Sherritt International Corporation (OTCPK:SHERF) Q4 2022 Earnings Conference Call February 9, 2023 10:00 AM ET
Company Participants
Lucy Chitilian – Director, Investor Relations
Leon Binedell – President, CEO & Director
Yasmin Gabriel – CFO
Conference Call Participants
Gordon Lawson – Paradigm Capital
Shane Nagle – National Bank Financial
Operator
Good morning, ladies and gentlemen, thank you for standing by. Welcome to the Sherritt International Fourth Quarter 2022 Results Conference Call and Webcast. At this time, all participants are in a listen-only mode. I would like to remind everyone that this conference call is being recorded today, Thursday, February 9th at 10 o’clock Eastern Standard Time.
I will now turn the presentation over to Lucy Chitilian, Director, Investor Relations. Please go ahead.
Lucy Chitilian
Thank you, Joanna. Good morning — thank you, operator, and everyone for joining us today.
Before we begin, I just want to make mention of a couple of items. As you know, we released our Q4 results last night. And all our disclosure materials, including the presentation, MD&A and financial statements are available on our website, as well as on SEDAR. As is customary, during today’s call and webcast, we will be using a presentation that is available on our website and on the Investor Relations section.
In addition, we will be making forward-looking statements and references to certain non-GAAP financial measures. Forward-looking statements can be found on slides three and non-GAAP measures discussion and reconciliations to the most directly comparable IFRS measures are included in the appendix to this presentation.
With me today are Sherritt’s Chief Executive Officer, Leon Binedell; and Chief Financial Officer, Yasmin Gabriel, who will be reviewing our results in detail. Following this discussion, we will open the call up to questions.
It is my pleasure to now pass the call along to Leon.
Leon Binedell
Thank you, Lucy, and good morning, everyone, and thank you for joining us today. 2022 was a very exciting year for us at Sherritt. On the strength of higher nickel and fertilizer prices we achieved strong operating and financial results, while at the same time delivering on each of our 2022 strategic priorities, as outlined on slide four.
We are happy with our strong operating results, including significantly higher adjusted EBITDA, net earnings and are equally encouraged by the progress we were able to make on our strategic priorities, providing the building blocks for continued long-term success for Sherritt. Some of the key highlights that we will be touching on in more detail during this presentation include the advancement on our expansion program that we’ll see approximately 6,500 tonnes of new nickel and cobalt contained metals annually by 2024, the program that remains on time and budget. Advancing our new life-of-mine, which will conclude in a 43-101 technical report by the end of Q1 that we expect will confirm the extension of the life-of-mine at Moa to beyond 2040.
Our buyback of almost $150 million in second lien secured and junior notes all at a discount, which strengthens our balance sheet and reduces our annual interest expense by about $13 million. Our transformative cobalt swap agreement with our Cuban partners to recover $368 million of legacy receivables. And in January, we received our first distribution under this agreement which Yasmin will touch on later.
In our power business, the extension of our Moa Swap, as we call it, facilitates access to foreign currency to provide certainty to the business, enable to fund its foreign currency denominated operating, maintenance and capital expenses, but equally important pave the way for future dividends to be repatriated to Sherritt. Also in our power business, the extension of the Energas joint venture contract by 20 years to March 2043. And we entered an agreement with Open Mineral, our first collaboration agreement towards the application of one of our promising proprietary technologies in the precious metal sector. And we also see continued advancement on our very important sustainability initiatives.
I’ll provide an overview of operations and the status of our expansion program and ESG scores and Yasmin will provide commentary on our financial highlights. I will then conclude with an update on our 2020 outlook, looking at our guidance before we address any questions.
Starting with the Moa joint venture, Q4 operating results outlined on slide six. Sherritt share of finished nickel and cobalt production was 4,112 tonnes and 423 tonnes of cobalt, 4% an 11% lower, respectively, than Q4 2021. Lower finished nickel and cobalt production during the quarter was the result of lower mixed sulfide availability at the refinery. The refinery utilized some of its available mixed sulfide feet inventory. However, this was tempered by lower-than-planned mixed sulfide production at the mine due to lower ore grades as a result of heavier than expected rainfall limiting access to some mining areas, coupled with some unplanned maintenance at the Leach plant, as well as lower availability of third-party feed for the refinery.
