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Edited Transcript of S.TO earnings conference call or presentation 27-Jul-17 2:00pm GMT

Thomson Reuters StreetEvents

Q2 2017 Sherritt International Corp Earnings Call

TORONTO Aug 12, 2017 (Thomson StreetEvents) -- Edited Transcript of Sherritt International Corp earnings conference call or presentation Thursday, July 27, 2017 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Andrew Snowden

Sherritt International Corporation - CFO and SVP

* David V. Pathe

Sherritt International Corporation - Chairman, President & CEO

* Flora Wood

Sherritt International Corporation - Director of IR

* Stephen James Wood

Sherritt International Corporation - COO and EVP

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Conference Call Participants

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* Greg Barnes

TD Securities Equity Research - MD and Head of Mining Research

* Kevin Bradley Cohen

Imperial Capital, LLC, Research Division - MD

* Orest Wowkodaw

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

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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to today's Sherritt International Corporation Second Quarter 2017 Results Release Conference Call and Webcast. (Operator Instructions) I would like to remind everyone that this conference call is being recorded today, Thursday, July 27, 2017, at 10:00 a.m. Eastern.

I would now like to turn the conference over to Ms. Flora Wood, Director, Investor Relations. Please go ahead.

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Flora Wood, Sherritt International Corporation - Director of IR [2]

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Thank you, everybody, who has joined in the call this morning. I'll remind everyone that we do have forward-looking statements that you can (technical difficulty) Forward-looking statements apply to comments we make in our remarks and then also later on in the Q&A.

With me today in the room, I have David Pathe, CEO; Andrew Snowden, CFO; and Steve Wood, COO.

And I will turn over to David.

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

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Okay. Well, thank you, Flora. Good morning, everyone. I know from the calendar, there's quite a number of companies out with earnings last night and this morning, so I know it's a busy day. So thank you, everyone, for taking the time to join us this morning. I'm -- we're going to do what we normally do here. I'm going to touch on a few highlights and talk a little bit about nickel and cobalt. And then we'll have Steve talk -- give you a bit of an update on operations, and Andrew will talk about the finance a little bit before we come back and take your questions.

Starting into the slides then. On Page 3, there's a few of the highlights from the quarter. We ended the quarter with cash balance still strong, it was up at $274 million, including the little debt repayment again in the quarter. Q2 is traditionally a heavy cash quarter for us based on the timing of interest payments on our debentures and the timing of cash and the seasonality in fertilizer receipts. Andrew will talk a little bit more about that.

We also had some reductions in our CapEx. Our oil CapEx was up by about $20 million. That reflects the savings in -- that we're able to realize in our drilling costs in Block 10 that we talked about last quarter. We've also deferred some seismic we're going to shift to one of our other newer blocks in Q late this year into next year. There is potential for some further capital reduction, and I'll touch on that a bit towards the end.

Over on to Slide 4. Just a quick summary on our Ambatovy restructuring transaction that we announced during the second quarter. This is the solution to our "40 for 12" issue that we've had in our Ambatovy capital structure that we've been dealing with really since financial completion in October of 2015. The basic deal is still there and that we will see ourselves go from a 40% equity interest in the project to a 12% interest. In exchange for that, we will essentially remove the $1.4 million -- $1.4 billion in nonrecourse debt that is effectively linked to the 70% of our 40% interest in the project. We continue to work through that with our partners, while we're on the verge, we hope of finalizing definitive documentation and still on track for a closing, hopefully, right into Q3, if not Q3, the end to Q4 turning largely on the timing of getting the senior lender consent.

In the [meantime], you'll see that Ambatovy still continues to flow through all of our financial statements at a 40% rate even though our interest is effectively now 12%, given where those partner loans are. And we'll look to see that better reflected the economic reality of that reflect in our financial statements once we get this deal closed.

Moving on then to nickel and cobalt markets. Slide 6, really, tells 2 different stores based on what we're seeing in nickel and cobalt so far this year. Nickel has had a tough first 6 months. You can see it's off 10% or so far in 2017 after a bit of a rally in late last year. Certainly, pressures on availability of ore out of Indonesia and the Philippines is weighing on prices at the moment. But we have seen a little bit of an uptick and a rally in the last few days. We are still actually quite confident that we will in time see more of a bifurcation in nickel market as we come to understand and the market comes to understand that the difference in different types of nickel. We produce class 1 LME-grade nickel at both of our operations. And that goes towards not just stainless steel, but also for battery demand, which is really what's driving the cobalt price.

