cobalt asset through our 12% ownership interest in Ambatovy. The total cost of the restructuring to Sherritt was approximately $70 million, and this included a catch-up of 12% cash costs that we've declined to make the financial completion in September 2015. There are also transaction costs and an additional $12 million that we're holding in escrow for future cash costs, and that $12 million is currently disclosed as restricted cash. You can see that on the balance sheet on this slide also. In addition to the elimination of debt, the restructuring has also impacted a number of other items on our balance sheet, including reducing our investment in Ambatovy by about $480 million and reducing our Ambatovy subordinated loans by around $560 million. And both of those items reflect a change in ownership interest from 40% to 12%. And in addition, there was around $270 million of unrealized foreign exchange, which has been reclassified out of accumulated other comprehensive income on our balance sheet. Turning now to Slide 17. I just wanted to touch on the impact that this restructuring has on our income statement. So the result of all of those changes in our balance sheet has led to a gain of around $629 million, which impacted our Q4 and year-end 2017 results. And this gain primarily arises because the liabilities that were eliminated from our balance sheet are larger than the assets that were reduced from our balance sheet. So the larger liabilities that have been eliminated results from this gain. So including this gain, Sherritt's reported net earnings for the fourth quarter were $553 million or $1.85 a share. But the Ambatovy restructuring gain was a onetime noncash item. This slide also presents our adjusted earnings, which eliminates that onetime gain, and our adjusted earnings were around $50 million negative or negative $0.17 for the quarter. So turning to Slide 18 now. Presented here, an update on our Cuban energy overdue receivables. As you can see from this slide, during the quarter, we received around USD 7.5 million for the quarter. This was a lower amount than was due during the quarter, and so as a result of that, our overdue balance increased from USD 100 million at Q3 to USD 133 million at year-end. Q4 is typically a lighter quarter for collections, but Q4 was also impacted by Hurricane Irma and the impact that had on the Cuban economy. Now reducing the amount of overdue receivables is a strategic priority for us. But it's important to remember that this amount has always fluctuated over the 25 years we've operated in Cuba, and it's been at levels much higher than it is today. During this time, we've never had any disputes on the amounts owed and always recovered these amounts. So just a few comments on the consolidated cash position now on Slide 19. This is our typical waterfall slide, which shows the movement in our cash balance from December 2016 through to December 2017 and highlights our year-end cash equivalents and short-term investment balance of $203 million at year-end. The main use of cash during the year is the $70 million Ambatovy restructuring payments that I referred to earlier on. In addition, the typical interest that we pay on our outstanding debentures of $57 million is highlighted here as well. These uses of cash are partly offset by a positive operating cash flow of about $50 million from our Oil, Gas and Power operations. And also, during the year, we received $32 million of advances from Moa, and $20 million of that was in the fourth quarter, as Dave referred to earlier. This cash received from Moa reflects the ability of the Moa Joint Venture to generate surplus cash flows in the current commodity price environment. And as long as that continues, we'll expect ongoing cash coming out of Moa through 2018. So just turning to Slide 20. I just wanted to remind everyone on the call of our production unit cost and CapEx guidance for 2018, which we released last month, in middle of January. The production numbers here are presented at the midpoint of the ranges and also are based on our ownership interest, which is 50% for Moa and now 12% for Ambatovy. And as Steve mentioned earlier, these guidance numbers do include or have factored in some of the production issues that we're seeing and expecting through the third quarter of 2018. In addition, on the CapEx side for the outlook, the one point I'll just highlight is that our Oil & Gas CapEx is dependent on and tied to our rate of collections on overdue receivables. So we will be looking at the amount that we'll spend on Oil & Gas CapEx being dependent on the receivables, which we hope to get through the course of 2018. The final point I'll make on this slide is just in relation to our net direct cash cost or unit costs at Moa and Ambatovy. Again, these numbers here represent the midpoint of the range. And they're all heavily impacted by market pricing of by-products and other input commodity prices, which I'll try to explain in a bit more detail on the next slide, Slide 21. Here, you'll see the midpoint of our guidance range for Moa's NDCC of $2.75 a pound. And that number was forecast based on an assumed cobalt price in 2018 of $30 a pound and also a sulfur price on a landed basis of $200 a tonne. You'll see there are some sensitivities, but clearly, the cobalt price is the key sensitivity to our NDCC. And for every $1 change in the cobalt price, that will impact our NDCC by approximately $0.10 a pound. If we were to look at today's spot pricing of both cobalt and sulfur, so I think cobalt's in the region of USD 36 a pound and sulfur pricing on a landed basis, approximately $1.70 a tonne. If we were to utilize those assumptions and assume they hold through the course of 2018, then that would reduce our NDCC expectation at Moa from $2.75 to about $2 a pound. So you can see there some of the sensitivities that might occur through the course of 2018. That concludes my remarks and review of our financials. On that note, I'll turn the call back over to Dave for his closing remarks.
