Sherritt International Q1 2022 Earnings Call Transcript

Sherritt International (S 0.79%)
Q1 2022 Earnings Call
May 12, 2022, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Sherritt International first quarter 2022 results conference call and webcast. [Operator instructions] I would like to remind everyone that this conference call is being recorded today, Thursday, May 12, 2022, at 10 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. Thank you, and thank you, everyone, for joining us today. Before we begin, I do want to make mention of a couple of items. As you know, we did release our Q1 results last night, and all of our disclosure materials, including the press release, MD&A, financial statements are available from our website, as well as from SEDAR.

As customary, we will be using a presentation that is available on our website on the IR section of our website. And during today's conference and discussion, we will be making reference to certain non-GAAP financial measures. Details on these measures and reconciliations to the most directly comparable IFRS measures are included in the appendix. We will also be making forward-looking statements, and those -- these quarter-related items are found on Page 3 of our presentation.

Now with me are Sherritt's CEO, Leon Binedell; and Sherritt's CFO, Yasmin Gabriel, who will be reviewing our results in detail. And following their discussion, we will open up the call to questions. Please go ahead, Leon.

Leon Binedell -- Chief Executive Officer

Thank you, Joe, and good morning, everyone, and thank you for joining us today. Q1 was a particularly active quarter against the backdrop of commodity price volatility exacerbated by unprecedented market and geopolitical disruptions. Sherritt continued to make progress on a number of fronts. Most notably this quarter, we had strong nickel and cobalt production at Moa and solid performance at the port site despite delays in fee deliveries due to transportation disruptions.

We generated our highest adjusted EBITDA for the quarter since 2014. We also ranked in the lowest-cost quartile-level nickel producers according to data collected by Wood Mackenzie. We saw a recovery in our power business. And very significantly, we started to build momentum on our expansion project.

As Joe said, Yasmin and I will expand on these points before we turn the call over for questions. Slide 8. While it's unnecessary to review the market and geopolitical developments in the quarter in detail, given the amount of media attention each has received, I believe it would be useful to review the impacts of these developments on Sherritt and our quarterly results. The chaos and disruption of nickel trading in March on the LME did cause concern with our industrial customers.

However, we experienced very limited impact on our sales volumes, largely as a result of our ability to shift the sale of limited volumes of product to the spot market in situations where our long-term customers sought to delay shipments. We do not foresee the events of March causing longer-term impacts on our ability to price our product or the LME and did not see a negative impact on pricing in our Q1 results, demonstrated by the high average realized nickel price of CAD 14.85 per pound, which was up almost 50% from the same period in the prior year. We successfully pivoted rapidly defined an alternative source for part of our sulfur supply to replace products previously sourced from Russia, given the recent sanctions against Russia and the impact of supply chains. The significance of this action should not be lost, given how strategic sulfur supply to our operations is and how quickly the sulfur supply market became constrained due to sanctions against Russia.

We are currently completing an assessment of a longer-term supply opportunities for substitution of Russian-supplied sulfur, which made up around 50% of our requirements. Our 2022 requirements are now all secured from non-Russian sources. From a broader supply chain perspective, we completed our risk exposure assessment and identified no other major risks. Our quick response to unprecedented developments over the span of a couple of weeks in March reflects the agility of our team and their ability to respond to unexpected circumstances and crisis.

First, I'll review the operations before handing over to Yasmin to cover our robust financial performance and to provide some context to the offer to purchase our notes, which we launched last night. I'll then conclude, providing an update on our expansion project. Turning to production at the Moa joint venture. As you can see from Slide 7, mixed sulphide production at Moa in quarter 1 '22 was up 5% from the same period of last year.

In Q1 2021, mining conditions at Moa were adversely affected by heavy rains, resulting in lower-ore quality. And by contrast, we were able to feed material much closer to our planned blending in 2022, resulting in improved metal recoveries in Moa. Finished nickel and cobalt production in Q1 '22 was down 7% and 6%, respectively, over the last year. The decline was attributable to delays in the delivery of mixed sulphides to the refinery in Fort Saskatchewan from the Fort in Halifax due to rail service disruptions.

