Higher nickel, cobalt and fertilizer prices drive Sherritt’s strong second quarter results
For immediate release
Higher nickel, cobalt and fertilizer prices drive Sherritt’s strong second quarter results
NOT FOR DISTRIBUTION TO U.S. NEWSWIRE SERVICES OR FOR DISSEMINATION IN THE U.S.
Toronto – July 27, 2022 – 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 six months ended June 30, 2022. All amounts are in Canadian currency unless otherwise noted.
“Strong long-term fundamentals for our nickel, cobalt and fertilizer products gave us the confidence to use some of our available cash to deleverage our balance sheet by repurchasing almost $60 million principal amount of our outstanding notes,” said Leon Binedell, President and CEO of Sherritt International Corporation. “On the strength of commodity prices in the quarter, our Adjusted EBITDA increased by more than 460% compared to the same quarter last year and almost doubled our first quarter of the year. Our NDCC at the Moa JV of US$2.19/lb was the lowest since Q3 2018, notably due to higher fertilizer by-product credits, and we received $19 million in distributions from the Moa JV during the quarter.”
Mr. Binedell added, “Despite some steady headwinds moving into Q3 as nickel and cobalt prices come off recent highs, we continue to be encouraged by long-term market fundamentals and will continue to make progress towards our expansion targets and further strengthening our balance sheet through increased distributions from our Moa JV during the balance of the year.”
SELECTED Q2 2022 DEVELOPMENTS
- As part of its priority of strengthening its balance sheet, Sherritt successfully purchased an aggregate of $59.2 million of Sherritt’s 8.5% second lien secured notes and 10.75% unsecured PIK option notes at a total 24% discount which will result in a reduction in annualized interest expense of approximately $5.5 million.
- Net earnings from continuing operations were $81.5 million, or $0.21 per share, compared to a net loss from continuing operations of $10.4 million, or $0.03 per share, in Q2 2021.
- Adjusted EBITDA(1) was $102.0 million compared to $18.0 million in Q2 2021. The improved Adjusted EBITDA was driven by higher nickel, cobalt, and fertilizer realized prices which offset lower sales volumes and higher input commodity prices. This quarter’s results also include a share-based compensation recovery of $17.2 million due to the impact of a reduction in Sherritt’s share price during the quarter. This compares to a $9.4 million share-based compensation expense in Q2 2021. Excluding the impact of share-based compensation in administrative expense, Q2 2022 administrative expenses were 27% lower than Q2 2021.
- Sherritt’s share of finished nickel and cobalt production at the Moa Joint Venture (Moa JV) were 3,704 tonnes and 396 tonnes, respectively. Finished production was lower in the current year period primarily due to timing of the planned annual maintenance shutdown. Last year, the plant maintenance shutdown occurred in Q3.
- Finished nickel and cobalt sales volumes for the three months ended June 30, 2022 were lower than production primarily due to logistics-related challenges in transporting finished product to customers and the deferral of orders by certain customers that were impacted by the slowdown of economic activity in China as a result of the country’s zero- COVID policies and recent global economic headwinds. The affected sales orders were partially offset by higher netback sales to other markets and sales to new customers, with a portion of the new customer contracts finalizing after quarter end. Subsequent to period end, additional sales of nickel and cobalt continue to reduce inventory towards more typical levels.
- Net direct cash cost (NDCC)(1) at the Moa JV was US$2.19/lb, the lowest since Q3 2018. During the current quarter, significantly increased cobalt and fertilizer by-product credits more than offset higher input and maintenance costs. Input commodity costs reflect a 178% increase in global sulphur prices, 102% increase in natural gas prices and 75% increase in fuel oil prices. Sherritt’s Q2 2022 NDCC continued to rank in the lowest cost quartile of all nickel producers according to annualized information tracked by Wood Mackenzie.
