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Edited Transcript of S.TO earnings conference call or presentation 31-Oct-19 2:00pm GMT

Q3 2019 Sherritt International Corp Earnings Call

TORONTO Nov 16, 2019 (Thomson StreetEvents) -- Edited Transcript of Sherritt International Corp earnings conference call or presentation Thursday, October 31, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Andrew Snowden

Sherritt International Corporation - Senior VP & CFO

* David V. Pathe

Sherritt International Corporation - President & CEO

* Joe Racanelli

Sherritt International Corporation - Director of IR

* Stephen James Wood

Sherritt International Corporation - Executive VP & COO

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Conference Call Participants

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* Don DeMarco

National Bank Financial, Inc., Research Division - Analyst

* Greg Barnes

TD Securities Equity Research - MD and Head of Mining Research

* Matthew Thomas Farwell

Imperial Capital, LLC, Research Division - MD

* Orest Wowkodaw

Scotiabank Global Banking and Markets, Research Division - Senior Equity Research Analyst of Base Metals

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, thank you for standing by. Welcome to the Sherritt International Third Quarter 2019 Results Conference Call and Webcast. (Operator Instructions) I would like to remind everyone that this conference call is being recorded today, Thursday, October 31, 2019.

I will now turn the presentation over to Mr. Joe Racanelli, Director of Investor Relations and Communications. Please go ahead.

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Joe Racanelli, Sherritt International Corporation - Director of IR [2]

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Good morning, everyone, and thank you for joining us today. As is customary, we will be using a presentation that is available from our website at sherritt.com. With me are David Pathe, our CEO; Andrew Snowden, our CFO; and Steve Wood, our Chief Operating Officer.

Before I turn it over to them for management discussion, I want to point out that we will be using or we will be making forward-looking statements, and the risks associated with these statements are available and detailed in our presentation. Copies of our financial statements, MD&A, as well our press release that we issued last night are also available from our website and have been filed on SEDAR.

And with that I'll turn it over to David to make his opening remarks.

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David V. Pathe, Sherritt International Corporation - President & CEO [3]

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All right. Thank you, Joe, and good morning and thank you to everyone there for joining us again this morning. A number of things internally and externally to share -- to tell you about this morning, so we'll get into that -- run you through that and then take any questions that you may have.

Starting with a few highlights on Page 4 of the presentation. Another strong operational quarter for us, particularly the Moa Joint Venture. We're improving it once again due to the efforts that we've been making over the last couple through our operational excellence and organizational design to improve the operation and reliability are paying off. And with another quarter of good, steady production.

We had $11.6 million in distributions from the joint venture as a result of that strong production and increases in nickel and cobalt prices over the course the quarter. And I'll talk a bit more about nickel markets in a moment.

Our focus on liquidity continues. We've got some covenant relief from our credit facility bankers, and Andrew will talk a bit more about that. And after a double-digit reduction in G&A costs last year, our costs are down again year-to-date this year as well.

Liquidity is -- continues to be our focus. We had a couple of interest payments on her debentures in the quarter that affected our liquidity. Timing of Cuban energy payments continues to be something we're actively managing. We've got decent payments under our receivables plan. We took some repayments in country to pay local expenses, but we didn't see that much in other payments in the quarter, partly as we anticipated in Q2.

On balance, a very strong quarter for us operationally, but I want to touch on now before I turn it over to Steve and Andrew on a couple of external things happening in the quarter, one of which was very positive for us and one of which continues to cause some concern.

Page 5, you will see -- I mean, obviously, this is the piece that drew the greater attention over the course of the quarter was the significant improvement in commodity prices, particularly in nickel. Nickel got on a really nice run beginning in the summer and was up upwards of 50% and that has continued, though, with some volatility into the fourth quarter.

Cobalt moved as well, and I'll talk a bit about that. The other countervailing to that from us -- from our perspective and perhaps one that receives less attention, because its impact is more specific on us and on Cuba, is ongoing tightening of U.S. sanctions against Cuba, building on the implementation of Title III that we spoke about last quarter. I'll talk a bit about that as well.

But first we'll go over on Page 6 and just look at what nickel and cobalt prices have done in the quarter. You can see the significant run-up in July and August there. We maxed out, I think, about 8 -- just under $8.50 a pound and then fell back to about -- in the low $7s in October and have been bouncing around in the -- between $7.25 and $7.75 since then.