On nickel demand, we have seen stainless remain relatively flat and that availability of ore out of Indonesia and the Philippines for nickel pig iron, while potentially growing in size, it's really only available for stainless consumption and that is what's weighing on the price. However, if you look at class 1 nickel and primary nickel, we've seen really the -- that's where the growth and demand is really coming from on the back of an expected growth and for battery production. And we've been in deficit for primary nickel for the last few quarters, and I'll touch on that a bit more as we look at inventories in a moment.

Cobalt, on the other hand, is continuing and accelerating the great run it got on in the second half of last year. And we saw cobalt prices run significantly in the second half of 2016 and not progress as continued in the first 6 months of 2017. Cobalt now is trading at $27, $28 a pound, up from lows of $9 or $10 in the middle of last year. We started the year with an estimate internally in our cost forecasting of $14. And we've upped that to $24, and that's partly what's behind our reductions in our cost guidance this year, but even spot prices, even that's now looking a bit on conservative side.

Over the page, you do see the charts showing global nickel inventories in the last few years. We have talked about LME inventories in the past that maxed out last year around 425,000 tonnes. They came off to around 375,000, 380,000, but they've been kind of stubborn with more or less at that level for the last few months.

Looking at nickel inventories in total, however, we are seeing more of a decline. We've gone below 500,000 tonnes in terms of global nickel inventory for the first time in a couple of years, and from there, peak global nickel inventories are off about 15% so far. As I mentioned, in the data from CRUs as of for the last probably 6 quarters now, there's been a deficit between our production and consumption of primary nickel, and I think that's what's starting eating into that inventory, and we expect to see that trend continue as the consumption and ramp-up that we're expecting to see in battery and other more sophisticated applications of nickel beyond stainless steel for which only primary nickel can be comfortably used and the Indonesian and Philippine ores don't contribute to that supply.

Cobalt has been quite in the story lately. The Slide 8 just shows you a few of the headlines there and what's the attention that cobalt is drawing. Driving it is this focus on electric vehicles, and the trend on that is -- and forecast over the rate of adoption for the next 10 years vary quite widely, but they all see much more aggressive adoption and usage of electric vehicles in over the next 10 years. In the last few months, we've seen automotive manufacturers make greater commitments to battery and electric vehicles. Volkswagen's talking about all electric and hybrid vehicles by 2019. Similarly, we've seen countries mandating the use of electric vehicles or at least looking to eliminate the use of internal combustion engines. France, China, has a big push on this. The U.K. just in the last few days looking to eliminate internal combustion engines and new vehicles by 2040. And as a result of that, we are seeing battery manufacturers looking to focus on security and supply for cobalt.

Cobalt's contribution to us is, obviously, significant, particularly at Moa, where we have a very strong cobalt-to-nickel ratio. We produce about 8 pounds -- 8 or 9 pounds of nickel for each pound of cobalt, making it one of the higher cobalt-producing relative operations in the world, which is most relevant to us because it's Moa is the -- of our 2 nickel operations where we actually see the immediate cash benefit. Despite that 8 or 9 to 1 nickel-to-cobalt ratio, you can see on the chart here that 30-odd percent of our revenue in Moa came from cobalt, 45% came from nickel. Just to give you a sense of the exposure we have to nickel and cobalt, every $5 change in the cobalt price is worth about $26 to us, and that's out of 50% share at Moa. $1 change in the nickel price is worth about $45 million, $46 million to us at Moa.

Lastly, for me on Page 10 there, you see the nickel industry cost curve that we typically look at each quarter. Just a couple of comments on that for me. This quarter, we've tried to highlight the operations on that curve that we do have the benefit of some cobalt credit. You can see they are largely congregated down the lower end of the cost curve. Because of that, the increase in the cobalt credit that we and other producers are seeing, we did see the 25th percentile on the cost curve come down quite a bit -- well, not quite a bit, but at least to down a little bit. Conversely, the net direct cash cost up to 50th percentile stayed relatively flat in the quarter. I think, we're only reflecting that absent in by-product credits does not relay much more ability for the industry to lower costs beyond where we are today.