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- Received $19.2 million (US$15 million) as its share of Moa JV distributions in Q2 to bring total distributions received in the year to $43.4 million (US$34 million) which exceeds the total amount of distributions received in all of 2021. Given prevailing nickel and cobalt prices, planned spending on capital, including growth capital, working capital needs, and other expected liquidity requirements, Sherritt continues to anticipate higher distributions in the second half of 2022 compared to the first half of the year.
- The Moa JV advanced its expansion strategy aimed at growing annual nickel and cobalt production by 15 to 20% from the combined 34,710 tonnes produced in FY2021 once all projects are completed, and extending the life of mine at Moa beyond 2040. The first phase of this expansion, the slurry preparation plant at Moa, continues under construction and remains on budget and on schedule for completion in early 2024. Sherritt continues to evaluate its growth capital spend estimates in light of supply chain challenges and inflationary price pressures on construction materials, equipment, and labour costs. Additional engineering and design work continues and will facilitate more accurate cost estimates. The most recent assessment of expansion capital costs continues to indicate that costs are expected to be approximately US$25,000 per tonne of new nickel capacity consistent with previous disclosure. Progress in Q2 2022 included:
- ongoing construction of the slurry preparation plant with 50% of civil construction complete, 85% of the contracts for supply of materials and services awarded, and completed slurry pipeline design and ordered all materials;
- completed a feasibility study for the leach plant sixth train at Moa and confirmed previously installed equipment is in an acceptable condition for use;
- continued with basic engineering on the acid plants at Moa to meet the acid requirements from the expansion projects; and
- continued with basic engineering on de-bottlenecking projects at the refinery.
Sherritt expects to provide an update on the rollout and spending on capital related to the expansion strategy with each of its quarterly results with full project approval expected in the second half of 2022.
- Completed the first of the London Metal Exchange’s (LME) Responsible Sourcing requirements for LME-Listed Brands. The Corporation completed a LME-conformant Red Flag Assessment of its mineral supply chain and did not identify any red flags such as human rights violations, association with conflict, financial crimes or corruption. Independent LME-approved auditors validated this assessment and recommended that the LME confirm Sherritt’s conformance with its responsible sourcing requirements.
(1) Non-GAAP financial measures. For additional information see the Non-GAAP and other financial measures section of this press release.
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Q2 2022 FINANCIAL HIGHLIGHTS
| 2022 | 2021 | 2022 | 2021 | |||
| $ millions, except per share amount | June 30 | June 30 | Change | June 30 | June 30 | Change |
| Revenue | $ 65.9 $ | 31.0 | 113% $ | 100.0 $ | 52.9 | 89% |
| Combined revenue(1) | 221.5 | 152.3 | 45% | 423.7 | 294.0 | 44% |
| Earnings (loss) from operations and joint venture | 74.0 | (7.3) | nm(2) | 97.5 | (1.2) | nm |
| Net earnings (loss) from continuing operations | 81.5 | (10.4) | 884% | 97.9 | (12.3) | 896% |
| Net earnings (loss) for the period | 81.1 | (10.7) | 858% | 96.8 | (16.3) | 694% |
| Adjusted EBITDA(1) | 102.0 | 18.0 | 467% | 160.5 | 48.2 | 233% |
| Net earnings (loss) from continuing operations ($ per share) | 0.21 | (0.03) | 800% | 0.25 | (0.03) | 933% |
Cash provided (used) by continuing operations for operating nm nm
| activities | 25.6 | 1.5 | 31.2 | (1.5) | ||
| Combined free cash flow(1) | 23.5 | 2.6 | nm | 21.8 | 21.6 | 1% |
| Average exchange rate (CAD/US$) | 1.277 | 1.228 | 4% | 1.272 | 1.247 | 2% |
(1) Non-GAAP financial measures. For additional information see the Non-GAAP and other financial measures section of this press release.
(2) Not meaningful (nm).