Number of news items that came out in the quarter that helped drive that. The announcement of the implementation of the ban again -- once again on the exportation of raw ore from Indonesia scheduled to take place at the 1st of January next year, had quite a positive impact.

We've seen inventories come down significantly and we'll look at that in a moment over the page. And a lot of speculation in the market now about what is actually driving it and where prices are going in the near term. We did see some correction, as was anticipated, after the dramatic run-up in July and August. But the pricing thus far has kind of found its footing in the low $7s every time it's tested down there.

In terms of demand, we continue to see demand growing. There's much uncertainty in the world around a global growth generally and geopolitical concerns and trade war concerns. But we are expecting to see nickel demand up about 4% again next year. Stainless steel demand is expected to be up about 3%. And demand for electric vehicles and batteries continues to grow, although still a relatively small segment of the market, but that's expected to be up about 13%.

Nickel inventories, you see the graph there on Page 7, continuing the trend in decline in inventories that we saw really beginning back in late 2016-2017 when inventories globally maxed out at over 0.5 million tonnes, have now dropped quite dramatically to 100,000 tonnes. A much debate in the market as well now about what is driving those inventory reductions. Some of it is expected to be stainless steel producers, particularly in China, getting inventory in-house before the implementation of the ore ban from Indonesia next year.

Given that rapid decline, though, there is also some debate about how much of that nickel that's gone off. The LME is actually ultimately for consumption and how much of that's speculation. And depending on whether that inventory buildup for LME, inventory reduction has overshot. So much -- whether we'll see some of that come back onto LME exchanges later this year, next year, time will tell on that.

Overall, we have seen kind of support for the nickel price in that low $7 range since the run-up over the course of the summer. I think, because of all the large number of uncertainties out there at the moment we will see continued volatility in commodity prices, both nickel and cobalt in the near term. But our views on the long -- medium and long term fundamentals of expected nickel shortages and ever-growing demand, particularly increasing demand for Class 1 nickel, as we produce ultimately for battery production. That story seems as -- the fundamentals of that seem as solid as ever.

Just over on Page 8 I want to talk a little bit about U.S. policy towards Cuba and its impact on Cuba and consequently on us. This hasn't received as much attention in markets as nickel price run-ups and volatility has. But it is having quite a significant impact.

We spoke last quarter about the implementation of Title III 22 years -- 24 years after the original implementation of Helms-Burton. And over the last few months we have seen an ongoing ratcheting up of U.S. pressure on Cuba. The slide there on Page 8 cites a number of different examples in terms of further restrictions on travel, further restrictions on family in the U.S. sending remittances to family in Cuba.

We've seen sanctions uncertain financial transactions. We've seen sanctions on some shipping companies going in and out of Cuban ports. And each one of those implemented successfully does impact Cuba's ability to drive hard currency reserves into the country and puts more pressure on their liquidity situation and hence more pressure on their ability to service our receivables.

Through that, though, we did receive all of the payments we're expecting under our receivables agreement over the quarter. And it's important to note here that the distributions from our metals business are unaffected by Cuban liquidity, because those are all paid out of hard currency sales to consumers all over the world other than the United States.

U.S. sanctions, though, continue to be a concern for us. There is potential for further sanction increase in the months ahead and that does put further difficulty on our ability to forecast the timing of Cuban receivables out of -- receipt of cash on Cuban receivables out of our from our Cuban partners in the Oil and Power business.

Steve is now going to talk about a few operational highlights before Andrew turns to financials and then I'll come back at the end and sum up a couple of things, and we'll take your questions.

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Stephen James Wood, Sherritt International Corporation - Executive VP & COO [4]

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Okay. Thanks, Dave, and good morning to everyone on the line. As usual, I'll begin with a comment or 2 on health and safety. So we continue to work at ensuring everyone is healthy and safe within the Sherritt enterprises and we are addressing workplace risks through visible felt leadership, higher standards and process safety management.

And through the analysis of some injuries in the workplace, we've managed to target a few topics that have improved our safety even further and they're being addressed to maximize those improvements in the future.

I'll now turn to Slide 10 and talk about our production results, starting with the Moa JV. It was another solid production quarter, up from the second quarter of this year. And on a 50% basis, Moa produced 4,139 tonnes of nickel and 436 tonnes of cobalt in Q3. These numbers are down slightly by 7% and 6%, respectively, from last year. When we were drawing down the high inventories of the mixed sulphides that we had at the refinery in Fort Saskatchewan that were the result of the rail service interruption we had earlier in 2018.

