Sherritt International Corp

TSX:S

Earnings Call Transcript

[Operator]

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Sherritt International Third Quarter 2021 Results Conference Call and Webcast. [Operator Instructions] I would like to remind everyone that this conference is being recorded today, Thursday, November 4, 2021, at 10 A.M. Eastern Standard Time. I will now turn the presentation over to Joe Racanelli, Director of Investor Relations. Please go ahead.

[Joe Racanelli, Director of Investor Relations]

Good morning, and thank you for joining us today. Before we begin, I'd like to make mention of a couple of items. As you know, we released our Q3 results and announced preliminary details of our Moa JV expansion strategy last night. All of our disclosure materials are available from our website as well as been filed on SEDAR. We will be using a presentation today and then the copy is available on our website within the IR section of sherritt.com, and we will be making forward-looking statements. With me today are Leon Binedell, Sherritt's CEO; Steve Wood, our Chief Operating Officer; and Yasmin Gabriel, our Chief Financial Officer, who was appointed in August following 12 years with the company in a variety of financial and accounting roles. I'll now turn the call over to Leon for his introductory remarks.

[Leon Binedell, President, CEO & Director]

Thank you, Joe, and good morning, everyone, and thank you for joining us today. In our Q2 call, which was my first since becoming CEO of Sherridon June 1, I made mention of the solutions developed by our technologies group and taking advantage of embedded brownfield growth opportunities. We have made considerable progress advancing the strategy during Q3. And in mid-October, we met with our Cuban partners and had positive discussions about how we can grow production to take advantage of the improving market fundamentals. I will expand on the results of these discussions, and on the road map we have developed in my closing remarks. While we still have more work to do to finalize our plans, I believe our strategy has the potential to deliver significant rates of return with low capital intensity and upgraded a number of targets, including our goal of net 0 emissions by 2050, and Steve will touch more on this. This progress should not be lost when we review our Q3 operating results, nor should the considerable success that we experienced in mitigating the effects of COVID-19 on our production throughout most of the pandemic. Unfortunately, the rapid spread of the Delta variant in both Alberta and Cuba, combined with unplanned maintenance contributed to a disappointing production result in Q3. And received USD 10 million of distributions from our Moa Joint Venture during the quarter, both of which were possible because of strong prevailing nickel and cobalt prices. Current market conditions are favorable, and we are encouraged by the long-term outlook for both nickel and cobalt. I will now turn over the call to Steve for a more detailed discussion on our operating results for the quarter.

[Stephen James Wood, Executive VP & COO]