All right. Thanks, Andrew. A couple of things for me just on 2018. It's been a busy start to the new year for us here as well, and so there are a couple of things I want to touch on before we take your questions. A couple of things first in Oil & Gas. You'll have seen that we just recently were able to execute an extension to our production sharing contract at PE/Yumuri, in the oil business in Cuba. That contract was originally scheduled to mature and the production revert back to the Cubans in March of this year, has now been extended out to 2021. And that production was reflected in our 2018 guidance. I also want to just touch on where we stand in our Block 10 drilling. You'll have seen our announcement just prior to the holidays that we -- we're taking a break from drilling there to reassess how we are going to go about getting down to the target reservoir. The issue there is the same issue for those of you who've been following the Block 10 drilling over the second half of last year, is around these zones where we're losing circulation. And our first attempt to get through those lost circulation zones resulted on us having to suspend when we started to lose stability in -- the geotechnical stability in the wellbore. Just to back up a little bit, lost circulation is not an uncommon phenomenon for us in the drilling that we've done in Cuba over the years. But historically, most of the time, we've been able to overcome those lost circulations just by pumping seawater down the well hole and restoring enough pressure to resume circulation on the drilling margin and get our casing in. Block 10, the first go around, obviously, that -- the seawater wasn't able to do it, and we took a break and then started the last sidetrack once we brought into the country a number of different compounds, including things as diverse as rubber pellets and walnut shells, which are widely used in the industry for healing fractures that lead to lost circulation. The results of that, however, over the course of December were that we weren't able to sufficiently heal those lost circulation zones as efficiently to be able to restore circulation and get on with the drilling and get our casing in. And after a few attempts at that, we decided to take a break and step back and look at what other options are available to us. We have, since then, been exploring several different options, and we're probably a couple weeks away from making a final decision here. There are some other technologies that have been used in other parts of the world quite extensively that, historically, we have not had access to in part because of the embargo. We have identified some technologies that are being used out of that in the U.K. and have been used in the North Sea and elsewhere. And our hope is that we'll be making a decision on that in the next couple of weeks that will most likely involve a new sidetrack similar to what we did last time. So backing up to about the 3,300-meter level, where we have the wider diameter casing set to breaking out the casing and going at this again with some new technology in the form of casing that we think can actually help us overcome these zones. But ultimately, we'll have a decision on that in the next few weeks here, and our expectation is it will take some time to get those supplies on the island. And then we should be drilling again probably in April sometime, and a couple of months' worth of drilling before we can start sharing with you the results. At the moment, over the last few weeks and ongoing is the technical work to assess the viability of solution with the different vendors and to price it out so we know what we're talking about. We'll have more definitive cost numbers for you in the future when a final position is taken here. That work's ongoing. But the capital guidance that you saw for the year for us in Oil & Gas was certainly designed to contemplate finishing this hole and a second hole on Block 10 later this year. Lastly, I want to touch on our most recently -- our corporate capital structure activity. We recently completed our first equity raise in more than 10 years, raising gross proceeds of $132 million. The offering consisted of shares and warrants. The warrants are linked to the price of cobalt. That was a very innovative structure that made possible a successful offering, and we are really quite pleased with the overwhelming interest and support that we received from investors around the world. The offering was executed to help us continue to pursue our strategy of deleveraging and strengthening our balance sheet. Over the last few years, we've reduced our total indebtedness by [ at most ] $2 billion. And this activity is designed to continue in that direction. Sentiment around nickel and cobalt continues to improve. The biggest impediment to new investor interest in Sherritt continues to be the extent of our leverage, and we're determined to manage that issue. Actions like this demonstrate that determination and make Sherritt an even more attractive opportunity for new investors. So consistent with that deleveraging objective, concurrent with the offering, we also launched the modified Dutch Auction tender process to repurchase some of that outstanding debenture debt. The bidding process for the Dutch Auction culminates tomorrow night, so we'll have a better idea where we stand by then. But thus far, we've been quite encouraged by the level of interest expressed by bondholders. And by tomorrow evening, we'll have a sense where we stand, and you'll hear more from us later this week as the Dutch Auction process comes to a close. So that is what we wanted to cover for you this morning. And with that, operator, we'll take any questions anybody may have.