These delays have since been resolved. Looking ahead, I should point out that Q2's finished nickel and cobalt production will be impacted by our planned annual maintenance shutdown at the refinery. This year's shutdown is expected to be up to seven days and will occur in June, consistent with previous years, but about half as long as last year. If you will recall, last year, we had a full facility shutdown in the third quarter lasting 13 days.

The full facility shutdown occurs only once every six years, a schedule, which was made possible by our ongoing commitment to effective enterprise asset management. Turning to production costs on Slide 8. Prices for input commodities included in our mining processing and refining costs and our byproduct credits had significant impacts on our net direct cash costs or NDCC in Q1 of '22. Despite the negative impact of higher input costs, our NDCC for Q1 this year was the lowest since quarter 4 of 2018 at USD 3.42 per pound of nickel sold, an 11% decrease from the first quarter of last year due to the significant benefit of byproduct credits.

As a result, Sherritt ranked in the lowest quartile of all nickel producers according to annualized information tracked by Wood Mackenzie. Compared to the prior-year quarter, Sherritt benefited from higher realized prices for cobalt, where realized prices for cobalt was up 90%, and fertilizer prices were up 110%. The benefit of higher fertilizer prices was further supported by a 16% increase in fertilizer sales volumes in the quarter over the prior year. The higher by-product credits and higher fertilizer sales volumes were partly offset by higher input costs, and particularly, sulfur costs were up 181%, natural gas prices were up 47%, and fuel oil costs were up 35%, similar trends the industry as a whole is experiencing.

Turning to our power division on Slide 9. We produced 137-gigawatt hours of electricity in the first quarter of '22, up 44% from last year when we produced 95-gigawatt hours. In Q1 '21, production was lower due to reduced capacity as the steam turbine at Boca plant was brought offline for major maintenance. As a result of higher production and lower maintenance costs in Q1 '22, unit operating costs were down 39% over the prior year, down to USD 15.70 per megawatt hour from USD 25.89 in the prior year.

An important development in Q1 '22 for the power business related to extending our power generation agreement beyond its current expiry in 2023. We submitted a feasibility study, which represented the final step in the process to the Cuban government, and we anticipate the final decision on the power agreement extension before the end of this year. Related to the extension of the power agreement, we continue to have discussions with our Cuban partners to increase the availability of natural gas needed to generate arm. As a reminder, our Cuban partners to the Enagás, joint venture are responsible to provide sufficient supply of fuel for power generation.

That concludes my remarks on our operational performance, and I will now hand over the call to Yasmin to review our operating -- our financial results.

Yasmin Gabriel -- Chief Financial Officer

Thanks, Leon. Good morning, everyone. I'll begin with a discussion on two of our key financial metrics, adjusted EBITDA and net earnings from continuing operations. You can see here on Slide 11, both metrics were significantly higher in Q1 2022 when compared to the same period in the prior year.

We generated $58.5 million of adjusted EBITDA, nearly double the amount in the prior-year quarter. The increase was driven primarily by higher realized nickel, cobalt, and fertilizer prices at our Moa Joint Venture in Port trade operations, resulting in EBITDA of $81 million this quarter. This positive impact was also reflected in our net earnings from continuing operations of $16.4 million, marking our second consecutive quarter of positive earnings. The positive operational performance was partly offset by almost $27 million of non-cash share-based compensation expense, driven by share price performance, which rose 103% compared to a 33% increase in the same period in the prior year.

Slide 12 illustrates the recent distribution history of amounts received by Sherritt from the Moa joint venture since the start of 2019. In Q1, we received US19 million as our share of distributions, reflecting improved nickel and cobalt prices. As a reminder, this amount includes US6.5 million in dividends that were deferred from Q4 2021 to assess the impact of delays in product deliveries caused by flooding in BC and congestion at the port in Vancouver in November of 2021. The amount of dividends to be distributed to each partner is decided by the Moa joint venture forward on a quarterly basis.

