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TORONTO--(BUSINESS WIRE)--Sherritt International Corporation (“Sherritt”, the “Corporation”, the “Company”) (TSX: S), a world leader in the mining and hydrometallurgical refining of nickel and cobalt from lateritic ores, today reported its financial results for the three- and nine-month periods ended September 30, 2020. All amounts are in Canadian currency unless otherwise noted.

During the quarter, pursuant to its plan of arrangement under the Canadian Business Corporations Act, Sherritt announced the successful closing of the latest step in its program to improve its capital structure. Overall, the transaction which closed on August 31, represented completion of the key Ambatovy part in the broader restructuring of Sherritt’s debt obligations.

In summary, this CBCA restructuring:

• eliminated a further $300 million in direct debt;
• eliminated debt maturities in 2021, 2023, and 2025, and replaced them with maturities in 2026 and 2029;
• reduced our cash interest expense by one-third to approximately $30 million per year;
• completed our exit from the Ambatovy project, eliminating the associated direct and indirect debt and the risk of being required to fund further cash calls with the associated risk of default; and
• achieved all of this with no dilution to the current equity of Sherritt.

CHAIRMAN COMMENTARY

Commenting on the debt restructuring program, Sherritt Chairman Sir Richard Lapthorne said, “Preserving adequate liquidity and rebuilding balance sheet strength have been Sherritt’s top priorities since the current management team and Board have been in place. This has been a step-by-step process requiring a sustained concentration on removing the threats to the Corporation’s viability, and this process had to focus on Ambatovy. Indeed, final resolution of our Ambatovy position was a key part of the recently completed CBCA arrangement.”

He continued, “Sherritt entered the Ambatovy project in 2007 as a 40% partner with Sumitomo and Kores, our Korean partner, through the $1.6 billion acquisition of Dynatec. At that time, the project was forecast to require funding of US$3.3 billion. A senior debt facility of US$2.1 billion with recourse to the three partners was negotiated with the balance to be funded directly by the partners. However, the capital requirement for Ambatovy grew and, at the last count, had reached US$8.5 billion of which the shareholders funded US$6.4 billion. A feature of the shareholder agreement was that each partner had to meet its calls for cash from the joint venture or risk a default, which could cross default to its other borrowings; in Sherritt’s case to its publicly traded debentures. As early as 2009, Sherritt was forced to start mortgaging its future earnings from the project by borrowing from the other partners in order to finance its cash calls. By 2016, with accrued compound interest, one of these loans had a balance of $1.4 billion with no direct recourse to Sherritt, whilst the other of $133 million became a liability on Sherritt’s consolidated balance sheet.”

Sir Richard added, “Over the past six year, the management team has worked tirelessly in seeking to reduce these financial risks created through its Ambatovy commitments. In 2015, a combination of specialists from Sherritt’s Technologies business and locally-based expatriate management enabled Ambatovy to operate its mine and plant at the required throughput relative to capacity to enable the senior loans to become without recourse to the partners’ own balance sheets. This removed US$840 million from Sherritt’s debt profile. In 2017, Sherritt negotiated with its partners to reduce its shareholding in Ambatovy to 12%. As a consequence, the partner loan of $1.4 billion was cancelled and Sherritt’s responsibility for meeting the JV’s total cash calls dropped from 40% to 12%. Finally, as part of the CBCA Court application completed in August 2020, the 12% stake was surrendered, the remaining partner loan, which had increased to $145 million on Sherritt’s Balance Sheet, was cancelled and the financial planning uncertainty created by its cash call and potential default exposures from Ambatovy was extinguished.

“Sherritt has also effectively addressed the non-Ambatovy components in its funding. In 2006 it had borrowed $274 million in publicly-traded debentures. Through the course of funding Ambatovy, total public debenture debt peaked at $1,158 million in 2013. Following the recently completed restructuring, debenture debt has now fallen to $358 million at the end of September 2020. Bondholders also hold a $75 million 2029 note. In 2014, Sherritt sold its coal business for $814 million of total cash proceeds. Not only was this a well-timed business decision, but it also assisted the Corporation’s liquidity planning. The cash proceeds were used to redeem $300 million of debentures with the balance ultimately sustaining Sherritt’s liquidity during the prolonged Ambatovy exit program.”

Sir Richard concluded by saying, “In total, since 2014, Sherritt has eliminated approximately $2.4 billion in debt from the balance sheet along with a further $1.1 billion debt guarantee, and has removed the default risks posed by the Ambatovy agreements. Had we failed to do these, Sherritt would not exist in its current form today.”