[Operator Instructions] And we'll move to our first question from the line of Don DeMarco of National Bank Financial.
A question on net direct cash cost. So I see that if you were to update your guidance at Moa to spot prices for cobalt and sulfur, the costs come down quite a bit to $2. What would the cost at Ambatovy be -- rather, the guidance cost if you were to similarly update for current spot prices of cobalt and sulfur?
Don, it's Dave. I don't have a sense of those sensitivities off the top of my head. I'm looking to see whether Andrew does or not. I mean, obviously, NDCC at Ambatovy is a function of production as well. But Andrew, do you have a feel for the sensitivities?
Yes. Don, Andrew here. It will be around $0.50 per pound lower than the guidance we disclosed.
Okay. Perfect. So I see the midpoint's about $3.25, so we'd see that coming down to about $2.75.
Correct. Yes.
Okay. And then another question on Ambatovy cash costs. So I see that in Q4, you had $10.5 million cash costs. What do you expect for 2018? Is there any kind of -- does the cyclone impact anything? What can we put down for this?
So, Don, our expectation is -- and obviously, we're getting some help from the commodity prices on this at this point in time. But our expectation is still, notwithstanding the cyclone, that any further cash costs that are required for Ambatovy will be able to funded out of the money that we set aside for the -- at closing for our 12%. I mean, it does -- at 12% rate rather than a 40% rate, it grows up to a decent amount of cash for Ambatovy. And with the cash levels -- or with the net direct cash costs, where they are, there is positive margins to be made at Ambatovy, and they improve significantly if we can catch up with some production on the second half of the year. So that is currently our expectation, is that we're not anticipating any further cash going into Ambatovy off our balance sheet beyond what's in the escrow account.
Okay. And I think there's, what, about $12 million in the escrow account, something like that?
Yes. That's right.
Okay. So you're not anticipating any more than $12 million in cash costs in 2018? And in the event that there were cash costs, would you have to top up the escrow account? Do you have to maintain a certain level in the escrow account?
No. There's no obligation for us to fund anything further into the escrow account. That was just -- that figure was part of the deal in the restructuring. And there's nothing that obligates us to continue on further cash costs.
[Operator Instructions] And we'll move to our next question from the line of Greg Barnes of TD Securities.
All else being equal, what does the production profile look like at Moa over the next 5 years or so, both in terms of nickel and cobalt?
All things being equal, we expect to see production being pretty consistent over the next 5 years. There's haul distances in that to be managed in terms of what that will do to net direct cash costs. But we're not expecting to see any, and I'm looking over at Steve to see whether he disagrees with me on this, but I'm not -- I don't think we're expecting to see any material variations in the production over the next few years.
No. No. We don't expect any material variation at all. The increased haul distances will be offset, obviously, by the fact that we'll be getting some new equipment in there that will help us out.
So caution should remain more or less the same as well is what we're saying?
Yes.
Yes.
[Operator Instructions] We'll move to our next question from the line of Jacques Wortman of Eight Capital.
Can you speak to the level of interest that you're getting from automakers or other parties that are potentially trying to enter into long-term contracts for cobalt sales? I'm just interested in the current level of interest you're seeing.
There has been a lot made of that in the media. And companies like Volkswagen have tried to run processes to secure amounts of cobalt. BMW is in the process of doing that as well. We have participated in some of those conversations, admittedly, because of our -- the Cuban origin of some of our nickel out of Cuba. Some of that is, in some cases, less attractive for higher-profile uses of cobalt. But thus far, we haven't seen any advantage in doing that. We get market price for all of our cobalt products, as we have done for many years. And we sell a lot of it to -- under long-term relationships with battery manufacturers, primarily in Asia. So we haven't, as of yet, seen any compelling reason to commit any significant volumes. Most of our volumes are committed on an annual basis, but they're committed on an annual basis to long-standing customers, and it's all priced off at market rates. And we haven't seen anything that would suggest that there's any better way for us to maximize our netbacks than doing that.
It appears that there are no further questions at this time. I'd like to turn it back to management for any additional or closing remarks.
All right. Well, thank you very much then once again, everybody, for joining us. You'll hear more from us later this week as our Dutch Auction process for our debt repurchases comes to a finish. And we will speak to you all again when it's time to discuss Q1 results in a few weeks.
Thank you. This concludes today's call. Thank you for your participation. You may now disconnect.