2022 2021
| $ millions, as at | June 30 | December 31 | Change |
|---|---|---|---|
| Cash and cash equivalents | $ 124.6 $ | 145.6 | (14%) |
| Loans and borrowings | 393.4 | 444.5 | (11%) |
Cash and cash equivalents at June 30, 2022 were $124.6 million, down from $145.5 million at March 31, 2022. The reduction in cash was primarily due to the $44.8 million used to repurchase notes, $15.2 million in interest payments on the 8.50% second lien secured notes and $3.3 million of capital expenditures, partially offset by $19.2 million of distributions received from the Moa JV and strong fertilizer receipts.
Total distributions from the Moa JV to the end of the second quarter 2022 totaled $43.4 million (US$34 million) which exceeds the total amount of distributions received in all of 2021. Distributions from the Moa JV are determined based on available cash in excess of liquidity requirements, including anticipated nickel and cobalt prices, planned capital spend, working capital needs, and other expected liquidity requirements. Sherritt continues to expect distributions to be higher in the second half of the year than the first.
Sherritt also received US$12.2 million ($15.6 million) from Energas in Q2 which was used to facilitate foreign currency payments for the Energas operations. Total overdue receivables at June 30, 2022 were unchanged during the quarter at US$153.1 million. Collections on overdue amounts from Sherritt’s Cuban energy partners continue to be adversely impacted by Cuba’s reduced access to foreign currency as a result of ongoing U.S. sanctions and the global pandemic’s impact on tourism. Sherritt continues to work with its Cuban partners to accelerate receipt of payments on overdue amounts.
Of the $124.6 million of cash and cash equivalents, $28.6 million was held in Canada, down from $50.4 million as at March 31, 2022, and $91.8 million was held at Energas, up from $81 million as at March 31, 2022. The remaining amounts were held in Cuba and other countries.
Mandatory redemptions of the Corporation’s 8.5% second lien secured notes, as at the interest payment date in April 2022, was not required for the two-quarter period ended December 31, 2021 as the conditions pursuant to the redemption provisions of the indenture agreement were not met. For the two-quarter period ended June 30, 2022, excess cash flow, as defined in the indenture agreement, was $11.0 million. Subject to the minimum liquidity condition as defined in the indenture agreement, at the interest payment date in October 2022 the Corporation will be required to redeem, at par, total second lien secured notes equal to 50% of excess cash flow, or $5.5 million. In determining the minimum liquidity amounts in October 2022, the $44.8 million of cash used to repurchase second lien secured notes and unsecured PIK option notes during the three months ended June 30, 2022 will be added back in the calculation of minimum liquidity before and after any such redemption.
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Adjusted net earnings (loss) from continuing operations(1)
2022 2021 For the three months ended June 30 $ millions $/share $ millions $/share
Net earnings (loss) from continuing operations $ 81.5 $ 0.21 $ (10.4) $ (0.03)
Adjusting items:
| Sherritt - Unrealized foreign exchange gain - continuing operations | (3.8) | (0.01) | (8.6) | (0.02) | ||
| Corporate - Gain on repurchase of notes | (13.8) | (0.03) | (0.8) | - | ||
| Corporate - Transaction finance charges on repurchase of notes | 1.2 | - | - | - | ||
| Corporate - Severance and other contractual benefits expense | - | - | 2.4 | 0.01 | ||
| Corporate - Unrealized losses on commodity put options | - | - | 3.7 | 0.01 | ||
| Oil and Gas and Power - ACL revaluation | 1.2 | - | (0.1) | - | ||
| Other(2) | - | - | 0.8 | - | ||
| Total adjustments, before tax | $ (15.2) $ | (0.04)$ | (2.6) $ | - | ||
| Tax adjustments | (0.3) | - | - | - | ||
| Adjusted net earnings (loss) from continuing operations | $ 66.0 $ | 0.17 $ | (13.0) $ | (0.03) |
2022 2021 For the six months ended June 30 $ millions $/share $ millions $/share
Net earnings (loss) from continuing operations $ 97.9 $ 0.25 $ (12.3) $ (0.03)
Adjusting items:
| Sherritt - Unrealized foreign exchange gain - continuing operations | (4.9) | (0.02) | (11.2) | (0.03) | ||
| Corporate - Gain on repurchase of notes | (13.8) | (0.03) | (2.1) | (0.01) | ||
| Corporate - Transaction finance charges on repurchase of notes | 1.2 | - | - | - | ||
| Corporate - Severance and other contractual benefits expense | - | - | 2.4 | 0.01 | ||
| Corporate - Unrealized losses on commodity put options | (0.9) | - | 4.3 | 0.01 | ||
| Corporate - Realized losses on commodity put options | 0.9 | - | - | - | ||
| Oil and Gas - Gain on disposal of property, plant and equipment | (1.3) | - | - | - | ||
| Oil and Gas and Power - ACL revaluation | 1.5 | - | 1.5 | - | ||
| Other(2) | 0.5 | - | 2.6 | 0.01 | ||
| Total adjustments, before tax | $ (16.8) $ | (0.05)$ | (2.5) $ | (0.01) | ||
| Tax adjustments | (0.4) | - | (0.5) | - | ||
| Adjusted net loss from continuing operations | $ 80.7 $ | 0.20 $ | (15.3) $ | (0.04) |
(1) A non-GAAP financial measure. For additional information see the Non-GAAP and other financial measures section of this press release.