The Q3 2019 production totals for finished nickel and cobalt were impacted by an unplanned maintenance shutdown that took place in August at Fort Saskatchewan due to the -- due to a failed heat exchanger unit at the refinery. We've since been able to make up for much of that lost production. And when looking at production on a 9-month basis, nickel is up 13% and cobalt is up 7% this year as compared to the same period last year.

The increased production has been driven, as Dave said earlier, by a number of operational excellence initiatives launched over the past couple of the years, including the deployment of some new mining equipment in Moa. The new mining equipment has delivered a number of benefits, including improved access to the various ore concessions and reduced equipment downtime. And this operational momentum puts us well on track to achieve our production guidance targets for 2019.

Now turning to Slide 11. I'll remind you that earlier Dave mentioned that one of the impacts of tightening the U.S. sanctions resulted in reduced fuel supply to Cuba. This required our Moa operations to implement some fuel preservation measures in August, in September, and while these measures didn't have a bearing on our finished nickel or finish cobalt production at the refinery, they did result in reduced production of mixed sulfides in Q3 relative to the same period of 2018 as you can see from Slide 11.

But since the start of this quarter Q4, the access to fuel supplies has returned to normal and Moa remains on track to reach its mixed sulfides production for 2019, given its strong performance in the first half of the year and the resumption of the fuel supplies.

Our NDCC in Q3 was $4.37 per pound of nickel sold, and that's up from to $2.16 of last year. The increase was due to the 61% year-over-year decline in the realized cobalt prices. Higher fertilizer prices, coupled with lower third party feed cost and lower input cost in Q3 of this year helped to mitigate the impact of the lower realized cobalt prices.

I'll now turn to our Oil and Gas operations on Slide 12. We produced 4060 -- sorry, 4,060 barrels of oil per day in Cuba on gross working-interest basis in Q3. This total marked a decline of approximately 13% from last year when we produced 4,668 barrels of oil per day. The decrease was due to the natural and expected reservoir declines. And as is to be expected, the decrease in number of barrels produced had a negative impact on unit costs.

Our unit costs in Cuba for the third quarter were $21.40 per barrel, and that's up from $18.84 per barrel for Q3 of last year. The unit costs were also negatively impacted by the depreciation of the Canadian dollar relative to the U.S. currency as our labor expenses are denominated in U.S. dollars.

I'll now turn to Slide 14 and discuss our Power division. We produced 197 gigawatts of electricity in Q3 of this year, and that's up 3% from last year when we produced 191 gigawatts in the same period. The increase is due to the reduced maintenance downtime that previously had been planned and by additional gas supply. The unit operating costs in Q3 were $14.42, that's down 41% from $24.60 of last year.

The decrease was primarily due to our decision to limit operational spending to levels that are required to maintain certain plant operations as we continue to work with our Cuban partners to collect on energy receivables. The impact of reduced spending more than offset the impact of a weaker Canadian dollar in the third quarter as the Power business' costs are generally denominated in U.S. currency.

That concludes my review of our operational results. And with that, I'll hand it over to Andrew Snowden, our CFO, who will review our third quarter financial results in more detail. Andrew?

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Andrew Snowden, Sherritt International Corporation - Senior VP & CFO [5]

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Okay. Thank you, Steve, and good morning, everyone. And I'll begin my comments with a summary of our reported cash position as at September 30th. So if you turn to Slide 15, you can see our typical waterfall chart there showing our cash movements over the quarter from Q2 through until last September, and you'll see our consolidated cash balance declined by around $8 million during the quarter. As a reminder, this consolidated cash position does include our share of Energas cash and I'll talk a little bit more about that later in my commentary.

So in this chart, really the key highlights here are probably just 3 items to touch on. One are the couple of kind of key main uses of cash during the quarter, as you'll see we had our regular interest payments, which within in September. And there are 2 payments in each of Q2 and Q4 and one payment in Q1 and Q3, and so this represents that payment for the quarter.

The second main cash expenditure for the quarter relates to our capital costs associated with Block 10 drilling at our Oil and Gas operations. Those 2 kind of main outflows were mainly offset by the dividends that we referred to earlier received from Moa of $11.6 million during the quarter. And so to-date now in 2019, we have received just north of $28 million of dividends for Moa for the year, which is obviously good amounts of dividends that we're now seeing on a regular basis out of those operations.