And there are a number of factors that go into that decision-making process. This includes available cash, prevailing nickel and cobalt, and input commodity prices, expected working capital, and other liquidity requirements as well as planned capex, including growth capital, which we expect to fund primarily through strong Moa joint venture operating cash flow. When we take these factors into consideration, we continue to expect our dividends this year to exceed those of last year and expect dividend receipts to be higher in the second half of this year compared to the first half. Turning now to our liquidity position on Slide 13.

At the end of Q1 2022, our total liquidity was $237 million, up from $228 million at the start of the quarter. We further strengthened our cash since the end of Q1 and expect this to continue under the strong nickel, cobalt, fertilizer pricing environment and with fertilizer sales being strongest in Q2. This will allow us to fund our growth strategy and take action to reduce our debt, which I'll turn to next. As Leon mentioned, and as many of you would have seen yesterday, we were pleased to announce an offer to purchase our notes for an aggregate cash consideration of up to $50 million.

As I touched on in the previous slide, recent market conditions, including high nickel, cobalt, and fertilizer prices, coupled with the strong performance, provides us with an opportunity to generate sufficient operating cash flow. This will allow us to not only pursue our growth strategy, including the expansion of the Moa joint venture but also use our available cash on hand to reduce our debt and achieve balance sheet strength, which remains a key strategic priority. This offer also provides a unique opportunity for the near-term liquidity to noteholders, which may not be available on the rise. Under the terms of the offer, Sherritt will repurchase all tendered junior notes at a fixed price, 520,000 principal and additional cash consideration of $30 for those tendered before the initial expiration date.

After considering junior notes tendered and factoring in our maximum consideration, we'll have the option to purchase any second lien notes tendered by way of modified Dutch auction with a maximum bid price being $820 per 1,000 principal and any second lien notes tendered before the initial expiration date will also be entitled to the additional cash consideration of $30 per 1,000 principal. Now we've included some of the key information for the offer on this slide, but we encourage you to review our press release and supporting documents available on our website and SEDAR for further details should you wish to participate. Now that concludes my remarks. I'll now turn it back to Leon for an update on our expansion strategy and closing remarks.

Leon Binedell -- Chief Executive Officer

Thank you, Yasmin. As we announced previously, Sherritt has embarked on a growth strategy focused on expanding our annual nickel and cobalt production, while also extending the life of mine of Moa. We made progress on our growth plans this quarter and are starting to build some momentum. Just to remind everyone, as outlined on Slide 16, accelerated growth at Moa is based on three key pillars that upon completion will grow our annual nickel and cobalt production between 15% and 20% over those of 2021.

More specifically, this would represent an increase in annual nickel production of approximately 5,000 tonnes to 6,000 tonnes on a 100% basis. Underpinning our growth strategy is completion of a new slurry preparation plan that will reduce ore haulage distances, reduce diesel consumption, improve ore sorting and reduce carbon intensity from mining activities. This part of the expansion project is already underway. The second bullet relates to the completion of expansion circuits at Moa and the extension of the life of mine through the conversion of measured and indicated resource into reserves by using an economic upgrade methodology and through an optimized mine plan.

The third pillar is focused on debottlenecking production at the refinery through the installation and upgrading of equipment. We continue to estimate these projects would require a low capital intensity typically associated with brownfield expansion, further reduced by the fact that the Moa expansion includes completion of a previously suspended expansion. In Q1, we completed a preliminary assessment of capital costs required to complete the expansion project and that was consistent with our initial guidance, albeit at the higher end of the range provided between USD 20,000 and USD 25,000 per annual tonne of nickel capacity. In light of a number of uncertainties relating to the current geopolitical developments, ongoing supply chain disruptions, the spread of COVID and lockdowns in China, and the inflationary pressures on construction materials, equipment and labor costs, we will further evaluate these estimates once greater certainty around global supply chains and consequential pricing is available and additional engineering and design work is completed.

This approach would reduce the execution risk and the risk to cost overruns related to these projects as former project sanction is not expected until the second half of the year. In addition to the cost assessment and analysis were completed in Q1, we continue to make progress on a number of elements to keep the overall project time lines moving forward. With respect to the slower preparation plant or SPP, we continue to advance construction and commenced civil works on site. We also completed our ore lurgical [ph] study and pipeline design.