Copper production was lower alongside nickel production and higher nickel to cobalt ratios in the mixed sulfide feet from Moa and a lack of historically profitable high cobalt bearing third-party feeds. Regarding NDCC or our net direct cash cost. As with much of 2022 when compared to 2021 the driving cost disruptor for our industry was input commodity prices. This quarter, again, we saw sulfur, diesel and fuel oil significantly higher than the prior year quarter. Details are included in the footnote.
On a positive note for Sherritt, higher fertilizer prices resulted in significantly higher byproduct credits to offset some of the higher input commodity costs. However, due to lower cobalt sales in the quarter our NDCC was elevated above expected levels.
On an annual basis, as outlined on slide seven. Sherritt share of finished vehicle production at the Moa JV was 16,134 tonnes, 3% higher than the 15,592 tonnes produced in 2021. This is primarily due to improved equipment reliability during the year and the drawdown of some feedstock inventory at the refinery. Cobalt production, however, was down 4% to 1,684 tonnes from 1,763 tonnes in 2021, primarily due to lower availability of historically profitable cobalt rich third-party feeds.
2022 finish nickel production was in-line with guidance, while finished cobalt productions was materially within guidance. On NDC, it was similarly impacted on a full-year basis by high input commodity prices, partly offset by higher net fertilizer byproduct credits. We were not able to fully benefit from our cobalt byproduct credits in 2022 due to slower than anticipated cobalt sales in the back half of 2022, due to significant market softening for cobalt. The Moa joint venture both inventory over 2022, which will benefit this year as the situation unwinds. In the near term market softness is likely to remain a challenge for cobalt. However, we see that stabilized over the course of 2023. Had we sold normalized volumes of cobalt in the second-half of the year, we would have been well within our cost guidance for the full-year.
On slide eight, we summarize some of the key points of Moa JV expansion. As was mentioned in our last call, Sherritt approved an additional $50 million on 100% basis for the second phase of our joint-venture expansion plan, bringing the total expansion program to US$77 million on 100% basis. The expansion program has been developed to achieve a 20% increase in metal production at a low capital intensity of only US$13,200 per annual tonne of nickel added. With the market focus on EV batteries, we do see an opportunity to focus our strategy on increasing production of intermediary products that will enable us to fully utilize existing capacity at the refinery, but also consider direct sales of intermediate products into the EV battery supply-chain.
We estimate that two-thirds of the increased Moa feed will be processed into finished nickel and cobalt using the remaining — the refinery capacity and the remaining component will be sold into the EV battery supply-chain. We always retain the option to make improvements to the refinery to process all of the MSP for Moa. However, we do not believe at this time that any expansion capital may be required at the refinery. The program will be completed in two phases as outlined, the Slurry preparation plant and the Moa processing plant improvements. In Phase 1 of the program, the Slurry preparation plant or SPP is expected to be completed in early 2024 and is anticipated to deliver several benefits, including reduced ore haulage distances and lower carbon intensity from mining. Upon completion, it will increase MSP production from Moa by approximately 1,700 tonnes of contained nickel and cobalt annually.
Completion of the second phase of the program, the Moa processing plant improvements planned for the end of 2024 is expected to increase annual MSD production by approximately additional 4,800 tonnes of contained metals annually and will also reduce our NDCC by approximately US$0.20 per pound. As a reminder, the expansion costs are expected to be funded by the joint-venture itself, not directly by Sherritt. We anticipate spending on growth capital to spread evenly over the remaining period. The joint-venture is expected to fund the capital primarily from operating cash flows, but may also seek to fund select components for the expansion program.
Just to give everyone an idea of the progress to date. With regards to the SPP, 100% of the civil construction has been completed. 100% of materials and service contracts have been awarded and 65% of the steel pre-fabrication has been erected. For the Moa processing plant, the final feasibility study encompassing the full project scope has been submitted for approval to Cuban authorities and we expect that approval in Q1. That’s for long-lead items for the six Leach train has been evaluated and will be expect to be awarded in Q1. Both of these phases remain on-budget and on-schedule.