The other point I'd just make on this, and we've been making this point for a while is that you see the spot for year-to-date price there could cut through the graph, and it still shows that 35% of the industry is underwater on a cash margin basis. While that has persisted for quite some time, we continue to believe that, that is not sustainable over the long term, and you are starting to hear a bit more talk in the industry, again, now particularly having been through a period of particularly low nickel prices, again, in the first half of this year, about whether there's going to some supply-side response to that in response to lower nickel prices.

That's what I wanted to highlight for you this morning. We will come back, as I say, and take your questions at the end. But now I'm going to ask Steve to just touch on a few operational highlights for you before we go to Andrew.

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Stephen James Wood, Sherritt International Corporation - COO and EVP [4]

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Okay, thanks, Dave, and good morning to everyone. As usual, I'd like to begin by commenting on our safety and sustainability efforts. We continue to work hard in the area of safety to ensure that all people at our sites go home safe and healthy every day, and we're seeing good results coming from those efforts. For example, at Fort - Fort Saskatchewan that is, oil and gas, and the Ambatovy operations have been lost time injury free thus far in 27 -- I'm sorry, 2017 with combined numbers of over 15 million hours since the last LTIs. Moa, on the other hand, has not had the same success, and we continue to work with our partners there on this subject.

On sustainability, I'd like to point out that Sherritt's annual sustainability report was released June 13 and can be viewed at sustainability.sherritt.com. It outlines the company's sustainability approach and our performance.

On to Slide 12 now. Moa's nickel production was lower than expected, with our sales being about 100 tonnes less than production. Cobalt production held up better, although lower than that of Q1 this year. Dave talked about the positioning of our operations on the cost curve. And I'm very pleased to see that Moa's costs are competitive with nickel sulphide mines.

I'd like to take a moment to talk about fertilizer as well, as it's a very unusual for a fertilizer to be a net cost in the NDCC breakdown rather than a credit. I'll remind you that the other line item aggregates fertilizer credits and marketing costs and discounts as well as other byproducts like sulphuric acid. This year, we have lower fertilizer margins as we're squeezed at both the price end with continuing price pressure and the cost side because of our planned shutdowns. Ambatovy production year-to-date of 18,150 tonnes means the operation has to produce 23,350 tonnes in the second half to get to the midpoint of our most recent guidance, which is within the range of previous rates, by the way, as recently as Q4 of last year. The impacts to production in the second quarter stemmed from limited asset availability following the molten sulphur tank failure in February that we reported on previously, and subsequent issues at the acid plants along with some lower recoveries in PAL due to lower CCD thickener availabilities.

I'll spend some time on the guidance to outline what has happened at Ambatovy in the first half and what's been addressed. And I'll outline what's still ahead of us there. As you can see from the charts, NDCC is an improving story for both Moa and Ambatovy, and Andrew will speak more to the NDCC guidance later on.

On the energy slide, Slide 13, we had another good quarter for Cuban oil production, and power production is similar to its levels of last year. We saw a slight increase in oil unit operating cost with a natural decline in production rates. Powers' unit operating costs continue to fluctuate mainly with the scheduling of major inspections. The oil average reference price, Gulf Fuel Oil No. 6, continues to hold at around 88% to 90% of WTI pricing, a much more comfortable place to be than what we were in the first half of last year, where it was more like 66%. Our next milestone in oil is the drilling of the second Block 10 well, which is expected to start in August. This well will target the lower (inaudible) using the first 3,300 meters of the previously drilled well. We're just waiting for importation permission for certain materials and supplies that are required for the drilling of this second well, which includes the loss circulation materials required in dealing with a massive loss circulation we encountered in the first well. With this material, we will be prepared to implement methods that have been successful in Western Canada in dealing with similar situations. We expect to be in a position to increase results in the fourth quarter of this year.

My last slide, Slide 14, reiterates our guidance for the rest of the year. As you know, we are reducing production guidance at both Moa and Ambatovy. We're also reducing or narrowing the NDCC ranges and the expected CapEx. Andrew will speak to the NDCC and CapEx, and I have a few points to make on the production guidance revisions.