The capital cost of this part of the expansion is USD 27 million on a 100% basis and remains on budget and schedule. With respect to the processing plant projects at Moa, we are near completion of a feasibility study for the sixth train of a leach plant, and we also completed a debottlenecking study and cited basic engineering on the acid plant at Moa. The addition of the 6th leach train and new acid plant capacity are necessary to process the increased ore volumes expected from the new SPP to produce more mixed sulphides at Moa. With respect to reserves expansion, our internal -- sorry, our external consultants conducted site visits and commenced development of a new mine plan based on the economic cut-of-grade methodology.

The new mine plan is expected to be completed and submitted to Cuba's Natural Resource Ministry for approval in the second half of the year, as planned. Finally, at the Fort site, we started basic engineering on several debottlenecking projects. Combined, the joint venture partners committed an additional $6 million on a 100% basis to advance these projects ahead of the full formal sanction outside of the $27 million already approved for the SPP. We expect to build momentum established in Q1 through the rest of the year.

As you can see on Slide 18, we have a number of important milestones coming up in the second half of the year. Most notably, we expect to complete basic engineering on the refinery debottlenecking projects in the acid plant, as well as acid plant capacity testing. Formal project approval and go-ahead will occur in the second half of the year and the completion of a new life-of-mine plan and consequential release of a 43-101 technical report in the second half of the year as well. Over a longer-term horizon, we expect completion of SPP in early 2024, as planned, and the remaining projects by the end of 2024.

We will continue to provide updates on progress on our expansion at our regular quarterly meetings. Moving to Slide 20 on the outlook for 2022. As mentioned, we expect to formally approve the remaining scope of the expansion projects in the second half of the year. To date, the Moa joint venture expects to spend around $30 million on a 100% basis in 2022, relating mostly to the construction of the SPP and basic engineering work, and the procurement of suppliers.

As such, we have updated our planned capital spend for 2022, adding our share of the growth capital spend, which represents CAD 19 million. On the strength of positive market fundamentals and nickel, cobalt prices, we expect that capital spend for Moa JV, both for sustaining and growth, will be self-funded by the JV from cash flows from operations, as Yasmin mentioned. Given our results and performance in Q1, prevailing commodity prices, and our outlook for the balance of the year, we have made no other updates to our guidance for 2022 at this time. And I thank you for your time today.

And as you've heard, Sherritt had a strong quarter, delivering solid results for operations and financial results on the back of strong nickel, cobalt, and fertilizer prices. We also made considerable headway with our expansion project. We expect to build on Q1's momentum through 2022 and beyond, given the outlook for each of our commodities we produce remains favorable. It is why we have decided to take a balanced approach toward growth and deleveraging our balance sheet and launched the after purchase notes, as Yasmin referenced.

I'd like to remind everyone that we'll be hosting our annual meeting of shareholders tomorrow. The meeting will be held in a hybrid format, and I hope to meet many of you in person. Finally, I'd like to note that today marks Joe Racanelli's last results call with Sherritt. Joe has accepted the opportunity and will be leaving Sherritt shortly.

I want to thank Joe for his contribution to Sherritt and for keeping our investor community well informed and engaged and wish him well in his new endeavors. Thank you, Joe. This concludes our prepared remarks. Operator, we will now hand over the call for questions.

Questions & Answers:

Operator

Thank you. [Operator instructions] Your first question comes from the line of Gordon Lawson from Paradigm Capital. Your line is now open.

Gordon Lawson -- Paradigm Capital -- Analyst

Hi. Good morning, everyone, and congratulations on another excellent quarter. You just touched on this, but I want to make sure. Am I correct in assuming that Phase 2 now has the board approval? Or should we wait for the feasibility before such a decision?

Leon Binedell -- Chief Executive Officer

So the feasibility study on the sixth leach train is a technical requirement for our joint venture partner to move forward with the approvals. However, it is not going to slow us down, and we still anticipate to receive board approval in the second half of this year. And that is unlikely to change any views given our current perspective on total capital cost for the project.

Gordon Lawson -- Paradigm Capital -- Analyst

OK, OK. Great. And just curious, on a stand-alone basis, what are additional operational benefits are expected from the completion of Moa slurry plant in terms of production cash cost? And what exactly is involved the debottlenecking at the Fort Saskatchewan?