Okay. Thank you, Leon, and good morning, everyone. Safety. We've devoted considerable effort over the recent years to fostering an environment where best practices for employee health and safety are in place, and this has resulted in Sherritt's continuing to rank in the lowest quartile for incident rates in its peer group. I'll turn now to Slide 6. In the third quarter, we released our 2020 sustainability report that detailed the progress of our ESG commitments, and that included achieving 0 fatalities at our operations and implementing additional health and safety measures to protect employees at our operations from COVID-19. The sustainability report includes a number of upgraded ESG targets in the near and longer terms. As you can see from Slide 6, some of these targets include achieving net 0 greenhouse emissions by 2050, obtaining 15% of overall energy from renewable sources by 2030, and reducing nitrogen oxide emission in -- to 36% by 2030. Achieving net 0 greenhouse emissions will require some capital investments and some considerable effort, and we've already identified opportunities to reduce carbon emissions by 50%. These efforts will include taking advantage of new technologies, making use of solar power and electric vehicles, and we will provide updates on our plans on a regular basis going forward. Now turning to Slide 7. I'd like to discuss an example of an initiative that we've recently launched relating to reducing carbon emissions. In 2020, we identified a number of opportunities to use electric vehicles at both Moa and Fort Saskatchewan. And to date, we've integrated 8 EV vans into our fleet at Moa and received our first EV at the refinery. We're also looking to replace diesel-powered land cruisers with similar of our commitment to reduce our carbon footprint. Turning now to our production results for the quarter. I'll start with the Moa JV on Slide #8. On a 50% basis, the Moa JV produced 2,908 tonnes of finished nickel and 334 tonnes of finished cobalt in the third quarter of 2021. These totals represent decreases of about 22% and the lower production versus last year is attributable to the full plant shutdown, the full impact of COVID-19 in the quarter as well as some unscheduled maintenance due to found work. More specifically, in July, a shipment of mixed sulphides was canceled due to the outbreak of COVID-19 on the ship. In response, the refinery in Fort Saskatchewan slowed down its production rates during the month, and as well, the planned shutdown that had been rescheduled from May to August due to high COVID case numbers coincided with the fourth wave of COVID in Alberta, and that resulted in reduced contractor availabilities. This development extended the shutdown by 2 days, but I'd also like to point out that because additional measures were taken at the refinery, we managed to keep workplace transmission to a minimum. At Moa, the increase in COVID-19 cases locally within the Holguin province of Cuba was also impacted production of mixed sulphides. And during the quarter, a vaccination of personnel in Moa was rolled out, and by the end of the quarter, the majority of employees had been vaccinated. This year's full facility shutdown at the refinery lasted 13 days, and that's compared to the typical 5-day annual partial shutdown. These full facility shutdowns, I'll remind you, occur once every 6 years. With the repairs now completed in the third quarter, production has resumed to normal rates, and with the full facility shutdown now behind us, production rates at the Fort and in Moa back to normal rates, high COVID-19 vaccination rates, continued COVID protocols and significant inventory levels throughout the operation, we expect good performance for the foreseeable future. I will expand on the impact of our unit costs at the Moa JV on Slide 9. MPR, or Mining, Processing and Refining costs, increased by 31% in the quarter relative to the same period last year. The increase was attributable to a number of factors including higher input costs, higher maintenance costs and lower production volumes. As you can see from Slide 9, input costs rose dramatically in the quarter compared to last year. In particular, sulphur prices were up 126%, fuel oil prices rose by 69% and natural gas prices climbed 59%. These increases were partially offset by lower labor costs due to the net direct cash cost, NDCC, was $4.53 per pound of nickel sold, and that's up 12% from $4.04 in the third quarter of last year. The increase was driven by higher input costs and lower sales volumes. These impacts were partially offset by the 52% rise in the cobalt byproduct credits. Looking ahead, although we continue to anticipate inflationary pressure on given the offsetting rise in cobalt prices over the past several months. Now turning to the Power division on Slide 10. We produced 110 gigawatts of electricity in the third quarter, and that's down from 28%. That's down 28% from last year when we produce 152 gigawatts. The activities that had been previously deferred on account of limited liquidity that was available and reduced availability of spare parts. Unit operating costs in the quarter were $23.14, and that's up 58% from the $14.63 for the same period last year. The increase was due to lower production and higher maintenance costs, but offset partially by lower labor and third-party costs due to the effects of Cuba's currency unification. I'd like to wrap up my discussion on the Power business by pointing out that we continue to be in discussions with our Cuban partners to extend the power generation agreement with Energas. I note that this agreement is currently slated to expire in March of '23. Before I turn the call over to Yasmin I'd like to make some remarks on our updated guidance for 2021 on Slide 11. Given the developments in the quarter and anticipated production through to the end of the year, we've adjusted our finished nickel production guidance for 2021, and we now anticipate producing between 31,000 and 32,000 tonnes of finished nickel, and in effect, we've reduced the lower end of our initial target for the year by 1,000 tonnes or approximately 3%. As I mentioned previously, we have a high degree of confidence in these numbers given inventories at the fourth and throughout the flow sheet. Our targets for cobalt production and NDCC remain unchanged given our performance on a year-to-date basis, and we remain on track to reach that guidance for the year. Our share of capital spend at the Moa JV has been reduced to $35 million from $44 million. The reduction reflects the operational challenges that we experienced in the third quarter including the freight and the order delays caused by COVID-19. That concludes my remarks on operational performance, and I'll now pass it over to Yasmin.

[Yasmin Gabriel, Chief Financial Officer]