Starting with Moa. I think this one is fairly straightforward. A 1,500-tonne revision, mainly due to the decision not to add some third-party feeds and to recognize, to a lesser degree, the lower production at the Moa mine. Dave talked earlier about what might be the leading indicators for changing market demand for nickel, and one is the third-party feed market. There is clearly of tightness developing in the third-party feed market. The third-party feed sellers are able to improve their economics. The reduction at Ambatovy is more significant, and it takes us back to production levels closer to those of last year. While the results for the first half are quite disappointing, much of the loss was associated with the deteriorated condition of the sulphuric acid plants. Ambatovy has taken over full operation and maintenance of these plants and has put in place mitigations that now have the plants running at full capacity with full acid storage tanks. By operating at or near design rates for long periods of time, Sherritt has demonstrated that the flow sheet not only works as designed, but can work well in Madagascar. There are no fatal flaws. It is various equipment failures that have prevented sustained operation at design rates, and Ambatovy is well advanced in implementing a world-class asset management program to address this for the life of the operation. Many of the failures are the result of legacy design and materials of construction choices, and these are being addressed in a prioritized manner. For example, the major electrical issues that plagued the operation in previous years has been all but eliminated, with no total blackout event experienced since October of 2016. In the PAL area, 19 rubber-lined tanks have been reskinned with alloys, with 7 more planned to end in 2018. And by the end of 2017, Ambatovy will have replaced 10 to 12 major-risk rubber-lined pipe runs with alloys. Aside from production, Ambatovy has established a very stable, safe and cost-effective business that is poised to deliver strongly on its profitable -- profitability potential, as the effects of the asset management program kicks in and the nickel price improves over the coming periods. For example, Ambatovy has achieved world-class safety performance, with only one loss time injury in the last 22 months and is delivering second quartile NDCC, despite operating at 60% of design capacity this year-to-date. To achieve our revised production guidance for the year, Ambatovy will need to deliver in the second half at rates similar to those achieved in Q4 of last year. We also point out that this forecast anticipates a stronger Q4 than Q3 as we have some maintenance shutdown scheduled in September. With regards to oil, gas and power business, there are no changes to production guidance.

With that, I'll hand it over to Andrew, who will talk about NDCC and CapEx revisions next.

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Andrew Snowden, Sherritt International Corporation - CFO and SVP [5]

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Thank you, Steve, and good morning, everyone. I just have a couple of slides to talk to this morning, starting on Slide 16, which provides a bit more detail on our net direct cash costs for the quarter at both of our nickel operations. As Steve has already mentioned, despite the lower production in the quarter, we did post a very competitive NDCC numbers at both of our nickel operations, particularly at Moa, which came in within the lowest quartile, which is a great achievement. As you can see at the bottom of the slide here, really one of the key drivers behind the NDCC numbers for the quarter was the strong by-product credits we received on the cobalt side. When compared to Q1, in the second quarter, we saw realized prices for cobalt of approximately USD 25 a pound, which compares to around USD 19 a pound in the first quarter as that really helped us to improve our NDCC number.

As Dave has already referenced that cobalt price and the strength we've seen in the cobalt price year-to-date has allowed us to revise our NDCC guidance for the year, and we've lowered our guidance there at both the Moa and Ambatovy operations, which reflects an increase in our assumption from $14 a pound, which where we were at the beginning of the year from our forecast perspective, to around $24 a pound within our latest forecast, and there's still, of course, room for further upside there.

The reason why our NDCC forecast is not even lower than we are disclosing is because it also reflects the lower production guidance that we've adjusted for the year as well. So both the lower production and an improved cobalt price are being reflected there.

Looking at our mining processing, mining costs and this slide there provides a breakdown of the cost profile at both Moa and Ambatovy. There's very little change when you look at that from a high level. There's just a couple of things I'll just point out. Within Moa, the costs that were attributed to maintenance slightly increased in the second quarter as compared to the first quarter, you can see from that slide, and that was primarily driven by the annual shift down at the refinery and fertilizer operations within our Fort Saskatchewan location. Secondly, at Moa, and this is something that isn't clearly evident from the slide, but we do continue to benefit from a third acid plant at Moa. And to put that benefit in perspective, in the second quarter, our total sulfur and sulfuric acid purchases were around $0.66 a pound, and that's compared to $1.29 a pound in the equivalent period last year. So in excess of a $0.60 per pound saving, and we achieved that same saving in the first quarter, and we'll expect that to continue going forward.

