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Edited Transcript of S.TO earnings conference call or presentation 26-Feb-20 7:00pm GMT

Q4 2019 Sherritt International Corp Earnings Call

TORONTO Mar 20, 2020 (Thomson StreetEvents) -- Edited Transcript of Sherritt International Corp earnings conference call or presentation Wednesday, February 26, 2020 at 7:00:00pm 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 & Director

* Joe Racanelli

Sherritt International Corporation - Director of IR

* Stephen James Wood

Sherritt International Corporation - Executive VP & COO

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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Sherritt International Fourth Quarter and 2019 Year-end Results Conference Call and Webcast. (Operator Instructions) I would like to remind everyone that this conference call is being recorded today, Wednesday, February 26, 2020, at 2:00 p.m. Eastern Standard Time. I will now turn the presentation over to Joe Racanelli, Director of Investor Relations. Please go ahead.

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

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Good afternoon, everyone, and thank you for joining us. Before we begin, I'd like to remind everyone that we will be following a presentation today that is available from our website at sherritt.com. We will also be making some forward-looking statements, and the risks associated with these statements are detailed in our presentation.

With me are David Pathe, our CEO; Andrew Snowden, Sherritt's CFO; and Steve Wood, Chief Operating Officer of the company, who will be reviewing our operational and financial performance for the fourth quarter as well as the balance sheet initiative announced this morning. Copies of the balance sheet announcement, our Q4 results, MD&A and financial statements are also available on our website and on SEDAR.

Now before turning the call over to David, I would like to point out that in light of the transaction announced today, we will be unable to host a question-and-answer session following the management discussion, as customary, but we will be available for any follow-on discussions on a one-on-one basis. With that, David, please go ahead.

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

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All right. Thank you, Joe, and good afternoon to everyone from me as well. Busy day for us. You'll have all seen 2 releases from us this morning in addition to our year-end financial statement release, the balance sheet initiative transaction that we've put out there as well. We will touch on that in this presentation along with various highlights from the quarter and year-end.

Also, following this presentation, there will be another presentation available on our website that will go into more detail on both the rationale and the details of the transaction that we announced this morning as well, so that will be available for those that are interested as well.

This call will focus, primarily, on the year-end and quarter end results. And so we'll run through that as we usually do. I'll touch on a few matters. Steve Wood is traveling today, but on the line, and will touch on an operational update from Q4, and Andrew will touch on some financial aspects from the quarter as well as the highlights of the transaction we announced this morning.

Our operational performance in 2019 was -- it was particularly strong. Operational excellence initiatives that we've implemented over the past 18 months enabled us to exceed production guidance for nickel at the Moa JV. We achieved this milestone despite the negative impact of fuel supply disruptions at the Moa mine and the CN rail strike and the impact that had on operations in Q4. Cobalt production for 2019 was in line with guidance.

In our oil and power businesses, they also exceeded production against guidance for 2019. Each business unit overcoming a number of challenges to achieve the higher-than-forecast production [tools].

Over the past several months, a key area of focus for us has been completing the drilling on Block 10 and working with our partners to increase the monthly payments on our overdue receivables that are owed to us.

On Block 10, further to our announcements in Block 10, the equipment that we talked about has now been recertified and some mechanical interruptions that we had, that I'll touch on a bit later on, have been resolved, and we're now on the cusp of resuming testing on the well. And with respect to Cuban collections, we now have received a further commitment from our Cuban partners to increase the monthly payments to give -- by another $5 million a month, which will be used both to fund Energas operations and pay down overdue receivables amounts.

The USD 2.5 million that we agreed and have been receiving since last June will continue. And given the challenging economic conditions that Cuba has been facing because of the increased U.S. sanctions, Cuba's commitment to provide us that additional liquidity, I think, reflects the importance and value of that partnership.

With that, I'm going to turn the call over now to Steve, who can take us through some of the Q4 production results, and we'll move from there to Andrew on finance and then the transaction. Steve, are you there?

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

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Yes, I am, and thanks, Dave. Good afternoon, everybody. Before I discuss our operational highlights, I'd like to briefly comment on our efforts to promote health and safety throughout our operations. Q4 was a particularly strong quarter from a health and safety perspective. Overall, we had a recordable injury frequency rate of 0.47 and a lost time injury frequency rate of 0.07. These results put us firmly in the lowest quartile of the benchmark peer set data.

Turning now to our production results. I'll start with the Moa JV on Slide 6. On a 50% basis, Moa produced 4,049 tonnes of nickel and 411 tonnes of cobalt in Q4 of 2019. I should point out that while these results were modestly below totals produced in Q4 of 2018, our performance in 2019 was impacted by the CN rail strike that disrupted the transportation of mixed sulfides from Halifax to our refinery in Fort Saskatchewan.

