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

Thomson Reuters StreetEvents

Q1 2017 Sherritt International Corp Earnings Call

TORONTO May 2, 2017 (Thomson StreetEvents) -- Edited Transcript of Sherritt International Corp earnings conference call or presentation Thursday, April 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 - CEO, President and Non-Independent Director

* 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

* 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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Welcome to the Sherritt International Corporation First 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, April 27, 2017, at 10 a.m. Eastern Time.

I will now 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, Angelie, and good morning, everyone, I'd like to remind you that the forward-looking statements that are on the Slide 2 are -- apply to both the remarks today and to anything we say in the Q&A. Want to introduce the speakers I have in the room, which are David Pathe, President and CEO; and Andrew Snowden, CFO. And we also have Steve Wood, COO, who's dialed in today from Ambatovy.

And with that, I'll turn it over to David Pathe.

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David V. Pathe, Sherritt International Corporation - CEO, President and Non-Independent Director [3]

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All right. Thank you, Flora, and thank you, everyone, for joining us again today. Good morning. We're going to do what we usually do here. I'm going to touch on a few things that I wanted to highlight for you off the top. And then if we've got the technology in place, Steve's going to give you a quick update on operations from Madagascar, and Andrew will touch on financing before we come back and, as always, take any questions you may have.

Starting on Slide 3 then, a few highlights. A stronger quarter for us from a cash flow perspective. And over last year, we had positive cash flow of about $10 million with cash flow out of all of our businesses in Moa, power and oil and gas. It's about a $40 million swing from the same period last year when we saw multiyear lows in nickel, cobalt and Fuel Oil No. 6 pricing. That enabled us this quarter, with our focus on liquidity and cash preservation, to pay off a little more than $20 million in credit facility debt and still finish the quarter with north of $300 million in cash.

It was a stronger quarter for us in terms of Cuban receivables collection. And that's obviously, been a focus of ours, and we've been spending a lot of time with our partners in Cuba, working closely with them on that. We received almost USD 38 million in the quarter, which is a nice improvement over about the USD 18 million received in the end of fourth quarter of last year.

Steve will talk about operations. In the next couple of minutes here, I'm going to just touch on Block 10. You would've seen our release a few weeks ago on the results of our initial drill hole on our new Block 10 [there]. I'm going to talk a little bit more about what we learned from that hole and where we're looking to go from here on Block 10. And I'm going to talk a little bit about nickel markets in just a moment here.

The one thing I don't have for you today is any update on our Ambatovy discussions beyond this -- to tell you that there are still ongoing and are still constructive. Nothing has changed in our objectives in terms of trying to work towards a solution to what we've now talked about for a year as our "40 for 12" issue and trying to progress towards a "12 for 12" type solution. I'm sure everyone's aware that our current waiver expires on the 2nd of May, and we expect to be back to you before then with an update.

Over the page then to just look quickly at nickel and cobalt markets. As we talked at the end of last year, it was a -- 2016 was a further decline in terms of realized price over the year from 2015. But we did see an uptick over the course of the year from the beginning to end of 2016, pricing -- where prices were up close to 20%. We did get as high as little north of $5 late last year. Generally, the trend in the force -- in the first quarter this year has been downward again with really not much direction in the nickel market. I think that's really attributable to lack of certainty and clarity around both increases in supply, potentially added Indonesia and what impact that may have on overall market supply relative to potential decreases in supply out of the Philippines.

We are still seeing generally the analyst forecast consensus around deficits in supply and demand over the next few years. And that is still expected to materialize, but we haven't seen really the significant movements down in LME inventories yet. After topping out at about 425,000 last year, they did move down to around 370,000, 380,000. But they seem to be stalled there somewhere, and I think there's some expectation and waiting to see whether those inventories are going to continue to decline before we start to see if it -- more strength in the nickel market.

From our perspective, we're still seeing strong demand. We're not having any trouble placing the product. The demand side anecdotally for actual physical metals from our perspective, that continues to be pretty strong.