At Ambatovy, the one cost item there which, obviously, dominates our overall mining and processing costs, you can see, continues to be maintenance. And that portion there is still high compared to where we expect it will lead to. And we think -- we feel over time that will trend towards level similar to the Moa mine site, and that will be as a result of the focus on asset reliability that Steve spent some time talking about earlier on.

Turning now to Slide 17. We have the usual cash waterfall there, which shows the changes in cash from December of around $310 million to the balance at June, which is approximately $275 million. The main drivers for that change you can clearly see from the slide, we have $30 million of interest paid on the debentures and then approximately $27 million paydown on our revolving credit facility, which really declined our cash balance over that period. Those decreases there have been offset by a couple of items. One, you can see in the first column there, we generated around $32 million of operating cash flow, which primarily came from the good performance of our energy operations. And also, you'll see that we received $8.6 million from advances and that's related to advances that we provided to the Moa Joint Venture. And then that's a good news story from my perspective, in that despite a $4 a pound nickel price environment that we saw for much of the quarter, we were able to generate sufficient cash flow from the Moa Joint Venture to pay down some amounts owed to Sherritt, and that really reflects a strong operating top performance that we were able to achieve over at Moa during quarter.

The final point on the slide is to mention briefly the capital expenditure, which is around $11 million for the year-to-date. The capital expenditure will increase during the second half of the year, as has already been mentioned, and that primarily is relates to the drilling on the second well at Block 10. Overall, we did reduce our capital guidance by around $20 million for the year, and that what Dave's already mentioned, relates to the lower cost of drilling a second well as well as deferring the seismics on Block 8A.

That concludes my remarks this morning, and now I'll turn it back over to Dave.

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

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All right. Thanks, Andrew, Steve. Just before we take your questions, I want to just give you a sense of kind of what to look for from us in the second half of this year. We should see our Ambatovy transaction will finally come to fruition and then close, hopefully, in time to see that reflected in the third quarter financial statements, but if not, in time for year-end. We should see the continued benefit of the significantly improved cobalt prices flow through our results and cash flow from the Moa Joint Venture. We will have our Block 10 year-end results for you before the end of the year that will give us a sense of where we're going next year in terms of Block 10 development. I also touched on the possibility of further capital reductions in the oil and gas business. We are, at this point in time, in conversations with our Cuban partners down there in CUPET, the state oil company, about extensions to our existing production-sharing contracts that are due to expire at the end of this year and next year. And at this point, we're anticipating that we'll be able to get that done before the first of those contracts expires in November. And the greatest immediate advantage of that would be in addition to being enable us to sustain some level of production as we look to bring Block 10 online and potentially other blocks that we were talking about would be a potentially further reduction in capital as a result of money that we currently have earmarked for acquisition of new equipment that we'd otherwise be due to revert back to the Cubans at the expiry of those contracts. So we'll have more for you on that follow as well.

Lastly, before I open it up to the operator to take your questions, I do -- and so a number of you are aware of this already, but I wanted to highlight that Flora Wood, our Head of IR, is leaving us at the end of this week after a little over 2 years here, I believe. I just want to thank Flora for her contributions to Sherritt and the difference and help she's been to us and our ability to communicate with you and tell our story. She will be greatly missed, but she's been a great help to us seeing us through the quarter end here. Going forward, Joe Racanelli, who is, I believe, known to some of you already, will be joining us in a couple of weeks’ time to help us through the next little while here, and then we'll be on to see how we handle this longer term after that. But on behalf of everybody here, I want to express my thanks and gratitude to Flora and wish her the best of luck in her new pursuits, and we're going to miss you here.

Operator, with that, we'll take any questions anyone may have.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll go first to Kevin Cohen of Imperial Capital.

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Kevin Bradley Cohen, Imperial Capital, LLC, Research Division - MD [2]

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Certainly, appreciate the granular color in the prepared comments. I guess from a couple of different perspectives. I wanted to touch on the Ambatovy as it relates to the exit. I'm just wondering, the transaction fees and other closing costs still to be finalized, is there any sort of thought if that'll be kind of similar to the USD 30 million and the first bullet point under estimated cost? I mean, will the total outflows occur by the end of 2017? Or does some of those occur in 2018?