CEO COMMENTARY

“The completion of the balance sheet initiative and the resolution of the Ambatovy legacy debt puts Sherritt in the best possible position to manage our business through the long term,” said David Pathe, President and CEO of Sherritt. “We have achieved this outcome despite the significant volatility in nickel and cobalt pricing and the increasingly aggressive U.S. policy towards Cuba we have seen over the last few years.”

Mr. Pathe added, “With the debt restructuring now behind us, our near-term focus will centre on sustaining the momentum we have been able to establish at the Moa Joint Venture and achieve our production targets for 2020. That we are on track for this achievement is a testament to the determination and resiliency of so many Sherritt employees managing the impact of the COVID-19 pandemic.

“We continue to take proactive actions to manage our liquidity. Since the end of the quarter, we have received a US$15 million distribution from the Moa JV, representing both our 50% share of US$7.5 million and our Cuban partner’s share of US$7.5 million, which is being redirected towards overdue receivables pursuant to our 2019 receivables agreement. We have also taken advantage of the recent strength in nickel prices to purchase a derivative contract to provide a floor ­­- but no cap - on 25% of our share of 2021 nickel production at $6.50 per pound, which protects our 2021 cash flow against downside risk to the nickel price next year.

“Over the longer term, we anticipate demand for our products to grow given the strong outlook for nickel in the coming years, particularly as the market adoption of electric vehicles accelerates, and we will bring greater focus to the projects and innovation of our Technologies Group and look to commercialize those innovations to create new revenue streams for Sherritt.”­

SUMMARY OF KEY Q3 2020 DEVELOPMENTS

• Sherritt successfully completed its balance sheet initiative, which improved its capital structure and addressed its Ambatovy investment legacy, following stakeholder approval. As a result of the transaction, Sherritt reduced its total outstanding debt by approximately $301 million, extended the maturities of its note obligations to 2026 and 2029, reduced cash annual interest payments by more than $15 million, and terminated its debt obligations relating to the Ambatovy Joint Venture, all without any dilution of its common shares.
• Following close of its balance sheet initiative, Sherritt’s note obligations, totaling $433 million, were reclassified as long-term debt.
• Sherritt’s share of finished nickel production at the Moa Joint Venture (Moa JV) in Q3 2020 was 3,750 tonnes, down 9% from last year, while finished cobalt was 409 tonnes, down 6% from last year. The decline was due to the rescheduling of the planned plant shutdown and maintenance activities at the refinery in Fort Saskatchewan from June to July as previously disclosed. The Moa JV remains on track to meet its production guidance in 2020 and has produced 23,466 tonnes of finished nickel and 2,468 tonnes of finished cobalt on a 100% basis through September 30.
• Sherritt ended Q3 2020 with cash and cash equivalents of $165.1 million of which $82.1 million was held by Energas in Cuba. The $7.3 million decrease in Sherritt’s liquidity from $172.4 million at the end of Q2 2020 was largely driven by costs associated with the balance sheet initiative, including approximately $16 million of cash payments made to note holders as early consent consideration.
• Net earnings from continuing operations totaled $11.4 million, or $0.03 per share, and included a non-cash gain of $143.4 million on the exchange of debentures relating to the balance sheet initiative, offset by a non-cash impairment loss of $115.6 million relating to the write down of Block 10 capital assets.
• Sherritt recognized earnings from discontinued operations of $217.1 million related to the disposition of its 12% ownership interest in the Ambatovy Joint Venture as part of the balance sheet initiative and reclassification as discontinued operations.
• Sherritt received US$16.3 million in Cuban energy payments as part of the overdue receivables agreement with its Cuban partners. Payments, which included US$14.0 million received in Canada and US$2.3 million accepted in Cuba to support local costs for Sherritt’s Oil and Gas operations, were lower than expected as the spread of COVID-19 and the ongoing impact of U.S. sanctions limited Cuba’s access to foreign currency in Q3 2020.
• Sherritt completed the analysis on a second set of samples from Block 10 that confirmed that the water produced during the test period is from the loss circulation zone, which is located at a depth of approximately 5,300 meters and above the target oil reservoir. The analysis also confirmed that no viable technical solution to prevent the further flow of water into the existing well is possible. While Sherritt still believes that the Block 10 reservoir contains oil, the existing well cannot be used for future production purposes. Sherritt is currently reviewing its options with respect to Block 10, including seeking an earn-in partner. At this time, Sherritt is not contemplating any further investments in Block 10 without first securing an earn-in partner.
• Sherritt released its 2019 Sustainability Report that showed progress against the Company’s Environmental, Social and Governance targets, including efforts to reduce greenhouse house emissions, maintain peer-leading safety metrics, and commit to doubling the number of female employees by 2030.