Cobalt is obviously much more of a story, as there is a much clearer direction what's going on in the cobalt market. After seeing a decent uptick in the latter part of 2016, that trend has continued and accelerated in the first quarter this year. We've seen cobalt prices move in the last 6 months or so from bottoming out below $10 to now probably in the neighborhood of USD 25. And that's driven in large part by increasing demand and expectations of ever-higher demand relating to electric vehicles, probably driven as well by lack of clarity on where that future supply is going to come from, given that cobalt is bit of a different market than other base metals given its high portion of byproduct production.

Over on Page 6, we just dig a bit deeper into the cobalt market. It's not a very big market relative to nickel or certainly to other base metals. It's not much more than 100,000 tonnes a year. And unlike most base metals, it's almost all byproducts, so the ability for supply to response to increases in the cobalt price is limited because most of the supply is really a byproduct of either copper or nickel production. And the little pie charts on the left-hand side of Slide 6 gives you a sense of that.

Sherritt, between our 2 operations in Moa and Madagascar, on a 100% base, produce about 6% of the world's total cobalt supply. And I think, putting further pressure on the cobalt market generally is a -- there is a high concentration of cobalt supply coming out of the DRC, and there's certain increased political risk there -- and concern around political risk. An additional factor that I think gets a little less attention is the -- some of the other geopolitical concerns around the DRC and supply concerns around the nature of that supply. We are seeing cobalt consumers now actually looking for certifications and guarantees that -- and as the production methods of the cobalt not involving child labor and other human rights concerns. And I think that is putting more pressure on pricing as well, given that a lot of the end use of cobalt obviously ends up in retail-type consumption.

Over on Page 7, you can just see a little bit there in terms of the impact that the higher cobalt prices have had on us. We are starting to see that higher cobalt pricing flow through to our revenue and in our net direct cash cost. There is generally a bit of a time lag between spot pricing and when that starts showing up and you start to see that [sparity] a bit in terms of our realized price at Moa and Ambatovy. But generally, we will be seeing the full benefit of that market price. The incremental benefit of it is a little higher at Moa than it is at Ambatovy, given the slightly higher cobalt ratio -- cobalt-to-nickel ratio that we have in the Moa JV compared with the Ambatovy JV. Roughly a $1 change in the nickel price is the equivalent of about a $8 change in the cobalt price for us at Moa. In Ambatovy, it's almost half that, so a $1 change in the nickel price to make that difference up is about a $15 change in the cobalt price at Ambatovy.

Just to take a quick look at the cost curve on Page 8 there. We've seen a little bit of movement in the curve again from Q4. [Between] the first quartile, the 25th percentile numbers actually come down a little bit. That's driven, as far as we can tell, largely by -- I think, in part by cobalt and improved by-product pricing. Certainly, the negative producers of the extreme left-hand curve there, have seen their negative price decline further as a result of, I think, greater by-product credit. And a few of the operations with larger cobalt credits and others -- credits have started to see that benefit a bit.

The 50th percentile, by contrast, has actually crept back up a bit, where they see less of the benefits of the by-product credits. And I think that's reflecting higher fuel oil and other input costs that are starting to creep back in, and the ability to continue to wring costs of operations starting to diminish.

Just to finish up from me, I do want to spend the next couple of slides and couple of minutes here on Block 10, to give you a bit better -- and a bit more insight and context around the press release that we put out a few weeks ago.

On Slide 10, you see an attempt at kind of a 3-D picture of the geology we see beneath Block 10. You can see that green oval circle on the surface there is our Varadero West block. We reproduce and really, we're just a little bit east of that on the other -- just east of Varadero, rather than west of Varadero, now in our new Block 10. You can see underneath there, that's that thrust-and-fold geology that we find all the way along that north coast of Cuba where we've been producing oil for the last 20 years or so.

Flip over to the next slide, because it actually just zeros in a bit on that cross-section where I can talk you through briefly what we found and what's -- the couple of things that surprised us in the course of drilling that first hole into Block 10. And how that is affecting our plans going forward here.

