Sherritt widens loss as output slows; lowers Ambatovy FY guidance

VANCOUVER (miningweekly.com) – Canadian diversified miner Sherritt International Resources has, for the second time this year, cut the nickel guidance at the 40%-owned Ambatovy mine, in Madagascar, citing a tailings pipe blockage and total shutdown that occurred in June and July, followed by weak output in August.

The Toronto-based Sherritt, which produces nickel, cobalt, mixed sulphides, oil and gas, and electricity, lowered Ambatovy’s 2016 nickel guidance by 2 000 t from July estimates to between 40 000 t and 42 000 t. This is down 8 000 t from the initial 2016 nickel guidance of between 3 300 t and 3 800 t.

CEO David Pathe told Mining Weekly Online that Ambatovy, which accounts for about 27% of the company’s third-quarter revenue, experienced slower-than-expected ramp-up in July and August following the shutdown. He expects the operation to again reach nameplate capacity of 60 000 t/y sometime in 2017, noting that achieving the upper 20% of capacity is a complex endeavour, comprising many moving parts, which the company is working on mastering.

Meanwhile, Sherritt is engaging stakeholders regarding the future ownership structure of Ambatovy and announced an extension – until January 15, 2017 – of an agreement with joint venture (JV) partners Sumitomo and Korea Resources that allows Sherritt not to fund any portion of recent and future cash calls. By agreement among the partners, Sherritt is not considered to be a defaulting shareholder for amounts not funded.

The company has ceased funding Ambatovy cash calls due to the ‘40 for 12’ issue. “It no longer makes sense to fund 40c of every $1 capital for only an effective 12c return on Ambatovy cash distributions,” Pathe stated.

In January, Sherritt booked a C$1.6-billion writedown of the value of its stake in Ambatovy.

Discussions with partners Sumitomo Holding (32.5%) and Korea Resources (27.5%) regarding the partnership structure and future funding arrangements are ongoing, Pathe said.

PRICE UPSIDE
Sherritt noted a 17% nickel price rebound in the third quarter ended September 30, to an average reference price of $4.66/lb, compared with $4/lb in the prior quarter. This performance was one of the strongest in the base metals complex, compared with copper remaining virtually flat over the same period.

Cobalt prices also increased by 14% over last quarter’s average. “News of Philippine mine shutdowns that have already been implemented are expected to continue to protect the downside in daily price fluctuation,” Pathe noted.

Sherritt maintained its finished cobalt production guidance for 2016 at 2 900 t to 3 300 t.

According to Pathe, potential market upside for the energy metal cobalt is priced into the company’s strategy, where rising prices could in future significantly reduce its cost of nickel production, as cobalt demand grows, owing to increased use in lithium-ion batteries and grid energy storage solutions.

On the oil and gas side, Sherritt reported that the Gulf Coast Fuel Oil 6 price index increased by a further 12% quarter-on-quarter and is now up 65% from the average reference price of the first quarter this year.

STRATEGIC PRIORITIES
Pathe noted that the company has been delivering on several of its priorities this year.

It started oil drilling on Block 10, in Cuba, with the first well spud in mid-August. Drilling is expected to continue throughout the rest of the year. The company has allocated about C$14-million in capital to undertake new drilling on Block 10, with future drilling to be contingent on results from 2016 activity.

Exploration spending outside Block 10 has been deferred, but the company reaffirmed its commitment to extend the life of its Cuban energy assets.

Sherritt has also completed and commissioned the third acid plant at Moa, in Cuba. Mining, processing and refining costs at the operation have been consistent all three quarters this year, and are expected to improve by as much as C$0.50/lb with the newly constructed plant in production.

The acid plant is now producing sulphuric acid and is expected to provide full benefits by the end of the fourth quarter this year, when existing commitments for purchases of sulphuric acid have been fulfilled, Sherritt stated.

FRUGAL BALANCE SHEET
Pathe stressed to Mining Weekly Online that Sherritt would continue to focus on preserving liquidity and building its balance sheet strength.

It announced a three-year extension of the maturity on all outstanding notes and a deferral on six Ambatovy principal payments totalling $565-million, on a 100% basis. This will be repaid on a schedule starting in June 2021, or earlier, subject to cash flow generation.

The three publicly traded debenture maturities were extended following a near unanimous bondholder vote in favour of a three-year extension to each maturity, with a C$220-million principal value maturing in 2021, C$250-million in 2023, and C$250-million in 2025.

Until June 2019, the Ambatovy JV will only pay semi-annual interest payments (about $56-million a year) and will not make semi-annual principal payments unless there is sufficient cash flow after required deductions. The deferred principal will also be subject to an additional 2% accrued interest calculated from the date of each deferral.

Q3 RESULTS
Sherritt on Tuesday reported a loss of C$120.8-million, or C$0.41 a share, compared with a loss of C$210-million, or C$0.72 a share, in the third quarter of 2015.

The company reported an adjusted loss from continuing operations of C$104.3-million, or C$0.35 a share, for the period, compared with a loss of C$91.4-million, or C$0.31 a share, a year earlier. This missed analyst forecasts of losing C$0.20 a share.

Sherritt’s revenue totalled C$58.5-million in the third quarter, down from C$74.9-million in the comparable quarter last year.

Total nickel output in the third quarter was 7 964 t, while September monthly production of 4 185 t finished nickel is the highest recorded so far this year. Sales were down 22% to 7 386 t nickel.

Cobalt output fell 14% year-on-year to 759 t, with sales diving 23% to 647 t. Fertiliser sales fell 5% to 78 999 t.

Sherritt said improvement in WTI and Gulf Coast Fuel Oil 6 prices in the third quarter were the main factor contributing to adjusted earnings before interest, taxes, depreciation and amortisation (Ebitda) in the third quarter of C$11.1-million, compared with the second quarter Ebitda of C$8.9-million, despite lower production.

Cuba GWI production of 14 709 bbl/d is down 9% from its levels in the second quarter this year, owing to natural reservoir declines. However, Cuba NWI production is down 19% with natural reservoir declines, compounded by lower cost recovery barrels on the back of lower cost recovery spending, as well as higher Gulf Coast Fuel Oil 6 prices.

The quarterly average Gulf Coast Fuel Oil 6 price of $34.88/bl improved for a second consecutive quarter this year, and is now up 65% from the $21.13/bl average in the first quarter this year.

The company recorded net direct cash costs of $3.55/lb at the Moa JV and $4.67/lb at Ambatovy in the quarter, which is an improvement for Ambatovy from the second quarter levels, and higher for Moa, but consistent with normal seasonality in fertiliser sales and receipt of cash, Sherritt stated.

Sherritt’s stock gained nearly 6% on Tuesday to C$0.92 apiece, having gained 18.92% since the start of the year.