Performance in Q4 of 2019 is also impacted by the reduced availability of diesel fuel supply in Cuba on the Moa operations. The drags on performance caused by both of these developments was offset, however, by a number of mitigation strategies that we implemented in the quarter, including securing ground transportation for the mixed sulfides from Halifax to Fort Saskatchewan.

On a 12-month basis, we produced 16,554 tonnes of finished nickel and 1,688 tonnes of finished cobalt in 2019. These totals were up 8% and 4%, respectively, from 2018.

Growth was driven by a number of operational excellence initiatives launched over the past 18 months, including the deployment of new mining equipment. The new mining equipment has delivered a number of benefits, including improved ore access and reduced equipment downtime.

NDCC in the quarter -- fourth quarter of 2019 was $3.75 per pound, and that's up 28% from USD 2.94 per pound in Q4 of 2018. This increase was largely due to the 48% decline in the cobalt reference price.

As you can see from Slide 7, NDCC has been volatile over the past several years as we represented by the green line. This volatility has been driven by the wide fluctuation in cobalt prices, particularly since the start of 2017.

One thing that has been fairly consistent, however, are mining, processing and refining costs, or MPR, at the Moa JV. Since the first quarter of 2017, those MPR costs have averaged about $5.20 per pound per quarter. Although MPR costs can fluctuate from quarter to quarter due to changes in input costs, such as sulfur, the fact remains that the Moa JV is a steady producer and a low-cost to HPAL operations.

Next, turning to our oil and gas operations on Slide 8. We produced 3,785 barrels of oil per day in Cuba on a gross working interest basis in Q4. This total market decline of approximately 15% from last year when we produced 4,443 barrels of oil per day. The decrease was due to natural reservoir declines as we've reported previously.

As is to be expected, the decrease in the number of barrels produced had a negative impact on our unit cost. The unit costs in Cuba for Q4 2019 were $24.33 (sic -- see slide 8 - $24.23) per barrel and that's down 4% to -- compared to $25.16 per barrel for Q4 of last year.

The unit cost declined largely because spending on equipment and maintenance was deferred until the results of testing on Block 10 could be determined. Unit costs were also impacted by the appreciation of the Canadian dollar relative to the U.S. currency as our labor expenses are denominated in U.S. dollars.

Now I'll turn to the Power division on Slide 9. We produced 186 gigawatts of electricity in Q4, and that's up 1% from the previous year when we produced 184 gigawatts in the same period. The increase was due to reduced maintenance downtime that previously had been planned and by the unexpected availability of additional gas supply.

Unit operating costs in Q4 of 2019 were $22.15, up 5% from $21.09 for the previous year. The increase was due to the timing of maintenance activities. Lower unit costs on a full year basis were primarily due to our decision to limit operational spending to levels required to maintain certain plant operations as we continue to work with our Cuban partners to collect on Cuban energy receivables.

The impact of reduced spending more than offset the impact of the change in the Canadian dollar in the quarter and full year periods as the power business costs are generally denominated in U.S. currency. We expect to build on our operational results for 2019 and recently provided guidance for expected performance, unit costs and capital spending for 2020.

We've summarized the guidance on Slide 10. And our guidance is based on a number of conservative assumptions we have made with respect to operations, input costs and commodity prices. If we look at the Moa JV, the nickel production and cobalt production are slated to build on the strong results we enjoyed in 2019, largely because of the ongoing benefits of the operational excellence initiatives that I discussed earlier.

Net direct cash costs are expected to average between $4 and $4.50 per pound, consistent with our performance in 2019. And our cash costs are based on cobalt prices of $17 per pound and $100 per tonne of sulfur, and that's including freight and handling.

Turning to our oil and gas and power businesses. Our production totals for oil and power in 2020 will be down slightly from 2019 largely because of the oil fields that are currently under production are maturing and producing less natural gas to generate electricity.

Oil production totals forecasted for 2020, exclude anything we would produce from Block 10. And capital spend for each of our oil, gas and power businesses will depend on the timing of the receivables collection.

So that concludes my review of operational results. I'll now turn it over to Andrew Snowden, our CFO, who will review our Q4 financial results in more detail. Andrew?

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

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Thank you, Steve, and good afternoon, everyone. I'll start my comment as I usually do on Slide 12, just talking about our liquidity position as at the end of the period or at December 31.

As you can see from the slide, we ended the year with around $166 million of cash, cash equivalents and short-term investments, which is down marginally from the $169 million we reported at the end of September.

Now I'll discuss the movement in cash in a bit more detail on the next slide. But what I wanted to highlight here is that the $80 million of -- or included in that overall cash number is $80 million of liquidity that's held by Energas in Cuba. And that's about cash which is not accessible in Canada. This amount is an increase from Q3, reflecting the effects of U.S. sanctions that Dave spoke about earlier that limit Cuba's access to foreign currency and our ability to repatriate cash into Canada.