(2) Other items primarily relate to losses in net finance (expense) income and inventory obsolescence.
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METALS MARKET
Nickel
Following extreme volatility and multi-year highs experienced in the first quarter of 2022, the second quarter nickel prices experienced a period of reasonably stable prices before they declined towards the end of the quarter, with prices ending Q2 at US$10.48/lb, down from US$15.15/lb at the end of Q1. The nickel price averaged US$13.13/lb for Q2 2022, compared to US$11.97/lb for Q1 2022, a 10% increase. Reduced volatility on the London Metal Exchange (LME), continuing COVID-19 restrictions in China, inflationary pressures, and global economic recession concerns have all played a role in tempering the nickel price. Since the beginning of Q3, prices have continued to decline to US$9.66/lb at July 27.
Inventory levels on the LME and Shanghai Futures Exchange (SHFE) continued to decrease in Q2 with the LME inventory falling from 72,570 tonnes to 66,780 tonnes and the SHFE from 6,097 tonnes to 958 tonnes.
Near-term visibility of market fundamentals, including inventory levels, beyond 2022 is limited given the uncertainty caused by a number of recent geopolitical and macroeconomic developments relating to Russia’s invasion of Ukraine, slower than expected resumption of demand from China, the ongoing impacts caused by COVID-19, continued global logistics issues, inflationary pressures and global economic recession concerns.
The long-term outlook for nickel remains positive on account of the strong demand expected from the stainless steel sector, the largest market for nickel, and the rapidly growing electric vehicle (EV) battery market. Some market observers, such as Wood Mackenzie, have forecast a prolonged nickel supply deficit beginning in 2026 due to strong demand from the electric vehicle market and insufficient nickel production coming on stream in the near term.
According to Wood Mackenzie in June 2022, they estimated nickel demand to increase by 41% between 2021 and 2026 and increase to 2040 at a compound annual growth rate (CAGR) of 4%, with EV battery and storage accounting for 38% of nickel demand in 2040 a CAGR of 10.5%.
As a result of its unique properties, high-nickel cathode formulations remain the dominant choice for long-range and high performance electric vehicles manufactured by automakers. Sherritt is particularly well positioned to meet Class 1 demand given its production capabilities and the fact that Cuba possesses the world’s fourth largest nickel reserves. The adoption of lithium iron phosphate (LFP) cathode battery chemistry, which is less expensive than nickel-manganese-cobalt (NMC) cathode chemistry but with lower energy density and less vehicle range, may soften nickel demand from this segment of the market.
Cobalt
Cobalt prices experienced a steady decline during the quarter due to concerns relating to the slow rate of full reopening of the Chinese economy, global inflation and economic recession concerns.