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

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Kevin, there will be transaction costs in terms of banker and lawyer fees, consent fees to the senior lenders. There's going to be some stamp duty payable in Madagascar, and on the equity transfers, that's still being sorted out. That will be some number, million of dollars all-in. I would think. And if we do, depending on when we close, I would expect most of that will be incurred and spent before the end of the year.

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Kevin Bradley Cohen, Imperial Capital, LLC, Research Division - MD [4]

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That's helpful. And then looking at the organic sort of cost performance at the Moa JV, there's certainly a bit of noise in the quarter. But just kind of thinking excluding cobalt credits and sort of directionally where that goes, how do you guys kind of think about that over the next kind of 2 to 4 quarters, maybe, where that starts to settle out when you look at it more organically, just the mining, processing and refining costs, et cetera?

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David V. Pathe, Sherritt International Corporation - Chairman, President & CEO [5]

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The by-product credits always introduce some noise into the net direct cash costs. Both fertilizer does move our -- at Moa around seasonally somewhat, and fertilizer prices have been low. Obviously, we aren't getting the benefit of stronger cobalt pricing here. But the last time we had net direct cash costs at the level they're at today was in 2008 when we had the benefit of $45 a pound cobalt by-product credit. So there has been progress made on the costs side beyond just riding the back of higher by-product credits, you see that in our acid plant that we completed last year and other efforts that we've had, both in the mine in Moa and the refinery in Fort Saskatchewan to lower costs and be more efficient. And that, I believe, is sustainable going forward here for the next few years. We see pretty consistent grades coming out of Moa. I think the cost achievements that we've been able to make beyond commodity price noise in the last couple of years are meaningful and sustainable.

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Kevin Bradley Cohen, Imperial Capital, LLC, Research Division - MD [6]

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And then just one last question. Kind of thinking about Block 10, assuming that there is a successful outcome on that front. I guess, how do you kind of think big picture zooming out about sort of the potential total CapEx budget? And how the company might approach that over the next kind of 1 to 2 to 3 years or whatever that time frame might be?

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

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I think, we'll have more clarity for you on that after we see what the results look like out of this next well. In addition to the potential extensions, we are looking at another opportunity in Cuba that could also be in a development position by next year. And so I'm hoping we'll have more of that over the course of this fall. They have the potential, I think, to absorb a lot of capital, if we want them to, in terms of the capacity of these fields to support a significant sized oil business for quite a long time. What we've said in the past is we have a pretty high degree of flexibility to flex the capital spending at a rate at which our balance sheet can absorb, and it also is linked to the timing of receipts on Cuban receivables. But as we get a greater clarity and ideally some success on the second attempt to pierce the reservoir and drilling of Block 10, which some results coming out of that later this year, I think we'll be in a position then to give you more insight as to how aggressively -- how aggressive the drilling campaign might be next year on Block 10 and the other areas in Cuba.

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Operator [8]

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Up next from Scotiabank, we'll go to Orest Wowkodaw.

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Orest Wowkodaw, Scotiabank Global Banking and Markets, Research Division - Equity Research Analyst of Senior Base Metals [9]

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Just a quick question. With the closing of the Ambatovy transaction, potentially moving, or at least extending to the end of the year, and the result of that being you're going to carry that at 40% until it closes, does that mean that will there be another catch-up for -- in terms of that 40% your funding requirements, call it, to the end of this year? And do you have an estimate of what that could be in terms of, will there be any add-on to what's already been proposed in addition to the escrow?

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David V. Pathe, Sherritt International Corporation - Chairman, President & CEO [10]