Leon Binedell -- Chief Executive Officer

Sure. So first of all, to respond to the slurry preparation plant, the new slurry prep plant is closer to future mining areas and allows us greater operating flexibility, having two slurry prep plants to feed materials from, reducing impacts on any potential unplanned maintenance downtimes. So that reduces the risk of operating losses, if you will, from production and allows us to increase production by around 1,700 tonnes of mixed sulphides, as a result. From an operating cost perspective, it is a closer area to where we're mining, and therefore, will reduce diesel consumption, as well as the need for the size of the fleet, the trucking fleet.

We will be disclosing the impacts on those us one of the new mine plan has been delivered and we understand the mining sequence in more detail. With regards to the debottlenecking question, Gordon, it involves a number of steps. When we looked at debottlenecking the refinery, as you can imagine, in a fixed plant, once you remove one particular bottleneck, it moves to the next. These relate to various circuits we have in the process technology that we use at the refinery.

And we will provide further details on the specific components of those as we move forward and disclose the approved capital later this year. But in essence, it covers off various parts of our process to remove impurities in the process or pump sizes, forte sizes, and things of that nature to provide greater throughput capacity ultimately.

Gordon Lawson -- Paradigm Capital -- Analyst

OK. Thank you very much.

Operator

Your next question comes from the line of Greg Barnes from TD Securities. Your line is now open.

Greg Barnes -- TD Securities -- Analyst

Thank you. Are you going to receive redirection of distributions or dividends from the Cubans in 2022? Or are they going to keep that cash to fund the share of the expansion?

Yasmin Gabriel -- Chief Financial Officer

Thanks. So we're currently in discussions with our partners in terms of Cuban overdue receivables. We are expecting any dividend redirection in the current year. And as we mentioned, in terms of funding expansion capital, we do expect that to be funded through the operating cash flow.

Greg Barnes -- TD Securities -- Analyst

OK. And just to follow up on the sulfur supply. Leon, you said you locked it up for 2022. What happens beyond 2022? Obviously, sulfur is pretty important to you.

Leon Binedell -- Chief Executive Officer

Indeed, it is. We have longer-term sulfur contracts that last beyond the current year. Around 50% of those contracts were sourced from Russia. And so we've substituted all of 2022's volumes from Russian sources.

We have the ability to continue to receive volumes from those sources. It comes at a higher cost, which we've reflected in our estimates.In terms of beyond 2022, we're looking at opportunities where we could find cheaper sources of supply potentially, but we don't foresee any challenges for us in actually finding a source of supply. We're looking at optimizing a long-term supply structure that provides us a greater flexibility and cost position relative to our current situation.

Greg Barnes -- TD Securities -- Analyst

Are there any other reagents or even components that you need for the expansion that you were going to get from Russia that now you'll have to find elsewhere or not?

Leon Binedell -- Chief Executive Officer

No. Our risk assessment has indicated that we have no other major risks associated with the current situation with Russia and sanctions. We do, however, find some challenges from a logistics perspective, supply chain perspective, given the lockdowns in China, as everybody is currently, with port challenges in the Chinese ports around deliveries, particularly around some of our sustaining projects. But those are being resolved and is going to impact timing of delivery within the calendar year but not push things out beyond the year.

Greg Barnes -- TD Securities -- Analyst

OK. Thanks again.

Operator

[Operator instructions] There are no further questions at this time. I would now like to turn the conference back over to Leon Binedell for closing remarks.

Leon Binedell -- Chief Executive Officer

Thank you, operator. Thank you, everyone, for listening to our results call today. We appreciate your interest and engagement, and we look forward to seeing those of you who can join us at the annual general meeting tomorrow. Thank you, and we'll speak to you soon again.

Operator

[Operator signoff]

Duration: 27 minutes

Call participants:

Joe Racanelli -- Director of Investor Relations

Leon Binedell -- Chief Executive Officer

Yasmin Gabriel -- Chief Financial Officer

Gordon Lawson -- Paradigm Capital -- Analyst

Greg Barnes -- TD Securities -- Analyst

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