While the average price for Standard Grade cobalt in Q2 2022 of US$38.19/lb was 6.3% higher than Q1 2022’s average of US$35.90/lb, according to data collected by Fastmarkets MB, cobalt prices steadily declined from US$39.35/lb at the end of Q1 to close at US$32.25/lb, down 18%. Since the beginning of Q3, prices continued to fall to US$25.70/lb at July 27.
Near term visibility on cobalt prices are limited for much of the same reasons as nickel and the ongoing logistics issues relating the transportation of cobalt hydroxide from the Democratic Republic of Congo (DRC), the world’s largest supply market.
Longer-term, the demand for cobalt is forecast to be positive as cobalt is a significant component in electric vehicle battery chemistries. Given the expected increase in EV adoption in the coming years, cobalt demand is expected to increase despite the EV industry’s efforts to minimize cobalt content to reduce battery cost. According to CRU in June 2022, they estimated that cobalt demand is expected to increase at a CAGR of 13% over the next five years (from 173 thousand tonnes in 2021 to 320 thousand tonnes in 2026), with EV battery driving much of this increase with a forecast CAGR of 23%.
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REVIEW OF OPERATIONS
Moa Joint Venture (50% interest) and Fort Site (100%)
For the three months ended For the six months ended 2022 2021 2022 2021 $ millions (Sherritt's share), except as otherwise noted June 30 June 30 Change June 30 June 30 Change
FINANCIAL HIGHLIGHTS
| Revenue(1) | $ 205.7 $ | 142.2 | 45% $ | 391.3 $ | 268.5 | 46% |
| Cost of Sales(1) | 125.7 | 120.2 | 5% | 241.7 | 216.6 | 12% |
| Earnings from operations | 78.4 | 19.7 | 298% | 146.1 | 47.5 | nm(2) |
| Adjusted EBITDA(2) | 91.9 | 34.1 | 170% | 173.1 | 75.8 | 128% |
CASH FLOW
Cash provided by continuing operations for operating activities $ 41.7 $ 21.6 93% $ 65.9 $ 45.1 46% Free cash flow(2) 29.5 13.8 114% 43.0 32.7 31%
PRODUCTION VOLUMES (tonnes)
3,906 4,020 (3%) 8,032 7,951 1% Mixed Sulphides
| Finished Nickel | 3,704 | 4,230 | (12%) | 7,579 | 8,418 | (10%) |
| Finished Cobalt | 396 | 476 | (17%) | 842 | 953 | (12%) |
| Fertilizer | 61,965 | 69,516 | (11%) | 125,052 | 133,308 | (6%) |
| NICKEL RECOVERY(3)(%) | 89% | 85% | 5% | 89% | 84% | 6% |
SALES VOLUMES (tonnes)
| Finished Nickel | 3,148 | 4,268 | (26%) | 6,906 | 8,445 | (18%) |
| Finished Cobalt | 248 | 452 | (45%) | 646 | 929 | (30%) |
| Fertilizer | 49,951 | 64,722 | (23%) | 81,390 | 91,833 | (11%) |
AVERAGE-REFERENCE PRICE (USD)
Nickel (US$ per pound)(4) $ 13.13 $ 7.87 67% $ 12.54 $ 7.92 58% Cobalt (US$ per pound)(5) 38.19 21.06 81% 37.00 21.38 73%
AVERAGE-REALIZED PRICE (CAD)(2)
| Nickel ($ per pound) | $ 16.99 $ | 9.46 | 80% $ | 15.83 $ | 9.71 | 63% |
| Cobalt ($ per pound) | 44.16 | 22.82 | 94% | 42.62 | 22.35 | 91% |
| Fertilizer ($ per tonne) | 1,090.96 | 409.06 | 167% | 922.38 | 380.50 | 142% |
UNIT OPERATING COST(2) (US$ per pound)
Nickel - net direct cash cost $ 2.19 $ 4.58 (52%) $ 2.85 $ 4.20 (32%)
SPENDING ON CAPITAL(2)
| Sustaining | $ | 12.5 $ | 7.7 | 62% $ | 28.2 $ | 12.4 | 127% |
| Growth | 0.8 | - - | 1.1 | - - | |||
| $ | 13.3 $ | 7.7 | 73% $ | 29.3 $ | 12.4 | 136% |
(1) Revenue and Cost of sales of Moa Joint Venture and Fort Site is composed of revenue/cost of sales, respectively, recognized by the Moa Joint Venture at Sherritt’s 50% share, which is equity-accounted and included in share of earnings (loss) of Moa Joint Venture, net of tax, and revenue/cost of sales recognized by Fort Site, which is included in consolidated revenue. For a breakdown of revenue between Moa Joint Venture and Fort Site see the Combined revenue section in the Non- GAAP and other financial measures section of this press release.