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The short answer to that is, no, Orest. You know, we haven't funded at 40% rate since we achieved financial completion in October 2015. The -- and for all of the noise in terms of production levels at Ambatovy, Ambatovy every quarter from Sherritt's perspective has been no cash in, no cash out. So from a cash position, it's all neutral. The deal in under "40 for 12" does see us playing catch-up on all the funding that has gone into the project. But at a 12% rate from October 2015, not at a 40% rate. And I think the numbers you see in the presentation today, in terms of the split between catch-up numbers into Ambatovy and amounts going to escrow vary a little bit, but sum of the 2 is the same. But there's been a bit more into Ambatovy catch-up and a little bit less into escrow on the basis, that there was a small cash call in June to help fund the interest payment. Given Ambatovy's production in the first 6 months, it didn't have the cash to make that. In terms of whether that changes anymore between now and closing, at this point, my expectation would be that it doesn't. Obviously, the Ambatovy has another cash call to make in December. But with prices where they are now, I'm assuming we can hit some reasonable level of production, Ambatovy should be able to generate sufficient cash to be able to make its interest payment. Any further cash calls that are made by Ambatovy between now and closing would just go to -- we would be -- we'd see a further reallocation of the amounts from the escrow to the amounts that go straight to Ambatovy to fund it not at a 40% rate, but at the 12% rate.

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Orest Wowkodaw, Scotiabank Global Banking and Markets, Research Division - Equity Research Analyst of Senior Base Metals [11]

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Perfect. So you're locked in effectively at 12%, no matter kind of what happens here in the second half. And then just in regards to the offsite operating performance. Clearly, it continues to struggle. Can you give us any idea on what we can anticipate from an operational or production perspective for next year? I mean, clearly, this asset is yet to reach its full potential, but is there -- do you think it's possible that it could never get there at this point?

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David V. Pathe, Sherritt International Corporation - Chairman, President & CEO [12]

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We -- for all of the various issues we've had down there in the last couple of years, Orest, there's still nothing there that leads us to believe that this can't get to 100% or north of 100% in terms of its throughput capacity. We've had quarters or extended periods of time down there where it's done that, and we've been able to put together a good quarter. Our challenge is we haven't been able to string together a few good quarters, and that's what this -- all this asset reliability focus that Steve has elaborated on a little bit has been focused on. I know it's not shining true in the production results on the quarterly basis yet, but Steve was trying to give you a flavor that we do feel like we're making progress down there. And when is the end of this is, I'm afraid a bit of a how long is a piece of string type of question, but we do remain confident that there is an end to this, and that this asset is capable of producing that with the throughput the rates it was designed to do. And I think that the cost numbers that it's put up to date, even with relatively poor production, it demonstrates that it can be a viable and profitable asset as well.

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Orest Wowkodaw, Scotiabank Global Banking and Markets, Research Division - Equity Research Analyst of Senior Base Metals [13]

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Okay, and maybe just as a follow-on, in terms of, should we think of 2018 as kind of another catch-up year to fix some of the engineering issues and design issues? Or -- I guess, I'm trying to get a sense of how far away do you think you are from reaching that potential?

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David V. Pathe, Sherritt International Corporation - Chairman, President & CEO [14]

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Yes, I mean, to give you a sense, I think we'll be looking for Ambatovy. I don't have a number for you today, but Ambatovy will be -- I would expect full year guidance for Ambatovy in 2018 will be higher than what guidance was for Ambatovy before the reduction for 2017. But I would guess it's -- we're not going to be full capacity.

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Operator [15]

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We'll hear next from Greg Barnes of TD Securities.

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Greg Barnes, TD Securities Equity Research - MD and Head of Mining Research [16]

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I guess returning to Ambatovy again. On the acid plant, I think from your comments, you suggested that, maybe, it was being run by a third-party and you have now assumed operatorship, is that right?

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

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Yes. The acid plant was being run by a contractor, who is no longer on-site.

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Greg Barnes, TD Securities Equity Research - MD and Head of Mining Research [18]

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So the implication is they were not running it well or not maintaining it as well as they should have been, is that correct?

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David V. Pathe, Sherritt International Corporation - Chairman, President & CEO [19]

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Yes, I would agree with that, Greg. And I'm only hesitant because I'm not sure what I'm allowed to tell you here. But yes, it's fair to say that we were not satisfied with the performance of the contractor in the way the acid plant was being run, and as a result, they are no longer running it.

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Greg Barnes, TD Securities Equity Research - MD and Head of Mining Research [20]

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Okay, and secondly then on the counter current decantation, you said it didn't -- it was lower in the quarter availability. I know you've had problems there before. What where the issues this quarter and how do you fix them?