So if you look at Slide 11, you can now see the 2 sets of zones for reservoirs that we're targeting. So in rough terms here, the gray areas are what we refer to as the Vega Alta, the cap over the reservoirs. The green areas are the more -- the Veloz sections, which are more limestone-type formations where we typically find the oil. And you can see there's 2 layers of this fold-and-thrust geology where these layers get kind of pushed up over top of one another, which is what creates the geological formations to create potential oil zones.

The vertical or relatively vertical blue line you can see towards the right-hand side is the wellbore for the CUPEY-1X well that we drilled 20-plus years ago on this block that ultimately tapped into those lower reservoirs and, at least, for a short period of time, had a strong oil production showing. And that was where our target was for the original drill plan, as you can see with the line coming in from the top left and tracking down to the bottom right. So you can see the blue line from the top-left area was our initial -- where we drilled to in our first hole, and you can see what the original well trajectory was down towards intersecting with the CUPEY-1X line. And you can see how far we got before we had to abandon the well. And as you will recall from the press release, we then did drill an off-shoot from that to try and get a bit better sense of the upper zones since we were there anyway.

The original wellbore direction obviously, failed to reach its target. And that was what we announced a few weeks ago. There were 2 real reasons for that: The first as you can see, we drilled down through the Vega Alta, which is the overburden, if you were to go back to a mining term, over the reservoirs. And that is relatively unstable shale-type formation. And when you're drilling horizontally through it, you have a limited amount of time before the wellbore starts to fall in on itself because of -- from gravity, as much as anything else. And we guard against that by drilling so far and then inserting steel casing and guarding, then protecting the hole with our steel casing. When we got to the very first tip of that first green reservoir and got into the first fold of the Upper Veloz on that first green strand on the left-hand side there, we got a few meters into that and we stopped and we set our casing. So we inserted steel casing to protect the hole down to that Veloz, but then we thought we were then into the more stable limestone formation.

What happened then -- what wasn't apparent from seismic but it is now apparent from the drilling results is that, that was actually just a relatively small sliver of Veloz. And you can it in that gray finger the -- that inserts down between the first and second green zones there, actually put us back into an upper Vega -- the Vega Alta again.

So we drilled through that but that did start the time fuse on us in terms of how much time we had to get further down the hole. Because we had just set our casing, we do have -- as we start with quite a wide wellbore, about 13 inches when we're drilling at the top. And each time we set casing, you obviously lose diameter on your wellbore hole and you then drill smaller and smaller, progressively diameter holes as you get down to the [length], towards our total depth target of 5,800 meters. And our ability to get to 5,800 meters requires keeping the wellbore reasonably wide open, [first] far enough you can't close it down too far to be able to make sure you can get there.

So once we've hit that upper Vega Alta, it was necessary for us to get a certain distance down the hole again before we reset our casing, otherwise we wouldn't have enough wellbore diameter left to get to our total depth target of 5,800 meters. So at that point, we were kind of racing against time, if you will, to get far enough down the hole to be able to set casing again, maintain sufficient hole diameter but protect against that little sliver of Vega Alta there beginning to collapse in on us. So as we were drilling through the second and third and fourth zones of the Upper Veloz there, we were trying to make progress in time to be able to get our casing set and protect the integrity of the wellbore hole.

The second surprise that we had is what caused us difficulty and ultimately led us to having to abandon the hole before the -- when the Vega Alta started collapsing in on us. And that was a greater loss of circulation in our drilling mud. So that as we drilled through these upper zones, there are fractures in them, which we expect and hope to see because it's ultimately those fractures that the oil within the formations flows through. But those fractures can sometimes be significant enough that the drilling mud, as they get circulated with the bit for -- to manage friction and to ultimately bring the drilling fragments back up, we were losing that drilling mud down into crevasses. That's a phenomenon we've encountered often in our drilling in the past, up and down the coast of Cuba. And we've typically been able to deal with it by pumping sea water down the hole until you can get enough resistance against those crevasses and, again, get resumed circulation on your drilling mud.