One of the key impacts to our cash position that isn't necessarily highlighted in this waterfall is our collections on Power and Oil and Gas from Cuba. And that's contained within the -- kind of a working capital change chart -- bar item within this waterfall chart and you'll see more on Cuban collections on Slide 16. So we did end the quarter with approximately USD 155 million of overdue receivables, which is relatively in line with the balance at the end of Q2.

There's a few comments I'll just make about this movement during the quarter. And firstly looking at Oil and Gas, CUPET collections were very low during the quarter. So you'll see we received $1.5 million during the quarter. Those collections are consistent with the expectations and the remarks, which I made on our Q2 call and what CUPET has paid most of that planned Q3 payments to us in Q2 to help support our liquidity constraints.

Looking at Power, the timing of collections from Energas is difficult to predict and this continues to be difficult to predict. Although we have started to see the benefits of our overdue receivable agreement, and you'll see that we received about USD 9.8 million under that agreement during the quarter, and regular payments from Energas were unpredictable. And in fact, the $7.5 million you do see that being the sum of the $5.5 million and the $2 million on that slide were collections, which we accepted in Cuba to support local oil and gas costs. So there were no in Canada payments received from Energas outside of overdue receivable agreement during the quarter.

And really what that highlights is just the importance of that agreement towards and the benefits we have seen for that over the past few months. And as discussed previously, we are continuing to discuss with our Cuban partner the potential to improve that overdue receivable agreement in 2020, and hopefully we'll know more on that through the course of the fourth quarter.

Turning now to Slide 17, as I have highlighted on this slide the breakdown of our -- of quarter-end cash balance. As I mentioned earlier, that consolidated balance does include our share of Energas' cash balance, which is $77 million at the end of the quarter. So excluding Energas, the Sherritt to the corporate level has access to $92 million of cash at the end of the quarter.

Looking forward, I do expect our year-end cash balance to continue to soften a little bit through the course of Q4. And that's in part because of the higher interest costs we'll expect in the fourth quarter and that's because of the 2 payments we have one in October, one in November, and also the ongoing uncertainty in timing of Energas collections. This expenditure will be partly offset by expected dividends in Q4 from the Moa JV. And based on current commodity prices, I expect those dividends will be somewhere in the $10 million to $15 million range for the quarter.

So given this pressure on cash, we are continuing to focus on preserving liquidity as Dave mentioned earlier, and as evidenced by 2 key developments in the quarter. I just wanted to spend a couple of minutes on now. Firstly, the covenant balance that you'll see here on Slide 18. The one item of this I will just sort of talk to you briefly is the reduction in the minimum cash requirements that we have now.

So you'll recall that our revolving credit facility does have a -- or did have $100 million minimum cash requirement. During the quarter, we did negotiate an amendment to that through until the end of the facility at the end of April in 2020. And that minimum cash is now $60 million in Canada through until the end of this year, which points increases marginally to $70 million through until the end of that facility. That does allow us a little bit more flexibility to now manage the uncertainty of Energas collection looking forward.

As a reminder, our existing credit facility does have $19 million available under it and $51 million is utilized under that facility, $8 million of which is drawn and you'll see on our balance sheet through the liability an additional $43 million, which is in the letter of credit relating to our Spanish oil and gas operations.

So turning now to Slide 19, another sign of our progress on preserving cash and I'll just touch on this briefly given Dave has made reference to this already, is our focus on reducing administrative costs. You may recall from previous disclosure that excluding stock-based compensation and depreciation which are our non-cash items, we did reduce our administrative expenses by over 10% in 2018 compared to the prior year and that momentum is continuing through the course of 2019. You'll see that year-to-date we are down another 6%. And that -- this decrease would have been higher if not for the increased legal costs I referred to at -- on our Q2 call relating to assessing the impact of Helms-Burton Title III when that became enacted in May of this year.

So the final slide I just had a couple of comments on is Slide 20, which really just highlights our -- the evolution in our EBITDA results from Q2 versus Q3. So you'll see that our EBITDA for Q3 is $21 million, roughly $12 million increase on the prior quarter. That's primarily due to the improved nickel prices that have been referred to already, so that's clearly the key driver for that improved EBITDA. And in addition, the Moa MPR costs and that MPR refers to mining, processing and refining costs, so operating costs for Moa JV, will lower during the quarter which also benefited our EBITDA.