Given our liquidity position is constrained, it was important that we looked at a number of cash preservation strategies through the course of 2019, and we talked about those in a bit more detail on our Q3 earnings call. But we have summarized a few of these points on Slide 12 also, specifically kind of calling out the ongoing reduction in our administrative costs, and we achieved further savings through the course of 2019 as we did in 2018.

This year, savings have been partly offset by increased costs associated with the enactment of Helms-Burton and Title III earlier in the year, and I referred to that on an earlier earnings call also.

In addition, there were a number of other austerity measures that we implemented across the organization, which we -- saved us considerable amounts of cash, particularly in our capital costs. And you'll see those within our financial results released today.

Our cash in Canada balance is particularly important to us, given that we have a covenant in place with our creditors that requires we have a minimum cash balance in Canada of approximately $70 million through to the end of the credit facilities' maturity at the end of April, April 30. We will be commencing our annual discussions with the syndicate shortly to extend that maturity date as part of our kind of annual renewal process, and we'll provide updates on that as appropriate.

Turning now to Slide 13. This is really our typical cash waterfall that shows the cash movement through the course of the quarter. You can see here that the modest decline in cash through the course of Q4 is primarily driven by the 2 interest payments, which were made of approximately $15 million and then also a capital expenditure, primarily relating to finalizing the drilling of Block 10. These declines were partially offset by dividends that we received through Moa JV of $14.9 million.

I should point out that through the course of 2019, we received over $43 million of dividends from the Moa JV, largely a result of a strong operational performance and improved nickel prices that we saw through the year.

Turning now to Slide 14. You would have noticed in our financial results release that we also announced an increased payment commitment from our Cuban partners, and Dave referred to this a little bit earlier. So this was a commitment for an additional $5 million, which is an addition to the USD 2.5 million that we announced back in June of 2019.

As Dave mentioned, this commitment is a result of months of discussion with our Cuban partners and does reflect the strong partnership we have in place with the Cuban government. This cash will be used to both fund Energas operations and also reduce our overdue receivable balance going forward. And that overdue receivable balance was around USD 158 million at the end of 2019.

Also, as Dave mentioned earlier, today did mark the launch of a balance sheet initiative that serves to strengthen our capital structure and address our liquidity constraints and it also resolves our Ambatovy legacy debt. The transaction includes a number of components, and I'll spend a few minutes now highlighting its key terms and benefits.

So a number of factors that went into our decision to launch the transaction today, including the near-term uncertainty of commodity prices, the impact of increased U.S. sanctions against Cuba and the time line of a debt maturity that you can see on Slide 16.

Our first material debt repayment obligation, you can see on this slide, is in actually November of 2021 for $170 million. 2 years later, we have another tranche of our debentures due for $198 million as well as the repayment of our Ambatovy partner loans, which is $145 million. And then the final series of our debenture tranche of $221 million is due in late 2025.

So these obligations, along with the associated cash interest expense of $46 million per year is -- represents a significant financial risk for the company as we've always thought to proactively manage this risk and our debt maturities, and today's transaction is another example of that commitment.

The proposed balance sheet initiative is a result of share to evaluating a number of alternatives with our legal and -- or financial advisers over many months and concluding that this transaction is the best option for all stakeholders under the current circumstances. I'd like to just highlight a couple of the key components of this transaction which are summarized on Slide 17.

As I'm sure the listeners have picked up, the transaction really centers on the exchange of the existing $588 million of unsecured notes for approximately $319 million of new secured second lien notes. These notes will rank second only behind a revolving bank facility, and so we're ahead of all unsecured obligations.

They'll pay an interest rate of 8.5%, which is a rate higher than any of our existing series of notes. And we also include a mandatory redemption feature or cash sweep starting in 2021, whereby 50% of our excess cash flow will be used to buy back outstanding notes if Sherritt's Canadian cash balance is in excess of $75 million.

There'll be more details on the excess cash calculation within our circular when that's mailed. But in essence, it's calculated based on operating cash flow, a less sustaining CapEx during the last -- the prior 6-month period.

The other key component of the transaction involves our Ambatovy joint venture interest, where we will be exchanging the Ambatovy partner loans, which are currently valued at the $145 million, I mentioned earlier, for either Sherritt's 12% ownership in Ambatovy or an amended loan, which has no recourse to Sherritt.

But this aspect of the transaction also did provide some inputs into our year-end impairment assessments, and you may have seen that we did record an impairment of Ambatovy of approximately $110 million during the fourth quarter, consisting of a $30 million impairment on our investment in Ambatovy line item and the $80 million impairment on our advances to Ambatovy, and that's a function of the inputs of this transaction.

The transaction is expected to close on or about April 30, and I should point out that noteholders, who vote in the favor of the transaction by the March 27 early consent date, will also receive a cash payment on closing equal to 3% of the principal amount of their notes.