Here, we tried that same technique but the crevasses or fractures that we were finding were greater in their size, and we weren't able to restore drilling mud circulation in time to be able to drill deep enough before we lost the integrity of the wellbore up in that Vega Alta section. So -- and that ultimately, led to the well being abandoned, as we press released a few weeks ago.

So we learned a couple of things from this exercise that changed our plans and affect what we're going to do forward. The first one is, obviously, is that we're now going to branch off because we want to get back down to that same target. The good news in this is that we -- our failure to get to the target doesn't in any way change our views on the value of the target. And we -- Block 10 and the original drill well there and our understanding of the geology of that lower section and the oil that was there in the past are unaffected by this.

It's not an adverse drilling result from negative findings. It was an adverse drilling result with some geotechnical issues that we now think we have a plan to overcome. The first is now obviously, having a better understanding of those upper zone formations from what we could discern from the seismic interpretation. We will obviously drill further into those upper zones in the second go-round before we set our casing so that we won't have that same time fuse running against us from that sliver of the upper Vega Alta.

Secondly, as we come and encounter those areas where we were losing circulation, we now know within a few meters of drilling where we will encounter those. And there are number of different tools and compounds and methods of into getting through those non -- those loss of circulation zones that are well-known and well applied in the industry. There's different compounds that can be inserted down the holes to effectively bridge across these crevasses. And there's 4 or 5 (inaudible) different options that we've identified. The problem the first go round is we didn't have any of those to hand at the time when we encountered the drilling the first time because we never encountered this before. And none of those compounds are readily available in Cuba. And so we're now in the process of actually getting those in place, and we'll have all of those different options at the ready at the top of the drill bore hole when we go back in again.

So our current thinking is to actually -- because the track towards that upper zone is where -- down through those zones to the lower zone. And our target destination is still the same place. We can actually save some money on the second drill hole by using about the 3,300 meters of the drill bore hole that we already have. And what our intention will be -- to back uphill from where we last set our casing, we will branch out of the hole and resume a trajectory very similar alongside on where we were now and go further into that Upper Veloz, with a good plan in place to how we'll get across those lost circulation zones and then proceed on down to the -- to our target zones in the Veloz formations and the -- down below the lower Vega Alta, which was our original target destination for the first well.

Our hope is to have all the material in place that we need in the coming weeks and look to be drilling sometime in late May or June. And there's probably 2 or 3 months' worth of drilling work there, depending on the rate of progress through the lower Vega Alta. But that, I wanted to just talk you through briefly, and that's a big longer than maybe would've been ideal. But I did want to give you a real sense of what it is that we're encountering, what it was that caused us the geological problems in the -- with the first drill hole, and what did we learn from that, and how we're going to address it. And just to stress once again, that it doesn't in any way change our views on the viability of the block and the presence of oil there. And now our job is to get on with getting down and actually demonstrating that.

So that's what I wanted to talk you about today. I'm going to now turn it over to Steve. And with any luck, he will be speaking to you momentarily from Madagascar. Steve, are you there?

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

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Yes, I am, Dave. And hello to everybody from Madagascar. As always, I'll start with safety. Our results in the area of safety were generally good for the quarter. And we continue to see improvements as a result of our efforts to ensure that all employees go home safe and healthy every day.

Also note, in the first quarter, we received an acknowledgment of our hard work in the area of sustainability. Sherritt was named one of the Corporate Knights Future 40 responsible corporations in Canada. And this is our first time making the list and it's a reflection of the continuous improvement in leadership and sustainability that we take so seriously.