Thanks, Steve, and good morning, everyone. It's a pleasure to be here today. As Joe mentioned, I became CFO for Sherritt at the beginning of August after spending almost 12 years with the company in a variety of roles within finance, including VP of Finance. In the coming months, I look forward to meeting and having discussions with many of you, better growth initiatives and continued efforts to strengthen our balance sheet. I'd like to begin my remarks today with a discussion of our adjusted EBITDA Performance and in Q3, our adjusted EBITDA grew by 14% to $17.6 million compared to the same period in the prior year. This growth is indicative of stronger realized nickel and cobalt prices, and as you can see on the waterfall chart on Slide 13, the positive effects of higher nickel and cobalt prices were partly offset by increased input commodity prices and the impact of lower sales volumes, which were driven primarily by the effects of COVID-19 and the full facility shutdown Steve mentioned earlier. As most of you are aware, we've made significant effort to reduce our administrative expenses over the past several years. And to share its new CFO, I want to assure you that our commitment to lowering administrative costs remain a priority, and we'll continue to act on every opportunity to reduce costs. And while these cost containment measures continue, they will be balanced against the need to support growth initiatives over the coming years. With that in mind, I want to put developments impacting administrative expense. We incurred costs totaling $3.4 million in contractual benefit expenses related to the departure of 2 senior executives. Excluding the impact of these expenses and $2.7 million of balance sheet initiative-related costs that were reclassified to discontinued operations in the prior year, our administrative expenses were flat over year-over-year. Now looking ahead, I'd like to remind everyone that the 10% corporate office workforce reductions that we made earlier in the year will result in $1.3 million in cost savings annually. Moving on to Slide 15. The sensitivity analysis in our MD&A released yesterday provides an approximate impact on net earnings for the quarter based on a change in selected key drivers. The analysis down an unplanned maintenance. As such, this skews projections on how price fluctuations would impact our financial results on a go-forward basis. As an alternative, the table presented on the slide is based on the midpoint of production guidance for 2021, providing a better indication of how changes in commodity prices and foreign exchange rates could impact our results on a go-forward basis. And as you can see from this table, we remain exposed to changes in commodity prices with a $1 increase to nickel reference price, resulting in an increase of approximately $35 million in net earnings per year. Turning now to Slide 18, where I'd like to highlight our improved liquidity position. At the end of Q3, our cash and short-term investments totaled $163.4 million, and that was up from $153.8 million at the end of Q2. Our cash position was positively impacted by a number of developments in the quarter, [ chief ] among them with the receipt of $12.7 million of distributions from the Moa Joint liquidity at the end of the quarter was $218 million, with available credit reflecting $8 million in cash previously borrowed and $8 million in letters of credit drawn against our $70 million credit facility. And to further strengthen our available liquidity and fund our growth strategy that Leon will outline next, we aggressively pursued and successfully completed an early renewal and expansion of our credit facility at the end of October. The amendment increases the amount of available credit by $30 million. From $70 million to $100 million, it allows us to utilize the facility to fund capital expenditures and extends the maturity out 2.5 years to April 2024. The increase in our credit facility is indicative of our strengthened financial position and favorable nickel and cobalt outlook. That concludes my review of financial highlights for Q3, and I'll now turn it over to Leon.

[Leon Binedell, President, CEO & Director]