The exchange of the existing unsecured notes for the new secured second lien notes will also impact the time line of our debt maturities, and is shown on Slide 18, which really just evidences the extension to the maturity date through until 2027.

The transaction includes several benefits and we've highlighted a number of these on Slide 19. Firstly, the transaction treats all noteholders in a fair and balanced way instead of a potential differential treatment by series. The noteholders will receive security over all material assets and priority to unsecured obligations. So by doing this, the transaction also eliminates the $230 million secured basket the company currently has available to it under its existing indenture.

As mentioned, we also included an excess cash flow sweep within the new notes, which underscores Sherritt's commitment to delever its balance sheet going forward. And finally, by reducing the total amount of debt by $440 million and decreasing the annual cash interest expense by approximately $20 million, we are better positioned to withstand the uncertainty arising from increasing U.S. sanctions against Cuba and near-term uncertainty in commodity prices.

Looking at the transaction as a whole, it represents the best opportunity for Sherritt to capitalize on the favorable long-term nickel market and therefore, be in a strong position to pay the new second lien notes in full, which is also supported by the incremental payment commitment we have from our Cuban partner that we discussed earlier.

So that concludes my remarks, and I'll turn the call back now to Dave for his closing remarks.

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

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All right. Thanks, Andrew. So as you'll see on Slide 21 there, our transaction requires approval by affected debt holders. There are a number of important dates that debt holders will need to take into account. 5:00 p.m. on March 27 is the early consent deadline for noteholders.

And as Andrew mentioned, the noteholders who vote in favor of the transaction by that time will be entitled to receive, on implementation of the transaction, 3% of the principal amount of their existing notes as additional consideration in exchange for their existing notes.

The next key date is April 7, which marks the voting deadline for both debt holders and shareholders. Meetings of debt holders will take place to approve the transaction, and they'll be held in Toronto on the 9th of April. And a shareholders' meeting will be held on the 9th of April as well.

At this meeting, shareholders will vote on whether to approve a reduction in state of capital shares -- common shares, and there is a preliminary step in connection to the transaction that doesn't result in any change to the number of shares held by investors nor does it result in a consolidation in the number of shares.

Pending debt holder and court approval, we anticipate the transaction end -- as Andrew said, will close by the end of April. Leading up to these dates, debt holders and shareholders will receive copies of the information circular and proxy voting forms. Copies of these materials will also be available on our website as well as on SEDAR.

As I mentioned earlier, we have developed a presentation and that will be available on our -- on the Investor Relations section of our website shortly after this call. And that will go through both the rationale and the transaction in more detail than we've done here.

Overall, the transaction announced -- that we announced today represents a major milestone, I believe, in our ongoing efforts to strengthen our balance sheet and addresses the legacy of our Ambatovy investment. We believe the transaction strengthens Sherritt's capital structure, preserves our liquidity and provides fair treatment for all stakeholders. Sherritt's senior management and the Board of Directors are unanimously recommending that stakeholders vote in favor of the proposed transaction.

Other matters, just before we finish up here, I want to touch on nickel markets. We saw a lot of volatility in 2019 in the nickel price, and we expect that to continue in the near term, frankly. A lot of trade uncertainty still exists and the full impact of the coronavirus on global growth in 2020 is obviously not yet known. But we do still fundamentally believe in the long-term fundamentals of nickel. We believe they continue to remain strong.

We expect to see nickel demand continue to grow at 3% per year annually from now through 2025 and the adoption of electric vehicles and the electrification of transportation more broadly continues apace. And the underlying fundamental story where that's positive for nickel, we believe, continues to be true.

Lastly, a quick update on Block 10. At the end of last year, we successfully completed our drilling program and reached the target depth of approximately 5,700 meters. Testing on the well had begun, but now it's been -- it was delayed by some mechanical failures and equipment for which parts had to be imported into Cuba and some of the equipment there needed to be recertified.

Our efforts have also being hampered somewhat by new restrictions from the Trump Administration that limits the amount of U.S. content and supplies and equipment entering Cuba. Under these new sanctions, and I think we touched on these in Q3 as well, the maximum U.S. content has been lowered from 25% to 10%, and that is going to cause us to have to resource some materials for Cuba.

Preliminary testing now, which we did begin in late 2019 before it was suspended, is now just on the cusp of resuming and is -- the additional work to -- for it to recertify specific material and repair some of the mechanical fare has been completed. We expect the preliminary testing to resume in the coming days, and then we'll provide an update to you as soon as we have some material developments there. We'll also be providing updates as the time line of our transaction unfolds.

And on that note, I thank all of you very much for joining us today. We appreciate your ongoing support and look forward to speaking to all of you soon. And as I say, a separate presentation on our transaction announced this morning will be available on our website shortly. Thanks very much again, and have a good afternoon, everyone.

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Operator [7]

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