Now on to Slide 13. Here, we'll cover the metals production and cost, and I'll start with Moa. The first quarter production is similar to the fourth quarter in 2016 and has a lot of carryover impacts from the fourth quarter. Our low fourth quarter production of mixed sulphides at Moa impacted refined nickel production at Fort Saskatchewan, both in the fourth quarter and in the first of this year, as any shipments from Moa in the month of December landed and were processed in the first quarter of this year. Add to that some zones of lower-grade -- lower leech train availability and slightly lower metallurgical efficiencies, all of which impacted recovery and you have the full explanation for Moa's lower production. The Fort site managed to make up for some of the lower mixed sulphides delivery by using increased volumes of third-party feed. But the third-party feed is of a lower margin and not meant to be a permanent solution. The second quarter and overall outlook for the year is better, and we have a no change to our guidance at this time. We do have planned shutdowns for maintenance this quarter, which impact cost because of the maintenance activity that's been performed, but are built into that production forecast and the guidance that we've given you.

I could spend a lot of time on Ambatovy's production, which is well below Q1 2016 levels, and 25% below fourth quarter levels of last year, but on a cost basis, still managed to come close to breakeven with a $2.3 million cash outflow for the quarter. We warned of impacts to the first quarter production when we had our year-end call back in February, if you'll recall. At the time, we expected Q1 production to come in at around 10,000 tonnes, and it was about 500 tonnes lower than that. We have continuing production and cost risk in these areas in the second quarter as we're employing a smaller temporary molten sulphur storage tank and -- while our additional capacity is being installed. The molten sulphur tank bypass solution is working. However, both of our acid plants have been experiencing separate unrelated problems. As a result, we're currently expecting to be at the bottom end of our guidance range for the year for Ambatovy.

Looking at NDCC. March was a better month for both Moa and Ambatovy, with Ambatovy's NDCC down to about $3.05 per pound and Moa's to $2.76. In Ambatovy's case, the difference is mainly better production. And in Moa's, it was mainly a higher cobalt credit with a higher average realized cobalt price.

The second quarter is looking better for the Moa Joint Venture, while Ambatovy still carries production and cost risks in the second quarter. But cobalt is helping significantly on the NDCC side.

Now on to Slide 14, and I'll cover off the oil and power performance. Starting with oil, the gross working interest production out of Cuba was strong this quarter as compared to the fourth quarter of last year. And that was helped by a couple of successful workovers. Flow rates, however, have subsided since the workovers were performed, and we are tracking our production guidance thus far. Our unit operating cost of $8.66 per barrel are about a $1 lower than they were in the first quarter of last year, with part of the explanation being the Canadian dollar change, as the dollar actually has strengthened by $0.05 against the U.S. dollar. The comparison against the fourth quarter of 2016 is also favorable because of the higher production. We expect our unit operating costs to be closer to $10 to $11 per barrel going forward, as our production declined as expected. However, power production results are the same as they were about a year ago and down from Q4 of 2016 levels. Our gas availability continues to be a challenge despite the new pipeline we put in last year, as CUPET-run oil fields are supplying slightly less gas.

That's what I have to say about oil and gas. And with that, I'll hand it over to Andrew and will re-join you for the Q&A session.

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

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Thank you, Steve, and thank you all for joining us this morning. I have 2 slides to cover, starting with Slide 16, which provides a bit more detail on our cash costs in the quarter.

In our year-end results presentation, you may recall we started to provide a more detailed breakdown on the difference in operating costs between Moa and Ambatovy and highlighted some key trends. You'll see we've provided this detail again comparing our cash cost drivers in Q1 2017 compared to Q4 2016.

A few points I wanted to highlight in this slide. Firstly, looking at Moa. As Steve mentioned, our NDCC has improved since Q4 of USD 3.80 to USD 3.25 a pound in Q1. And a couple of key drivers there. Steve already referred to the higher cobalt by-product credit due to the high cobalt prices in the quarter. But we also had a full quarter benefit from the new acid plant, which eliminated sulphuric acid purchases and allowed us to achieve the $0.50 a pound savings, and that we expected there.

To put that into context, when you look at total mining process and refining costs, the sulphur and sulphuric acid category contributed 23% of costs in that category through 2016. In Q4, you can see on the slide, that reduced down to 19%, when we started to see the benefits from the acid plant. And that's now decreased to 14% in Q1, and we expect to be consistent with those levels going forward.