Thank you, Yasmin. With the Q3 operational challenges caused by COVID-19 and some unplanned maintenance now behind us, I want to focus the balance of the discussion today on our growth opportunities, particularly our plans to grow production, get advantage of our embedded brownfield opportunities. I'd like to start with a brief overview of the backdrop of our expansion strategy. There are a number of conditions in our favor supporting the decision to move ahead. Most notably, demand for nickel is slated to grow by 3.5% on a compound annual basis over the next 20 years. The strong demand, which is being driven by the accelerated adoption, while nickel prices are strong, they are still below incentive levels for new mine development projects, creating a distinct advantage for those with brownfield or low capital intensity opportunities. These macro conditions form the basis for much of the discussions I had during my first visit to Cuba in mid-October to meet our partners in person. The meetings were particularly productive and provided an opportunity for us to reiterate our commitment to the island and our joint ventures. The President confirmed Cuba's alignment for our growth objectives and support to Sherritt to pursue growth on an accelerated time frame. Just as important, the discussions also included our Cuban partners reconfirming their commitment to repay their debt. On Slide 19, looking at some of the macro and market conditions a little closer to $31 per pound on October 21. Cobalt prices have also been on the ascent, climbing to above $28 a pound. Higher prices for both commodities were driven by strong demand and reports of consumer stockpiling. Conditions supporting these price levels are expected to remain in place through the balance of the year. The impact of growing demand and consumer stockpiling is apparent when we look at nickel inventory levels in warehouses. As you can see from Slide 20, combined inventory levels on the LME and Shanghai Future Exchange have dropped more than 40% over the past year to below 150,000 tonnes, which is the lowest level since December 2019. Currently, the market is slated to -- for a supply deficit of approximately -- a modest supply deficit is anticipated for 2021. The impact of growing nickel demand for EV battery segment will continue to grow and will become apparent in less than 5 years, as you can see from the chart on Slide 21. Many industry observers such as Wood Mackenzie are anticipating a prolonged and significant supply deficit starting in 2025 as no new nickel mines are slated to come on stream anytime soon, and the incentive price for significant [ new bolts ] have not yet been achieved. This encouraging backdrop helps put some context to our brownfield expansion strategy and why we are so excited about both our near and longer-term prospects. Accelerated expansion at the Moa JV will entail a multi-phased approach that, upon completion, will grow our [indiscernible] expansion will be the completion of a new slurry preparation plant that will reduce ore haulage distances and improve ore sorting. Other components of our strategy include completion of expansion circuits at Moa as well as installation and upgrading of equipment at the refinery in Fort Saskatchewan. These efforts center around the completion of a prior expansion that was put on hold, combined with de-bottlenecking type work at the refinery, making this a lower risk expansion and lower cost. In tandem with growing production, we're also planting the life of MOA to beyond 2040. Our plans consist of converting some of the more than 158 million tonnes of measured and indicated resources into reserves by upgrading our 43-101 technical report by making use of an economic instead of change for share and is one that we are truly excited about. We believe the project economics are compelling and will require low capital intensity. There are further opportunities beyond this more immediate expansion, which we will share at a future date once additional work to firm those up have been completed. In summary, I wanted to thank you for your time today. But as you have heard, we believe that, the worst of COVID-19's impact on operations is behind us given the increase in local vaccination rates and decline in number of cases, as well as the result of our improved inventory levels at the refinery. Just as important, nickel market conditions are favorable and the outlook for demand and prices remain strong. This encouraging outlook is why we are working closely with our Cuban partners to finalize plans to grow finished nickel and cobalt production by up to 20% and to grow the life of mine at MOA by taking advantage of our brownfield embedded opportunities. In the coming months, we will provide more details on the timelines and the exact [indiscernible]

[Operator]

[Operator Instructions] Your first question comes from the line of Don DeMarco from National Bank.

[Don DeMarco, Analyst]

Leon and team. Okay. So regarding this expansion Cuban. So stop me if you want to defer until then, but just a couple of questions to get a little bit more color. Regarding the Cuban partners, they're supported. Would they contribute CapEx to the project? Or would there be a different arrangement whereby they kind of -- you recoup whatever their investment might be by retaining their share of profit over...

[Leon Binedell, President, CEO & Director]

In such a way that the joint venture in and of itself is able to fund and support funding for its growth objectives, and that's why we're working closely with our Cuban partners to align on the exact quantum of growth capital and the funding mechanisms associated with that.

[Don DeMarco, Analyst]

Okay. Okay. So we're looking at -- what we're hearing is a low CapEx intensity project, which is great. Does it have any implications on the operating costs? Or is that something we just wait for until the end of Q1?

[Leon Binedell, President, CEO & Director]

We'll provide further details on that. But I think directionally, it's helpful to say that as production increases, there's a fixed cost dilution impact and also increase in byproduct credits from additional cobalt volumes as well.

[Don DeMarco, Analyst]

Okay. And just turning attention to Cuba...

[Leon Binedell, President, CEO & Director]

Let's, Steve answer that one.

[Stephen James Wood, Executive VP & COO]

Thanks, Leon. There were some vessels that we found had some cracking in them, so they were inspected and needed repairs before failure. So the positive coming out of what we found during the shutdown is we prevented. In operation, set of failures on several pieces of equipment. One example is the -- one of the autoclaves in the cobalt circuit. Couple of obsolete valves had some cracks in them, and they needed to be repaired. And as you can imagine, being a high-pressure vessel, they require special skills to be repaired and take some time. So that's an example of the kind of work that we found during that shutdown.

[Don DeMarco, Analyst]

Okay. Okay. That's helpful. And Steve, when is the next plan shutdown?

[Stephen James Wood, Executive VP & COO]

There is one mid-next year, and...

[Don DeMarco, Analyst]

Okay. Okay, guys. That's all for me, and I'll just look forward to more details on this expansion and the extension strategy. Congratulations.

[Operator]

Your next question comes from the line of Orest Wowkodaw from ScotiaBank.