DEVELOPMENTS SUBSEQUENT TO THE QUARTER END

• The Moa JV paid a US$15 million distribution to its shareholders in November. Sherritt received its 50% share of this distribution, or US$7.5 million, directly. In addition, General Nickel Company, Sherritt’s joint venture partner, re-directed its US$7.5 million share of this distribution to the Corporation to be applied against amounts owing to Sherritt from Energas. The re-direction was secured through negotiations between Sherritt and its Cuban partners, and was made in accordance with the June 2019 overdue receivables agreement.
• Sherritt purchased put options on 25% of its share of attributable finished nickel production from the Moa JV for 2021 at a strike price of US$6.50/lb. Any cash settlements will be completed on a monthly basis against the average monthly nickel price on the London Metals Exchange and will involve no physical delivery. The hedging strategy, which will be in effect for a 12-month period starting January 1, 2021, is designed to provide Sherritt with cash flow security in 2021 against major downward changes in nickel prices.
• Sherritt employee members of Unifor at the refinery in Fort Saskatchewan ratified a new collective agreement through March 31, 2022. The new agreement extends Sherritt’s track record of no labour disruptions at the refinery since it began operations in 1954.
• Sherritt agreed to an extension for the maturity of its $70 million credit facility from its syndicate of lenders to December 31, 2020. A longer-term extension is expected to be finalized in Q4 2020.
• Sherritt continues to be in discussion with its Spanish partners on a potential alternative arrangement relating to the expired $47.0 million letter of credit for reclamation costs associated with Sherritt’s Spanish oil assets.

Q3 2020 FINANCIAL HIGHLIGHTS⁽¹⁾

Cash, cash equivalents and short-term investments at September 30, 2020 were $165.1 million, down from $172.4 million at June 30, 2020. The decrease was due to a number of factors including, cash payments of approximately $16 million made to noteholders as early consent consideration and capital expenditures totaling $2.5 million, partially offset by higher Cuban energy payments. In addition, interest payments owed to holders of Sherritt’s series of debentures maturing in 2021, 2023 and 2025 were deferred as a result of the balance sheet initiative. Upon close of the transaction, all unpaid and accrued interest amounts were added to the principal amounts of second lien notes exchanged to holders for old notes.

As at September 30, 2020, $82.1 million of Sherritt’s cash and cash equivalents was held by Energas in Cuba, down from $82.2 million at the end of Q2 2020.

Sherritt received US$16.3 million in Cuban energy payments as part of its overdue receivables agreement with its Cuban partners in Q3 2020. Payments, which included US$14.0 million received in Canada and US$2.3 million accepted in Cuba to support local costs relating to Sherritt’s Oil and Gas operations, were lower than expected as the spread of COVID-19 and the ongoing impact of U.S. sanctions limited Cuba’s access to foreign currency in Q3 2020. Total overdue scheduled receivables at September 30, 2020 were US$159.1 million, unchanged from June 30, 2020 due to the timing of payments received and scheduling of expected payments. Subsequent to September 30, 2020, the Corporation received US$2.6 million in Canada from the Cuban overdue receivables agreement and US$2.4 million in Cuba to support local costs.

In Q3 2020, the Moa JV declared dividends of US$15 million, which were subsequently distributed in Q4 2020. In addition to Sherritt receiving its US$7.5 million share of this distribution, General Nickel Company, the Corporation’s joint venture partner, re-directed its share of this distribution to Sherritt to be applied against amounts owing to Sherritt from Energas. This re-direction was secured through negotiations between Sherritt and its Cuban partners, and was made in accordance with the June 2019 overdue receivables agreement. Sherritt anticipates receiving further dividend distributions in Q4 2020 given prevailing nickel and cobalt prices.

Sherritt anticipates that its liquidity position through the end of 2020 will largely be dependent on its ability to collect on amounts owed to it by its Cuban energy partners and dividends received from the Moa JV.