The benefits from the acid plants and from the cobalt credits were partly offset by higher fuel oil costs and also some higher fixed costs, which are temporary due to increased overburden removal. And those factors were both factored into our NDCC guidance that we released back in February.

Just touching on Ambatovy briefly. The NDCC there, as Steve mentioned, has increased from USD 3.10 a pound in Q4 to USD 3.93 per pound in Q1. And that primarily related to the lower production and the higher maintenance costs. And you can see there on the slide that maintenance contributions, 35% of total mining and processing and refining costs in the first quarter, the result of the operational challenges that Steve referred to.

Next, turning to Slide 17, which is our typical cash waterfall, which reconciles our cash balance in December of $310 million to the March balance of $301 million and highlights the key movements during the quarter. Just touching briefly on some of these items. So the second and third column relates to the operating cash flow, including corporate costs and also the working capital change. And combined, those 2 columns contributed $26.5 million of cash to Sherritt during the quarter. And that cash was primarily generated from the strong collection achieved in [energy] receivables, which Dave referred to earlier, and also prepayments on fertilizer sales, which -- for delivery that we'll be making through the course of Q2 and in the spring season.

The next column, you'll see we had interest payments on the debenture of $10 million. And to remind everyone, Q1 and Q3, we have this $10 million interest expense level. The next quarter in Q2 and again in Q4, our interest expense is $20 million.

The next column there is the $20 million repayment of borrowings that Dave already referred to. The one point I wanted to highlight here is that our revolving credit facility, a majority of that is actually loaned down from Sherritt to the Moa Joint Venture on a back-to-back basis. And in April, our -- the credit facility will be reducing there at Sherritt. And likewise, that facility will be reducing down at the Moa Joint Venture level. And so we will expect to receive close to $10 million of cash from the joint venture in April.

And the final item here, just to highlight, is the $5 million of capital expenditure. And that primarily relates to capital on Block 10 in our oil and gas business.

That concludes my remarks. And I will now ask the operator to open up the call for questions. So over to you, operator.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll go ahead with our first question from Greg Barnes.

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Greg Barnes, TD Securities Equity Research - MD and Head of Mining Research [2]

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Dave, is there anything you can do to increase your cobalt production to benefit from these higher prices? I know it's a by-product of the nickel, but can you get to some higher grade cobalt somehow?

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David V. Pathe, Sherritt International Corporation - CEO, President and Non-Independent Director [3]

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There isn't really, Greg. I mean, we have looked at it somewhat. I mean, there are -- nickel-to-cobalt ratios are relatively uniform throughout the ore body. And the reality is that what variation there is -- is not grade enough to really justify deviating from the mine plan for which it's already optimized for any number of other factors and deleterious elements in the ore body and all that kind of thing. So with -- there's not enough variation in oil -- in ore or cobalt-to-nickel ratios to really be able to make a big change there. Similarly, the refineries are kind of scaled for the cobalt-to-nickel ratio generally, so that we can't, frankly, engineer a dramatic shift in those ratios because the refining capacity downstream from PAL is scaled to that ratio. So there's not a large amount of flexibility on that.

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Greg Barnes, TD Securities Equity Research - MD and Head of Mining Research [4]

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Second question then on Block 10. Assuming you get down to the target area, what were the flow rates in that hole that you drilled 20 years ago? And what do you expect as you get there? And how will that impact your oil production and, hopefully, life of the oil production going forward?

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David V. Pathe, Sherritt International Corporation - CEO, President and Non-Independent Director [5]

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So I mean, that well that we drilled over 20 years ago, it flowed about 3,500 barrels a day. But it was -- that was for -- I'll caveat that by saying it was a relatively short period of time. It was never really brought onto commercial production. Our expectation longer term is that if this reservoir down there contains what we believe it to contain, and this is where the capital and the [sum] of the years ahead goes to, but if cash flows permit and oil prices permit, we think this block ultimately can support a 20,000-25,000 barrel a day oil business for 20 or 30 years. I guess we've got about 24 left on the -- 23, 24 years left in the PSC there. But that would depend -- how quickly we get to that would depend on how aggressively we can drill. And that will depend on our cash flow or finance-ability of a drilling campaign. But if our oil guys had their druthers, so in 2018, 2019, they'd have 3 rigs going around the clock.

