Sherritt International Corporation (S) Earnings Call Transcript & Summary

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 9, at 10:00 Eastern Standard Time. I will now turn the presentation over to Lucy Chitilian, Director, Investor Relations. Please go ahead.

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 press release, 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 in 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 Slide 3 and non-GAAP measures, discussions 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.

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 4. 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'll be touching on in more detail during this presentation include the advancement on our expansion program that will see approximately 6,500 tonnes of new nickel and cobalt contained metals annually by 2024, a 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 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 and able 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 are to see continued advancement on our very important sustainability initiatives. I'll provide an overview of our operations and the status of our expansion program and ESG scores, and Yasmin will provide commentary on our financial highlights. I'll then conclude with an update on our '23 outlook, looking at our guidance before we address any questions. Starting with the Moa joint venture Q4 operating results outlined on Slide 6. Sherritt's share of finished nickel and cobalt production was 4,112 tonnes and 423 tonnes of cobalt, 4% and 11% lower, respectively, than Q4 2021. Lower finished nickel and cobalt production during the quarter was a result of lower mix sulfide availability at the refinery. The refinery utilized some of its available mixed sulfide feed 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 feeds for the refinery. Cobalt production was lower alongside nickel production and higher nickel-to-cobalt ratios in the mixed sulfide feed for 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 disruptive 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 7, Sherritt's share of finished nickel 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 was down 4% to 1,684 tons from 1,763 tonnes in 2021, primarily due to lower availability of historically profitable cobalt rich third-party feeds. 2022 finished nickel production was in line with guidance, while finished cobalt productions was materially within guidance. On NDCC, it was similarly impacted on a full year basis by higher 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 bought 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 this stabilize 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 8, we summarize some of the key points of our Moa JV expansion. As was mentioned in our last call, Sherritt approved an additional $50 million on a 100% basis for the second phase of our joint venture expansion plan, bringing the total expansion program to USD 77 million on a 100% basis. The expansion program has been developed to achieve a 20% increase in metal production at a low capital intensity of only $13,200 per annual tonne of nickel added. With a 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 2/3 of the increased move 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 from Moa. However, we do not believe at this time that any expansionary capital may be required at the refinery. The program will be completed in 2 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 for 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 USD 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 SBP, 100% of the civil construction has been completed, 100% of the materials and service contracts have been awarded and 65% of the steel prefabrication as being erected. For the Moa processing plant, the final feasibility study encompassing the 4 project scope has been submitted for approval to Cuban authorities, and we expect that approval in Q1. Bids for long lead items for the 6 leach train has been evaluated and will be expected to be awarded in Q1. Both of these phases remain on budget and on schedule. Turning to our power division on Slide 9. Power production in Q4 was 159 gigawatt hours of electricity, up 22 -- sorry, up 22% 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 beat 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 costs of Energas as well as covering future payments that would be owed to Sherritt, 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 2 new gas wells to be drilled in Puerto Escondido that are scheduled to 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 success was seen in 2021 carried out in 2022, as outlined on Slide 10. We further improved our safety performance with the total recordable incident frequency rate and the lost time incident frequency rates decreasing 59% and 50%, respectively, between '21 and '22. 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 commitment 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 catch opportunities at the Fort site and solar power at Moa. And with that, I will hand to Yasmin to summarize our financial results.

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, while net earnings from continuing operations was almost $64 million compared to a loss in the previous year of $13 million. These results were driven primarily by higher nickel and fertilizer sales volume and realized prices, partly offset by higher input commodity prices and a $17.5 million share-based compensation expense resulting from a full year of additional unit vesting and appreciation in our share price. Also impacting EBITDA with a $15 million noncash year loss relating to legacy oil and gas finished 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 receivables related to the implementation of the cobalt swap agreement and an almost $21 million gain on the repurchase of notes. On an adjusted basis, removing the impact of these noncash 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 our 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 a 16% discount, reducing our principal debt by 35% from the beginning of the 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, strengthen our balance sheet and will generate value for our 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 Cuban receivables over 5 years, putting an end to the long-standing uncertainty related to these receivables. Under this agreement, which became effective on January 1 of this year, the Moa joint venture prioritizes distribution in the form of finished cobalt to each partner up to an annual maximum volume for Cobalt with any additional distributions in a given year to be paid in cash. All the Cuban partners Sherritt cobalt distributions will be redirected to Sherritt as a payment against these receivables. If the total value of cobalt distributed by the Moa joint venture is lower than the USD 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 5 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 2026. In January, the first month in which the agreement was effective, we received our first distribution of 760 tonnes of cobalt, representing 37% of the annual cobalt volume under the agreement. That had 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 a human partner share has been used for the settlement of the outstanding receivable. All of this cobalt is in shares 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 the full amount is received within the 5-year time frame as an incentive. This adjustment resulted in the noncash loss we recorded this year, as 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 $228 million at the start of the year. The decrease in our available liquidity reflects the almost $150 million repurchase of our second lien and junior notes for $125 million of cash as well as the $29 million in cash interest paid on the second lien notes and $28 million of capital spending. This was offset by strong distribution to the mode joint venture of approximately $100 million and $31 million of net fertilizer receipts. 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.

Thank you, Yasmin. 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 our plant capacity expansion and implement our updated life of mine plan utilizing an economic cut-of-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 build lending stockpiles, both impacting lower 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 to 32,000 tonnes on a 100% basis, while finished cohort production is forecast to be between 3,100 and 3,400 tons on a 100% basis. NDCC at the Moa joint venture is forecast to be in the range of USD 5 to USD 550 per pound of finished nickel sold, primarily as a result of lower forecast cobalt and net fertilizer byproduct credits, offset by moderated 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 2 new gas wells on an existing field in 2023. Unit operating costs are expected to be higher in '22 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 2022 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 will 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 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 high 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 a 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.

Thank you. Ladies and gentlemen, we will now begin the Question-and-Answer Session [Operator Instructions] First question comes from Gordon Lawson at Paradigm.

So with cash cost in the current range, you mentioned a $0.20 reduction based on MSP. But can you talk about your expectations beyond 2023 as it relates to other components in Phase II?

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 million based on current cobalt pricing environment as well as fertilizer pricing environment, which are lower than 2022, but those are offset by moderated input commodity prices that we've seen migrating closer towards 2021 levels.

Okay. And you talked about nickel sulfate. Can you provide further guidance as to what shipping pricing you're expecting in various geographical regions?

I guess, Gordon, you're referring to the intermediate products?

Yes.

At this stage, what we anticipate, given current market dynamics is that there are fairly high payabilities for intermediate products. and we'll see how the market shapes up. We have not provided any guidance as to what we expect those payabilities to be at this stage as we are in early-stage conversations with potential customers. However, we do hold the option should payabilities not play out to justify the margin loss on refining metal, we would convert back into full refining of all of MOS MSP and take the advantage of producing refined nickel product to capture the full margin, if you will.

And the Fort Saskatchewan has the capacity once it completes debottlenecking?

Currently, the capacity is sufficient to be able to process 2/3 of the additional volume. The other remaining 1/3, we anticipate we could through operating improvements and some other smaller debottleneck 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. Okay.

Seeing the impact on EBITDA, could you talk about expenses related to both the oil and gas as well as the technology division and what do you expect going forward?

So currently, we are not producing any well in the oil business, as we've outlined, but are providing some services to a third party in drilling services. while we're in process in seeking earning partners or alternatives for our oil business for the long term. In terms of the drilling services, we're 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 contributions 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.