Turning to our power division on slide nine. Power production in Q4 was 159 gigawatt hours of electricity, up 2022 — sorry, up 23% from Q4 2021. And on an annual basis, power production was 568 gigawatt hours or 26% higher than the prior year. Year-over-year, we have seen increased production as a result of better equipment reliability as much of the maintenance work was completed in 2021 and had a positive impact in 2022. In addition, the power division has been working on increasing additional gas to drive increased electricity production. And this was certainly a factor in Q4 in enabling us to meet our updated guidance for the year.
As mentioned in our Q3 call. During the quarter, we signed an extension to our Moa Swap agreement alongside the cobalt swap, which provides power operations certainty on access to foreign currency through the Moa joint venture, thereby funding the foreign currency denominated operating, maintenance and capital cost of Energas, as well as covering future payments that would be able to share it, including dividends. With this agreement in place, we are excited that we also received approval for the extension of the Energas joint-venture contract through to 2043. The extension is economically beneficial as that is and always has been a consistent operating earnings generator for us and supports Sherritt’s ongoing investment in Cuba.
For 2023, we continue to work with our Cuban partners to access additional gas supply for the Boca facility from two new gas wells to be drilled in Puerto Escondido, that are scheduled to be both be in production by Q4 of 2023. In Q4, Sherritt issued its 2021 sustainability, climate and tailings management reports, as well as its sustainability scorecard outlining our performance on ESG matters. The successes seen in 2021 carried out in 2022 as outlines on slide 10. We further improved our safety performance with the total recordable incident frequency rate and lost-time incident frequency rate decreasing 59% and 50%, respectively, between 2021 and 2022. We continue to meet safety and production targets at all our sites, prioritizing the health and safety of our employees, contractors and the communities in which we operate.
Once again, in 2022 across all of our sites we had zero work-related fatalities, zero significant environmental incidents, zero security incidents involving any allegation of human rights abuses and no tailings related incidents. Additionally, in Q4 we received confirmation of conformity with the London Metals Exchange Track B responsible sourcing requirements. Sherritt received independent verification that its minerals are not associated with conflict. Risks such as human rights abuses, forced labor or corruption. We continue to progress our commitments to achieving net zero greenhouse gas emissions by 2050 with near term objectives of obtaining 15% of overall energy from renewable sources by 2030 and reducing nitrogen oxide emissions intensity by 10% next year.
Further, we have initiated a greenhouse gas emissions baseline study in the Energas business and are advancing project planning for carbon capture opportunities at the Fort Site and solar power at Moa.
And with that, I will hand to Yasmin to summarize our financial results.
Yasmin Gabriel
Thanks, Leon. I’ll start today with our key financial metrics on slide 12, adjusted EBITDA and net earnings. As you can see on this slide, our adjusted EBITDA in 2022 was almost $218 million or 94% higher than the previous year. Our net earnings from continuing operations was almost $64 million compared to a loss in the previous year of $30 million. These results were driven primarily by higher nickel and fertilizer sales volumes and realized prices, partly offset by higher input commodity prices and the $17.5 million, share-based compensation expense resulting from a full-year of additional units vesting and the appreciation in our share price. Also impacting EBITDA was $15 million noncash [indiscernible] loss relating to legacy oil and gas Sherritt assets.
2022 net earnings from continuing operations was also impacted by the recognition of a $49 million noncash loss on the revaluation of allowances for expected credit losses on the Energas receivable related to the implementation of the cobalt swap agreement and almost $21 million gain on the repurchase notes. On an adjusted basis, removing the impact of these non-cash items, we had adjusted net earnings from continuing operations of $88 million compared to an adjusted net loss of $14 million in 2021. These strong market fundamentals drove our 2022 earnings and allowed us to take advantage of opportunities to strengthen our balance sheet, which I’ll cover next.