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Greg Barnes, TD Securities Equity Research - MD and Head of Mining Research [6]

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And how much would that cost, if they had their druthers?

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David V. Pathe, Sherritt International Corporation - CEO, President and Non-Independent Director [7]

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I assume -- my guess is you could spend up to about $100 million a year on drilling, just in terms of there being physical space. If you had -- we own 2 rigs. If you had 2 and hired a third, that would take up the physical space [in order] to do that. I think the top end of that would be probably $100 million a year. But we have the ability to pace that at whatever rate makes sense for us. By the time we've drilled the (inaudible).

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Greg Barnes, TD Securities Equity Research - MD and Head of Mining Research [8]

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Would the $100 million be what you'd need to spend to get to that 20,000 to 25,000 BOE per day rate?

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David V. Pathe, Sherritt International Corporation - CEO, President and Non-Independent Director [9]

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You would need to do that for a couple of years to get to that 20,000 to 25,000 barrel a day rate. If you pace the drilling out over a longer period of time, it would take a bit longer to get there, obviously. It's just depending on how -- the rate you went at it.

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Operator [10]

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(Operator Instructions) We'll now take our next question from Orest Wowkodaw of Scotiabank.

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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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Dave, I was hoping you could give us a bit more color on the status of negotiations with your partners at Ambatovy. I mean, obviously, this has been dragging on for quite some time now. And I'm just curious whether walking away is still a possibility. Or what direction you think the likely outcome is? And just curious also, with the, I guess, the USD 173 million now of partner funding on your behalf, how that sort of plays into any potential restructuring of the asset?

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David V. Pathe, Sherritt International Corporation - CEO, President and Non-Independent Director [12]

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Yes. I mean, I can't tell you a whole lot this morning, Orest. As you can expect, our current fixed waiver expires May 2. And obviously, we will have an update for you between now and May 2. I mean, I can tell you, obviously, this has been going on for a while. But you -- I know you've got some sense of the complexity of the issues, and I can add to that, that the tax and accounting issues have become more and more complicated as we've gotten deeper and deeper into this. By the time you factor in accounting and tax regimes in Canada, Korea, Japan and Madagascar, it is a tangled to nut -- or difficult nut to crack and unravel. And that is where a lot of the time and effort has gone. We are still working towards the "12 for 12" type solution that we've been looking for from the beginning. I can tell you, there is still a tremendous amount of goodwill amongst all the partners to find a solution here that works. But obviously, economics are challenged across the board in this nickel price environment, and that makes it a difficult conversation. The USD 173 million in outstanding funding, or funding that has taken place without us participating in since we achieved financial completion in the fourth quarter of 2015, is obviously part of the conversation as well. If we were to move to a situation where we had a 12% holding, I think it would be reasonable to expect us to be required to catch up on our shareholder funding at our actual shareholding amount. But clearly, that is all part of the conversation. I don't want to get too deep into it today, Orest, because we will obviously be updating next week.

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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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And maybe just as a follow-up. Can you give us a sense of timing? Like is this something that we should expect a resolution on in the next couple of months? Or is this something that could just drag indefinitely?

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David V. Pathe, Sherritt International Corporation - CEO, President and Non-Independent Director [14]

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I am -- dragging indefinitely isn't really an option for us, as we've been trying to impart over the course of the last few months. I am more optimistic of a resolution before the summer.

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Operator [15]

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It appears there are no further questions at this time. Ms. Wood, I'd like to turn the conference back to you for any additional or closing remarks.

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Flora Wood, Sherritt International Corporation - Director of IR [16]

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Okay, thanks, Angelie. Thanks, Greg and Orest for the questions and everybody who dialed in. And we'll talk to you next in our Q2 call.

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Operator [17]

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That concludes today's conference. Thank you for your participation. You may now disconnect.