[Orest Wowkodaw]

I also have questions about this potential expansion that you're thinking on the nickel side. I realize you're working on the study results, but is this -- Are we talking hundreds of millions of dollars? Or -- I'm just trying to understand how big of an investment this could be relative to your free cash flow and balance sheet strength right now.

[Leon Binedell, President, CEO & Director]

Sure. Thanks for the question, Orest. And as you pointed out, we will provide much more clarity on that in the coming months. But what we wanted to just highlight is that the size of the expansion is relatively modest in the 15% to 20%, and the capital probably on the lower end of what we've seen in the past.

[Orest Wowkodaw]

Okay. Now it's been a long time since I've really seen nickel brownfield or greenfield opportunities outside of nickel pig iron. So could you maybe remind us kind of where some benchmarks may be in the industry on those metrics?

[Leon Binedell, President, CEO & Director]

So the historical benchmark was the median somewhere in the $20,000 to $25,000 per tonne.

[Operator]

Your next question comes from the line of Gordon Lawson from Paradigm Capital.

[Gordon Lawson, Analyst]

More on the expansion plans. So you touched on this, but how much of the [ 2011 ] [indiscernible] of construction?

[Leon Binedell, President, CEO & Director]

[indiscernible] Sorry, could you just rephrase, Phase 2 of which expansion?

[Gordon Lawson, Analyst]

Well, there was a proposed expansion about a decade ago called the Phase 2 expansion. You were targeting 42,000 tonnes of nickel per year. Is there any of that infrastructure remaining to provide a head start in the expansion today?

[Leon Binedell, President, CEO & Director]

That's exactly what we're seeking to complete is the work that was done back then and halted. We're seeking to complete the majority of what was done back then at Moa and then couple that with some de-bottlenecking work at the refinery to match Moa capacity with the refinery.

[Gordon Lawson, Analyst]

Okay. Got you. And for the shipping delays, you mentioned that on the overall vessel availability, we've seen a lot of impact with other mining companies, particularly as it relates to the sales. So what's Sherritt's point of view on that?

[Leon Binedell, President, CEO & Director]

So the issue that we had in the third quarter that impacted production was, really, a COVID outbreak on the vessel that created a challenge for us missing a shipment. That's now since behind us, but we don't foresee any vessel challenges in mixed sulphide shipping at all.

[Gordon Lawson, Analyst]

And nothing to do with sales at all either?

[Leon Binedell, President, CEO & Director]

Yes. We have sufficient stockpile mixed sulphides at the refinery, so that logistics is back to normal.

[Operator]

Your next question comes from the line of Tony Robson from Global Mining Research.

[Anthony Robson, Executive Chairman]

Sorry, another annoying one on the Moa, the de-bottleneck, which is clearly good news. Where is the bottleneck? If you look at the 4 operations and Moa Bay, was -- the bottleneck, currently, I would have guessed more vague with over time, lower grades being process means less nickel or nickel cobalt sulphides, oxides -- hydroxides, whatever. Is there a need, in fact, to further de-bottleneck forward rather than simply selling the mixed sulphides?

[Leon Binedell, President, CEO & Director]

So first of all, the main bottleneck at Moa currently is really an ore feeding into the plant, and that's where -- why the slurry preparation plant is sort of the first of the back in terms of pursuit. That is probably the further risk advanced, and news around that will be coming out fairly shortly. That's -- that will give sufficient ore supply to the plant that the completion of the additional circuits at Moa will be sufficiently fed by [indiscernible] at the Fort site is relatively modest capital to de-bottleneck that operation and tie the 2 together nicely in terms of volumes, giving us the incremental margin that we're seeking. So for the additional capital, we believe it still makes sense to pursue the de-bottlenecking at the Fort as well to tie those 2 operations, but it also gives us marketing flexibility as to where we place our product in case there's any premium differentials between electric vehicle market, specialty alloys and ore stainless steel.

[Operator]

There are no further questions at this time. I will now turn the call back to Sherritt management. Please go.

[Leon Binedell, President, CEO & Director]

On the call today. We are very pleased to share some good news around our expansion strategy today and looking forward to sharing much more details around those. Thank you for your continued interest in Sherritt, and thank you for the questions today. Well, talk to you soon.

[Stephen James Wood, Executive VP & COO]

And if you have any other additional questions, please feel free to reach out to us. We'll be available over the next couple of days.

[Operator]

This concludes today's conference call. Thank you, everyone, for participating. You may now disconnect.