Adjusted net loss⁽¹⁾

Net earnings from continuing operations for Q3 2020 was $11.4 million, or $0.03 per share, compared to a net loss of $15.4 million, or $0.04 per share, for the same period last year. Net earnings for Q3 2020 includes a gain of $143.4 million on the exchange of debentures as part of the balance sheet initiative offset by an impairment loss recognized on the write down of exploration and evaluation assets and capitalized spare parts relating to Block 10 drilling activities totaling $115.6 million.

Adjusted net loss from continuing operations was $16.1 million, or $0.04 per share, for the three months ended September 30, 2020 compared to an adjusted net loss from continuing operations of $20.6 million, or $0.05 per share, for Q3 2019.

On the close of the balance sheet initiative, Sherritt exchanged its 12% ownership interest and its loans and operator fee receivables in the Ambatovy Joint Venture for $145.6 million owed to its partners. Consistent with IFRS standards, Sherritt’s investment in the Ambatovy Joint Venture met the criteria to be classified and presented as discontinued operations for accounting purposes. As a result, Sherritt’s share of loss of an associate, net of tax, and other components of comprehensive income (loss) related to the Ambatovy Joint Venture were reclassified to the earnings (loss) on discontinued operations, net of tax, in the current and comparative periods. Sherritt recognized earnings on the disposition and reclassification of $217.1 million in Q3 2020 as a result.

METALS MARKET

Nickel

Nickel market conditions continued to improve in the third quarter of 2020, sustaining the trend started in Q2 with the easing of lock-down restrictions related to the COVID-19 pandemic and the restart of economic and manufacturing activities, particularly in China.

Nickel prices on the London Metals Exchange (LME) opened at US$5.69/lb on July 1 and closed on September 30 at US$6.52/lb, representing a growth of 15%.

While nickel prices climbed during Q3, nickel inventory levels on the London Metals Exchange (LME) and the Shanghai Future Exchange (SHFE) remained relatively flat. Combined inventory levels at September 30 totaled approximately 263,000 tonnes, up from approximately 262,000 tonnes at June 30. Nickel inventories on the LME and SHFE have stayed relatively flat despite the reduced production of stainless steel globally on a year to date basis largely because a number of nickel mines around the world have either significantly reduced production or have gone into care and maintenance as a result of the spread of COVID-19. Production at the Moa JV has largely been unaffected by the spread of COVID-19 through September 30.

Renewed interest in electric vehicles and bullish forecasts for accelerated demand growth in the coming years have triggered speculative purchasing from commodity investors, sustaining the nickel price momentum into the fourth quarter. A number of carmakers, in particular, have indicated that high purity nickel will be the primary metal in their battery chemistries. At October 20, nickel prices had risen to US$7.16/lb, the highest price since the start of 2020. This renewed interest in nickel is expected to contribute to higher prices into 2021.

Over the medium term, nickel prices are expected to be volatile given the ongoing economic uncertainty caused by the pandemic. As mining operations resume production activities, nickel inventory levels may rise given that supply could exceed demand as a number of industries that are large consumers of stainless steel, such as food and hospitality sector, will experience a delayed or slower economic recovery, particularly if the second wave of the pandemic is prolonged.

In light of this uncertainty, a number of industry analysts have lowered their forecasts for nickel demand from end consumers, reflecting negative market sentiment through the end of 2021. Previously, demand for nickel through 2025 was expected to grow by approximately 3% per year to 2.8 million tonnes according to market research by Wood Mackenzie.

Added to this uncertainty is the substantial increase in nickel pig iron production, leading some industry analysts to predict an oversupplied nickel market in the near term. This development is putting additional pressure on producers of lower-grade material such as ferronickel, which is currently selling at significant discount. As a result, it remains unclear how nickel prices will fare in the near term.

Over the longer term, demand for nickel is expected to increase with the increased adoption of electric vehicles since nickel – along with cobalt – is a key metal needed to manufacture assorted energy storage batteries.

Cobalt

Cobalt prices experienced a turnaround in Q3 following an extended period of softness through much of the first half of the year as a result of the impact COVID-19 on consumer demand. Standard grade cobalt prices, in fact, rose 9% ending the quarter at US$15.65/lb according to data collected by Fastmarkets MB. Standard grade cobalt prices on July 1 closed at US$14.30/lb, widely believed by industry watchers and traders to be a floor-level price.

It is speculated that market conditions have improved for a number of factors, including growing demand from battery manufacturers as a result of higher demand for electronics and computer equipment due to the growing trend of working from home accelerated since the start of the COVID-19 pandemic.

Joe Racanelli, Director of Investor Relations
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