The one kind of big negative you'll see there the $8 million arising from fertilizer is really just a reflection of the cyclical nature of that fertilizer business. And, again, as a reminder, our fertilizer sales occur in the second quarter and the fourth quarter of each year, so in May and October, generally speaking. And so fertilizer sales are always lighter in Q1 and Q3 and that's what's reflected here in this EBITDA waterfall.

So that's all of the remarks I had on our financial results. So I'll pass the call back over to Dave.

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David V. Pathe, Sherritt International Corporation - President & CEO [6]

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Good. All right. Thanks, Andrew. Before we wrap up here, I wanted to give you another quick update on Block 10. You'll have seen from our release this morning, we have now resumed drilling and as of about 24 hours ago, I think, we were just down past 5,500 meters. For most of the quarter actually drilling was paused while we dealt with finishing out of the casing to the 5,300-meter depth that I believe we were at when we spoke to you a quarter ago. And we were dealing with some lost circulation as we were trying to get through into the sheet where the CUPEY-1X well from 20 years ago intersected. In order to manage some variable reservoir pressure there we needed mud at a few different densities and the tanks to mix and store that weren't available in Cuba. So we had to rent some additional mud tanks in Canada and get them down into the country.

So those got down there a few weeks ago, and we got up and running again and drilling a couple weeks ago. Our total depth target on this well is about 5,700 meters, and as I say, we're down south of 5,500 meters as of couple days ago. So we are now at the point where we're hoping that we'll see some results on this well in the coming weeks.

You're all aware, if you've listened in over the last number of quarters of the various technical challenges that we've had to address and overcome with different solutions. But we are now at the point where we're feeling that we're pretty close to being able to actually see what we've got down there. Once we get down to total depth, we'll put in the well in production and we'll run that for a while and run some testing to see what we can -- what we have and what we can expect over time.

Just as another example of the increasing U.S. sanctions that continue to affect us in the second quarter. The U.S. did put further restrictions on U.S. content going into Cuba and that's affecting some of our dealing with suppliers in the oil business. So previously content in components of up to 25% permitted. Now under newer U.S. rules that's limited to 10% U.S. content. So we've had to work through those kinds of issues with our suppliers as well.

Lastly, I want to just highlight our guidance over on Slide -- Page -- on 23. And encouragingly we're on track across all of our Cuban businesses to meet our production and cost targets for the end of the year. I mean, that speak as I started off with a testament -- the effort in the -- what's gone in the last 24 -- 18-24 months on operational excellence and improving the reliability of our operations. And the result of that is that we're on track to deliver our guidance objectives.

So to sum up, the operational excellence initiatives are really -- are coming through for us and we see that in the strong production that is in part -- combined with stronger nickel prices enabling us to see dividends come out of our -- out of the Moa Joint Venture. We have seen a significant run-up in commodity prices. We're expecting to see probably even greater than normal volatility in nickel and cobalt prices until the market conditions stabilize somewhat. But our belief in the long term outlook and the fundamentals that underpin the nickel business remain strong and as strong as ever.

Our efforts on preserving liquidity and managing balance, managing costs continue to pay dividends and give us the flexibility and runway as we look to manage our debt maturities, the first of which is still 2 years away in November of 2021. And we should in the fourth quarter be able to be in a position to at long last share some Block 10 results with you. So lots going on, lots continue to be going on. But that is what we wanted to tell you about this morning.

So with that said, operator, we're happy to take any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from Orest Wowkodaw with Scotiabank.

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Orest Wowkodaw, Scotiabank Global Banking and Markets, Research Division - Senior Equity Research Analyst of Base Metals [2]

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Andrew, I had some additional questions about your balance sheet liquidity. And specifically what happens to -- or what are the implications to your letters of credit? I think in the Oil and Gas business the $43 million, I believe, in that slide, if your credit facility which expires, I guess, in April of 2020, what happens if that facility is not renewed?

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Andrew Snowden, Sherritt International Corporation - Senior VP & CFO [3]

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So under our agreements with our partners on the Spanish oil and gas property, we are required to provide underlying support for the potential reclamation costs and we currently do that, as you pointed out, always through a letter of credit. If we did not have access to the credit facility, then that amount would have to be cash collateralized.

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Orest Wowkodaw, Scotiabank Global Banking and Markets, Research Division - Senior Equity Research Analyst of Base Metals [4]

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So if -- okay, so are there discussions going on to renew the maturity of the credit facility or do you see that as a risk that is not going to be renewed?