Moving on to slide 13, at the beginning of December with oversubscribed offers we maximized through debt repurchase, with an aggregate repurchase of almost $90 million in principal of our second-lien secured and junior notes at a discounted value of $80 million. Including the repurchase in Q2, we repurchased an aggregate of almost $150 million in principal of these notes in 2022 at 16% discount, reducing our principal debt by 35% from the beginning of year and reducing our annual interest expense by approximately $13 million. These note repurchases reinforce our positive outlook on our operations and together with our cobalt swap, which I’ll speak to next, strengthened our balance sheet and will generate value for stakeholders.
Turning now to slide 14, as we disclosed on our last call, in Q4 we finalized a transformative agreement with our Cuban partners to recover $368 million of total outstanding Cudam receivables over five years putting an end to the long-standing uncertainty related to these receivables. Under this agreement, which became effective on January first of this year the Moa joint-venture prioritizes distribution in the form of finished cobalt to each partner, up to an annual maximum volume of cobalt, with any additional distributions in a given year to be paid-in cash.
All of our Cuban partners who share these cobalt distributions will be redirected to Sherritt as payments against these receivable. If the total value of cobalt distributed by the Moa joint venture is lower than the US$114 million minimum all-cash distributions will be redirected to Sherritt until this dollar threshold is met. And as you can see here on slide 13, under the agreement, we expect to receive over $700 million in cobalt and cash distributions over the next five years and this amount excludes any potential distributions over and above the cobalt swap agreement. Further, we expect to receive the majority of these payments prior to the majority – maturity of the second-lien notes in November 2025.
In January, the first month in which the agreement was effective, we received our first distribution of 760 tonnes of cobalt, representing 37% to be annual Cobalt volume under the agreement. That have an in-kind value of $36 million. Half of this amount was received as a distribution to Sherritt from the Moa joint venture and the other half, which represents Cuban partners share has been used for the settlement of the outstanding receivable. All of this, cobalt is insurance possession and is being sold into existing customer contracts and on the open-market.
Finally, in exchange for these benefits, we agreed to forego interest over the repayment period on the condition that full amount is received within the five year timeframe as an incentive. This adjustment resulted in a noncash loss, we recorded this year that I noted earlier. Further detail on the mechanics of the cobalt swap agreement can be found in both our press release and MD&A.
Finally, turning to our liquidity position on slide 15. At the end of Q4 our total liquidity was $178 million, down from [$220] (ph) million at the start of the year. The decrease in our available liquidity reflects the almost $150 million repurchase of our second-lien junior notes for $125 million of cash. As well as the $29 million of cash interest paid on the second-lien notes and $28 million of capital spending. This was offset by strong distribution from Moa joint venture of approximately $100 million and $31 million of net fertilizer received.
In addition, I’ll note that with the cobalt swap distribution in January, Sherritt now has available finished cobalt inventory with an in-kind value of $36 million, which is expected to be converted into cash in the coming months.
That concludes my remarks, I’ll hand it back to Leon.
Leon Binedell
Thank you, Jasmine. Looking ahead at 2023 outlined on slide 17. We view this as a transitionary year for the Moa joint venture as we continue to deliver plant capacity expansion and implement our updated life-of-mine plan utilizing an economic cut-off grade methodology. The updated life-of-mine plan will be reflected in the revised 43-101 report expected in the first quarter and is expected to extend the current operation to beyond 2040.
The Moa joint venture production guidance is slightly lower for 2023 compared to guidance figures provided in previous years, as we prepared to execute on our expansion plan for 2024 and transition to the new life-of-mine plan. We also anticipate reduced reliance on low-margin third-party feeds. Transitioning to the new optimized mine plan, we’ll see the joint-venture access new mining areas and built blending stockpiles, both impacting Moa production capacity in 2023. This will set us up for growth in 2024. As a result, finished nickel production is forecast to be in the range of 30,000 tonnes to 32,000 tonnes on 100% basis, while finished cobalt production is forecast to be between 3,100 tonnes, 3,4 00 tonnes on 100% basis.
NDCC at the Moa joint venture is forecast to be in the range of US$5 to US$5.50 per pound of finished nickel sold, primarily as a result of lower forecast cobalt and net fertilizer byproduct credits, offset by moderating input prices. At our Power business, production is expected to be higher than in 2022 as we continue to work with our Cuban partners to increase access to additional gas supply, particularly from developing two new gas wells on an existing field in 2023. Unit operating costs are expected to be higher in 2022 due to the planned gas and steam turbine maintenance in preparation for the additional gas supply later this year.