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David V. Pathe, Sherritt International Corporation - Chairman, President & CEO [21]

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I'm going to ask Steve to just touch on that. There really -- it wasn't this significant in terms of the chemistry that we had in past go rounds on those 7 big CCD tanks that you've seen down there, Greg. But do you want to just touch on what the issue was, Steve?

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Stephen James Wood, Sherritt International Corporation - COO and EVP [22]

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Yes. The main issue we had there was a drive motor and coupling that weren't working, and we had to put it down and shutdown one of the CCD thickeners to allow us to do the repairs, so which means that the remaining thickeners, of course, because we have a few of them are less effective as a total then when you have all of them. Does that answer your question?

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Greg Barnes, TD Securities Equity Research - MD and Head of Mining Research [23]

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Yes, that resolved then?

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Stephen James Wood, Sherritt International Corporation - COO and EVP [24]

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Yes, that's once been resolved.

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David V. Pathe, Sherritt International Corporation - Chairman, President & CEO [25]

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A mechanical failure then that's been resolved rather than a chemistry process issue like we were having 18 months ago or so.

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Greg Barnes, TD Securities Equity Research - MD and Head of Mining Research [26]

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Okay, right. I guess the question that Orest had just now is looking into 2018, are there any potential areas of the plant where you do see issues or you're getting to the point now where you feel you've got most of this nailed down? I know Steve, you addressed that somewhat in your comments. But is it -- I think you got the acid plant nailed down, the CCD sounds like it's better, where is the next flashpoint for you, Steve?

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Stephen James Wood, Sherritt International Corporation - COO and EVP [27]

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So another area we're focused on is dealing with corrosion issues because we are near the ocean and because it is a sulphur-based plant, if you will, you're going to have a lot of corrosion. And we've undertaken an asset integrity program to -- and we've already identified where those critical items are, and over the next 1.5 years or so addressing those, and then putting in a program where we will be, on an annual basis, inspecting for corrosion and replacing and repairing as needed. So there would always be some corrosion work going forward. But we're playing a bit of catch up on that for this next -- for the near term.

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Greg Barnes, TD Securities Equity Research - MD and Head of Mining Research [28]

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That's not corrosion within the process. That's corrosion of the actual infrastructure itself due to the location of the plant next to the sea.

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Stephen James Wood, Sherritt International Corporation - COO and EVP [29]

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For the most part, yes.

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David V. Pathe, Sherritt International Corporation - Chairman, President & CEO [30]

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Just to put that in context though, Greg, in terms of what Ambatovy means to us today, for all the issues Ambatovy's been no cash in, no cash out from Sherritt's perspective for 2 years. We'll close our deal here sometime before the end of the year and put up the money to catch up on the 12 and the escrow. With a reasonable levels of production and commodity prices around where they are now, Ambatovy should be able to be, at least, cash flow-neutral between now and 2019. And so we would expect Ambatovy will continue to be no cash in, no cash out for the next couple of years. To the extent there is some small requirements, the escrow should be more than sufficient to cover it, and where the rubber will hit the road a bit more is in 2019 when the a deferral period on the amortization schedule expires and the project once again has principal repayment obligations on the project financing down there where even if it's running reasonably well, we'll need nickel prices a bit north of where they are today for the project to be able to generate sufficient cash flow. But from our perspective and what we've liked about what we are achieving with this transaction, in addition to getting at $1.4 billion of our balance sheet and reducing the debt down to less than $1 billion is that certainty that in terms of cash demands on Sherritt's balance sheet are minimized.

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Greg Barnes, TD Securities Equity Research - MD and Head of Mining Research [31]

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So you've got about a 18-month window towards 2019 before you really have to worry about it too much, basically, is what you're saying?

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David V. Pathe, Sherritt International Corporation - Chairman, President & CEO [32]

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Yes.

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Operator [33]

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(Operator Instructions) And it appears there are no further questions at this time. I would like to turn the conference back over to Ms. Flora Wood for any additional or closing remarks.

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Flora Wood, Sherritt International Corporation - Director of IR [34]

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Okay, thank you, Sara. Thank you, Dave, for your remarks. I'm going to miss you guys. And to everybody who joined the call, I hope to talk to you in my new gig, and Joe will be happy to be speaking to you when he starts in August. Thanks.

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Operator [35]

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And ladies and gentlemen, again, that does conclude today's conference, and we thank you, all, for joining.