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Andrew Snowden, Sherritt International Corporation - Senior VP & CFO [5]

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Yes, I don't see that as a risk today, Orest. I mean, as highlighted through our covenant release during the quarter, we're having a very constructive relationship with our syndicate who are very supportive. And as we approach the expiry of the current facility at the end of April, I currently have no concerns so that will be extended for another year.

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Orest Wowkodaw, Scotiabank Global Banking and Markets, Research Division - Senior Equity Research Analyst of Base Metals [6]

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And then just switching gears a little bit as well, I mean given the constraints you talked about in Cuba. What gives you confidence that the Cubans are going to be willing to give you, I guess, more than the 50% of their share of Moa dividend say beyond this year?

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David V. Pathe, Sherritt International Corporation - President & CEO [7]

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So there are couple -- Orest its Dave. There are couple of different things we are working on with our Cuban partners to try and increase or get some certainty around receivables collections for 2020. One is under that receivables agreement we are capturing some of the local expenses that Moa pays and buys local currency for each month to pay local suppliers in the Moa the region, and we are looking to get approval to increase that as part of the national planning of foreign currency inflows and outflows for 2020. That wasn't possible when we put the deals together as it stands today -- together earlier this year, because those numbers are already baked into the plan for 2019. But we think there is scope to increase that for 2020 and those discussions are ongoing with Cubans.

And then we are also in discussions, as you are alluding to, as to what the minimum dividend threshold should be for next year beyond which we can capture disproportionate share of the dividends. And that conversation is ongoing as well as part of the budgeting process for not just the Moa Joint Venture for next year, but also for the country and in terms of its central management of its hard currency inflows and outflows. And that obviously being influenced somewhat by the volatility we are seeing in commodity prices in terms of trying to predict what cash flows of the Moa Joint Venture are going to look like next year.

But there is a lot of intent on our Cuban partner to find a solution to this. They've recognized the importance to us of some degree of certainty around our cash flow, particularly given the situation that we are in today. And they recognize that the industries that we are in in Cuba and that we support for them are strategically important to them as they work through the challenges that they are dealing with.

So we're spending a lot of time in Cuba these days, working constructively with our partners to find solutions and those are the kind of things we are working on and hoping to have some clarity on over the course of this quarter in place for next year.

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Operator [8]

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Our next question comes from Greg Barnes with TD Securities.

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Greg Barnes, TD Securities Equity Research - MD and Head of Mining Research [9]

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Andrew, the sanctions in Cuba, how much do you think the impact of that reduced the payments you received from the Cubans in Q3 -- the trade receivable payment?

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Andrew Snowden, Sherritt International Corporation - Senior VP & CFO [10]

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I mean, it clearly plays an impact, Greg, into Cuban foreign currency availability. Exactly kind of linking the 2 is difficult to predict and assess. I mean, clearly, during the course of the last 12 to 18 months, in particular, Cuba has been under increased foreign currency pressure and that has played into overdue receivable collections and increased the overdue balance. And that's really why the overdue receivable deal that we agreed in May and started seeing payments on in June have been a real key benefit for us. Because it does allow us to capture those foreign payments before they enter Cuba.

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Greg Barnes, TD Securities Equity Research - MD and Head of Mining Research [11]

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With respect to the minimum distribution -- minimum dividend distribution threshold of $68 million this year you're quite going to get there from what I can tell. What nickel price would get you to that $68 million minimum distribution threshold?

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Andrew Snowden, Sherritt International Corporation - Senior VP & CFO [12]

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Look, I think, the current commodity prices that we're seeing today will get us in and around that -- about $68 million minimum dividend number. So if we saw nickel prices strengthen a reasonable amount from where they are today then that would allow us to potentially get some additional dividend from the GNC share through the course of Q4. But as you point out Greg, I agree where pricing is today, we'll be kind of in and around that $68 million and unlikely to exceed it.

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Greg Barnes, TD Securities Equity Research - MD and Head of Mining Research [13]

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And what are you targeting for the minimum threshold for next year?

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Andrew Snowden, Sherritt International Corporation - Senior VP & CFO [14]

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I think the goal would be a number that's lower than what we have for this year. We'll get some more clarity on that hopefully through the course of Q4.

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Operator [15]

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Our next question comes from Don DeMarco with National Bank Financial.