Finally, I just want to spend a minute on our strategic priorities for 2023 as outlined on slide 18. As I said at the beginning, the success we had in meeting our priorities in 2020 built the foundation for future successes. We will continue to execute our expansion program and we expect to adopt and implement the new optimized life-of-mine plan. We’ll leverage collections on our cobalt swap. And we’ll look to further opportunities to strengthen the balance sheet this year. We’ll continue to advance our technologies and anticipate further collaboration agreements to advance the commercialization of our proprietary technologies. And as I said earlier, we continue to work with our Cuban partners to access additional gas to provide much needed electricity to the Cuban power grid.
On the ESG front, we remain focused on keeping our employees and communities safe each day as we make progress on our long-term ESG targets. Just to sum up 2022, on slide 19, it was a pivotal year for Sherritt in that we put in-place a number of key elements that deal with legacy challenges and position the business going forward. In a market driven by higher nickel prices, we began a low capital intensity expansion program and reduced our long-term debt substantially. We also strengthened cash flows with the implementation of cobalt and Moa swaps.
I’d like to thank everyone for their time today. And operator, I’d like to now turn the call over for questions.
Question-and-Answer Session
Operator
Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] First question comes from Gordon Lawson at Paradigm. Please go ahead.
Gordon Lawson
Hey, good morning, everyone. So with cash cost in the current range, you mentioned a $0.20 reduction based on NSP, but can you talk about your expectations beyond 2023 as it relates to other components and Phase 2.
Leon Binedell
So what we’ve outlined today and also when we announced the expansion is that, we expect that the expansion volumes will drive our NDCC down by around $0.20 per pound from 2025 when those volumes come into play. But in terms of our guidance for 2023, we see a range of $5 to $5.50 based on current cobalt pricing environment as well as fertilizer pricing environment which are lower than 2022. But those are offset by moderate input commodity prices that we’ve seen migrating closer towards 2021 levels.
Gordon Lawson
Okay, thank you. And you’re talking about nickel sulfate. Can you provide further guidance as to what shipping costs and pricing you’re expecting in various geographical region?
Leon Binedell
I guess, Gordon, you’re referring to the intermediate products.
Gordon Lawson
Yes.
Leon Binedell
At this stage what we anticipate, given current market dynamics is that, they are fairly high pay abilities for intermediate products. And we’ll see how the market shapes up. We have not provided any guidance as to what we expect those pay abilities to be at this stage as we are in early stage conversations with potential customers. However, we do hold the option should pay abilities not play out to justify the margin loss on refining metal we would convert back into full refining of all of Moa MSP and take advantage of producing refined nickel product to capture the full margin if you will.
Gordon Lawson
And the Fort Saskatchewan has the capacity once that completed debottlenecking.
Leon Binedell
Currently, the capacity is sufficient to be able to process two-thirds of the additional volume. The other remaining third, we anticipate we could through operating improvements and some other smaller debottlenecking activities, able to capture some of that, but we still hold the option to do some additional capital at the refinery to capture the full volume.
Gordon Lawson
Okay, okay. And just one more if I may, seeing the impact on EBITDA could you talk about expenses related to both the oil and gas as well the technology division and what to expect going forward?
Leon Binedell
So currently we are not producing any well, in the oil business as we’ve outlined, but while providing some services to a third-party in drilling services, while we are in process in seeking earning partners or alternatives for our oil business for the long-term. In terms of the drilling services we also providing some of those services to access the additional gas wells for the power business. So there is services revenue anticipated in 2023.
In terms of the technologies business, it is premature for us to engage in discussions around what EBITDA contribution those may be. The nature of those endeavors in commercializing the technologies business it’s more akin to M&A, transaction based or participating in developing of new opportunities. So it will be premature until those opportunities are fully fleshed to be able to comment on what those EBITDA contributors might be, but we are very encouraged by the first agreement that we signed with open minerals to explore using those technologies in the precious metal space.