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Don DeMarco, National Bank Financial, Inc., Research Division - Analyst [16]

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So David, regarding the reduced fuel supply in Q3, what were the preservation measures that we took in August and September? And what contingency do you have if the supplies are restricted again?

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David V. Pathe, Sherritt International Corporation - President & CEO [17]

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Yes. So the fuel interruptions that we saw is for some short periods in Q3 in Moa were around diesel availability. And that affected -- basically just affected the number of trucks that we could have on the road for certain days that caused us to be in some ways where there's some part of the mitigation that was drawing down on stockpiles rather than running mining trucks. And in some cases it did lead to, as Steve explained, to some reduced production.

We do now actually have an external contract between now and the end of the year to provide some extra diesel importation directly to the Moa Joint Venture. I mean, we're working with the Cubans to get some greater certainty around the diesel supply into the country and into Moa specifically for 2020.

The shortages of diesel that Cuba experienced kind of countrywide in September were primarily caused by -- more by the imposition of sanctions on some shipping companies then they were by liquidity issues in Cuba that caused interruptions to shipments into Cuba that were expected and then were are no longer possible when the ships were sanctioned.

Shipments of diesel have resumed into Cuba in the fourth quarter and situations seems to be returning to normal more broadly across the country. As they do have contracts now in place with shipping companies that are going to be able to deliver it once again. So the situation has remedied itself for the moment, but it is something we actively manage both with our Cuban partners at the national level and at the Moa Joint Venture specifically.

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Operator [18]

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(Operator Instructions) Our next question comes from Matt Farwell with Imperial Capital.

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Matthew Thomas Farwell, Imperial Capital, LLC, Research Division - MD [19]

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The Moa EBITDA of roughly $26 million suggest a run rate of around $100 million. Your commentary was around the $68 million dividend threshold. I am trying to determine at the $100 million run rate what kind of dividends could we expect from Moa if pricing were to remain here?

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Andrew Snowden, Sherritt International Corporation - Senior VP & CFO [20]

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I mean, certainly just to make sure you've got this, Matt, the $68 million minimum dividend number is a U.S. dollar number and the EBITDA run rate of CAD 25 million is obviously Canadian dollars, just make sure that you're clear on that. So for this quarter EBITDA was CAD 25 million and we saw dividends in the $12 million mark. I would expect on a regular quarter based on the low interest costs that Moa have and the tax expense -- and Moa's tax expense is roughly 22.5%, that you will see the dividends up in the kind of $15 million plus range running at this type of EBITDA level per quarter.

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Matthew Thomas Farwell, Imperial Capital, LLC, Research Division - MD [21]

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And the new CapEx roughly-- assuming a CapEx number of roughly $30 million?

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Andrew Snowden, Sherritt International Corporation - Senior VP & CFO [22]

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Yes, based on the capital levels that we've seen this year.

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Matthew Thomas Farwell, Imperial Capital, LLC, Research Division - MD [23]

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How confident are you that the minimum dividend threshold will decline?

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David V. Pathe, Sherritt International Corporation - President & CEO [24]

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Matt, its Dave. I think we'll see -- we'll get a clear idea of that. And it is all part and parcel of the conversations around how much of the foreign currency we can capture. How much of the -- with the foreign currency exchange in terms of increasing the monthly amount under the receivable agreements, as is currently constructed is not completely disconnected from the dividend threshold.

And that we, obviously -- it's our interest and the Cuban's interests for them to have sufficient motivation to -- and opportunity to see hard currency come out of Moa Joint Venture as well, so that they are intended to dedicate resources like fuel to it. So it is all part and parcel of a broader conversation. I have a pretty good degree of confidence that we will see improvement in our ability to capture some -- a greater proportion of foreign currency next year and what shape that we'll come in the entirety of the package we will see.

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Matthew Thomas Farwell, Imperial Capital, LLC, Research Division - MD [25]

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Now one question I had about the cash, because you do break out the cash and where it resides, and you -- there's distributions of cash in the form of dividend from Moa that are offset by administrative costs at the corporate level. And then, obviously, you have costs and working capital at Fort site facility in Canada.

I am just trying to understand or try to walk in my head the cash balance that in Canada of $95 million in the second quarter through the ending cash balance in the third quarter of $80 million and how I can then think about that that walk?

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Andrew Snowden, Sherritt International Corporation - Senior VP & CFO [26]

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So Matt you are referring to the corporate level tax balance and how that shifted over the past several months or several quarters?

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Matthew Thomas Farwell, Imperial Capital, LLC, Research Division - MD [27]

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Exactly. No, just over the last 3 months.

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Andrew Snowden, Sherritt International Corporation - Senior VP & CFO [28]

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Yes. So look, I mean, as I mentioned the -- we have implemented several liquidity preservation measures. We also talked about the austerity measures which we implemented through the course of Q2 with the goal of trying to maintain our cash balances at current levels. I mean, clearly, a key driver behind that are the collections which we receive in Canada from Cuba, and as we've highlighted our collections in Canada during Q3 were quite light. We were outside of the overdue receivable agreement. We only received $1.5 million from CUPET in Canada. I mean, so that's really the key driver behind our cash balance declining from a $100 million at the corporate level at June to the $92 million at September.

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Matthew Thomas Farwell, Imperial Capital, LLC, Research Division - MD [29]

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So are you implying that the core dividend from Moa was not actually received in Canada or was it reinvested back into Cuba?

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Andrew Snowden, Sherritt International Corporation - Senior VP & CFO [30]

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No, so the Moa dividend was received in Canada, but that cash was more than offset through interest expenditure in the quarter and capital expenditure on Block 10. So those items were highlighted in our kind of cash waterfall chart on Slide 15.

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Matthew Thomas Farwell, Imperial Capital, LLC, Research Division - MD [31]

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And then in terms of the realized pricing that you are seeing for nickel and cobalt, should we assume that roughly LME is a good guidepost or can we expect any premium for say Class 1 nickel?

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Andrew Snowden, Sherritt International Corporation - Senior VP & CFO [32]

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I think for the forecasting purposes I would use LME as being a good prediction of the rates that we generally achieve. We generally do achieve rates in and around that. Sometimes there's a small premium, sometimes there's small discount. We are obviously in what's called our nickel making season right now where we are in discussions on the key contracts looking forward to 2020. And that -- those discussions often happen around LME week, which is on in London at the moment. But my expectation would be that we will be in and around that LME mark looking forward.

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Operator [33]

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And our next question comes from Orest Wowkodaw Scotiabank.

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Orest Wowkodaw, Scotiabank Global Banking and Markets, Research Division - Senior Equity Research Analyst of Base Metals [34]

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Just on the Cuban Oil & Gas business, can you quantify how much have you invested to date in Block 10 and what happens to this business if Block 10 doesn't hit? I mean, does that -- should we assume that business just winds down at the end of this year in terms of the entire Cuban Oil & Gas or is there something left next year outside of Block 10?

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David V. Pathe, Sherritt International Corporation - President & CEO [35]

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Orest, it's Dave. We can get you the number on aggregate spending on Block 10, because that goes back a couple of years now. In terms of what happens, as and if -- when it's a success or a failure, I mean, that will obviously be some that we'll be looking at. And there are points in between depending on how good the well is, as assuming that there is some oil production there and how commercial is and what the returns look on it.

Investing in the oil business has been part of our strategy with the ongoing relationship with the Cubans and our partners there and the importance of the oil business to them as well as to what it's been to us over the years. But, obviously, if this well is not a success that will trigger a review of what the oil business looks like going forward, including we mitigating in that our longer-term collection strategy given the overdue receivables.

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Orest Wowkodaw, Scotiabank Global Banking and Markets, Research Division - Senior Equity Research Analyst of Base Metals [36]

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I appreciate that. But I am not sure you answered the question in terms of is there actual oil production next year if Block 10 doesn't hit.

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David V. Pathe, Sherritt International Corporation - President & CEO [37]

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Yes, well the oil contracts as they are will continue and for the time period left in those contracts. I am not sure what the expiry date is on the production contract that is there. But that business still is pretty -- has relatively narrow margins. And then we would expect to see the declined rates, but I believe that contract runs until '23 and so that business will be in somewhat of a continuing, and the existing production will in kind of the runoff mode that it is in now.

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Operator [38]

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We have now reached the time limit available for questions. I will turn the call back over to David for closing comments.

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David V. Pathe, Sherritt International Corporation - President & CEO [39]

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Nothing much further from me beyond to thank you once again for taking the time for joining us. Obviously, a lot going on in the world and for us in particular. We will speak to you again when we report Q1 early in 2020. And, hopefully, between now and then we will have some news for you on Block 10. So thanks for joining us, again speak to you soon.

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Operator [40]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating, and you may now disconnect.