Gordon Lawson
Okay. Thanks very much. I appreciate the color.
Leon Binedell
Thank you, Gordon.
Operator
Thank you. Next question comes from Shane Nagle at National Bank Financial. Please go ahead.
Shane Nagle
Thanks, operator. So few questions around the cobalt, obviously, prices have fallen off a bit. If I understand the swap agreement correctly, you are to receive 50% of the distributions redirected to an aggregate of US$57 million and if you look at what the 2027 and assuming half of that is what’s been redirected from JV to cover the receivable, you kind of on pace for the year, you have $36.5 million, which is about $20 million shy of that number. So, does that just come out of the JV in terms of redirected cash flow towards yourselves and does that concern you at all, given obviously the CapEx plans that the JV has ongoing.
Yasmin Gabriel
Thanks for the question. I did want to clarify in terms of the total value of the cobalt we’re expecting it is US$114 annually, and that is 50:50 split, so 50% of that would be towards the receivable, the settlement of the receivable. Based on our forecast and the capital spending and our outlook, we’re confident that Moa joint venture can support both the expected capital expenditures, as well as be able to distribute at least US$114 required for the cobalt swap.
Leon Binedell
Yeah. And I think, just on your comment around if the cobalt prices below the reference price when we struck the volume of cobalt. That deficit if that exists will be made-up in cash dividends. And right now with the nickel market being as robust as it is, there is no concern that we will not be able to reach that minimum level of at least US$57 million cash. Whether it’s Cobalt [indiscernible]
Shane Nagle
Right. And so, does that — I guess it’s technically a cash distribution from the JV, but it cover these shortfalls. But you will receive a dividend that’s payable in Q4 on an annual basis or is there like a quarterly run-rate, that would be topped up.
Yasmin Gabriel
So we — the distributions are made from the joint-venture monthly. First, in the form of cobalt and then if that US$114 million threshold is not met, then it through cash distributions.
Shane Nagle
Okay, the one final –
Yasmin Gabriel
And we would expect that during the [Multiple Speakers] Sorry. What’s that?
Shane Nagle
So one final payment to top it up to about US$114, if it’s not there by the year end?
Leon Binedell
Yeah, or sooner, as soon as that cash is available to distribute.
Shane Nagle
Okay, and then has there been any consideration of alternative ways to monetize the swap. I mean, is your partner centralized maybe just selling all that cobalt now putting the cash drag down the receivables are third-parties that are interested in, obviously, cobalt [indiscernible] but is there any alternative ways to monetize that swap?
Yasmin Gabriel
So as I mentioned where we do receive title to that product once it’s distributed. And we’re currently selling that to existing customer contracts and on the open-market. We will consider alternatives to monetize any of the excess, but that will be dependent on-market conditions or contractual terms. But that is something that would be a possibility, it and it’s something that we would looking to.
Shane Nagle
And then just one last one, just on kind of sticking with the cobalt. We’re obviously lower than the budgeted amount in your guidance. But any indication of how the sulfur is trending. We’ve seen asset prices elsewhere come down just wondering how domestically that looks for you in Cuba, and if that’s enough to offset kind of what we’ve seen in terms of the weakness to cobalt market.
Leon Binedell
Yes, it’s a good question and a good observation. In terms of sulfur, as I mentioned, we are trending closer towards where sulfur pricing on a landed basis was in 2021, we’ve guided around $230 per tonne delivered at Moa. Last year was around $450 in 2022, so substantially lower than that on sulfur front. And so that is a significant offset to the lower cobalt prices that we’ve seen. So we’ve seen that moderation on input commodity prices, as you mentioned. And that’s countering some of the moderation in cobalt prices in 2023 and so that’s why we’ve guided NDCC broadly in-line with where we landed on NDCC for 2022.
Shane Nagle
Okay, thanks. That’s all from me. Thanks.
Leon Binedell
Thank you, Shane.
Operator
Thank you. That concludes today’s question-and-answer session, you may proceed.
Lucy Chitilian
Thank you, Joanna. And thank you everyone for your time today.
Operator
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and we ask that you please disconnect your lines.
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