(2) Non-GAAP financial measures. For additional information see the Non-GAAP and other financial measures section of this press release.
(3) The nickel recovery rate measures the amount of finished nickel that is produced compared to the original nickel content of the ore that was mined.
(4) The average nickel reference price for the six months ended June 30, 2022 was impacted by the suspension of nickel trading and disruption events on the LME in March 2022. The calculation of the average nickel reference price for the six months ended June 30, 2022 is based on LME guidance for disruption events, which uses the next available price after a disruption event.
(5) Average standard grade cobalt published price per Fastmarkets MB.
Revenue in Q2 2022 increased by 45% to $205.7 million from $142.2 million last year. The revenue increase was largely attributable to higher average-realized prices(1) for nickel, cobalt, and fertilizer which were up 80%, 94%, and 167%, respectively, which more than offset lower sales volumes compared to Q2 2021.
Mixed sulphides production at the Moa JV in Q2 2022 was 3,906 tonnes, down 3% from the 4,020 tonnes produced in Q2 2021. The variance was primarily due to limited access to planned mining faces and reduced Leach Plant capacity due to unplanned maintenance.
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Sherritt’s share of finished nickel production in Q2 2022 totaled 3,704 tonnes, down 12% from the 4,230 tonnes produced in Q2 2021 while finished cobalt production for Q2 2022 was 396 tonnes, down 17% from the 476 tonnes produced in the same period last year. Lower finished metals production in Q2 2022 was primarily a result of timing of the annual maintenance shutdown. All work has been completed and full production has resumed. In 2021, the annual shutdown was moved to Q3 due to the impact of COVID-19 and contractor availability. Guidance for nickel and cobalt production remains unchanged; however, based on the expected nickel to cobalt ratio in the ore, finished cobalt production is estimated to be at the lower end of the 3,400 – 3,700 tonne range.
Finished nickel and cobalt sales volumes for the three months ended June 30, 2022 were lower than production primarily due to logistics-related challenges in transporting finished product to customers and the deferral of orders by certain customers that were impacted by the slowdown of economic activity in China as a result of the country’s zero-COVID policies and recent global economic headwinds. The affected sales orders were partially offset by higher netback sales to other markets and sales to new customers, with a portion of the new customer contracts finalizing after quarter end. Subsequent to period end, additional sales of nickel and cobalt continue to reduce inventory towards more typical levels.
Fertilizers production for the three months ended June 30, 2022 was lower compared to the same period in the prior year in line with lower metals production. Fertilizer sales volume was lower as a result of lower production and reduced demand caused by wet weather conditions in western Canada including flooding in Manitoba.
Mining, processing and refining (MPR) costs per pound of nickel sold in Q2 2022 were up 29% from Q2 2021. Higher MPR costs in Q2 2022 continue to be driven by the significant rise in input costs, which were further compounded by Russia’s invasion of Ukraine, and higher maintenance costs. Most notably for the Moa JV, sulphur, natural gas and fuel oil prices were 178%, 102% and 75% higher, respectively, when compared the same period last year. Increased input costs were partly offset by lower purchased sulphuric acid consumption. Purchased sulphuric acid consumption was required in the prior year to offset lower sulphuric acid production at Moa ahead of the planned sulphuric acid plant shutdown in the second quarter of 2021. Higher maintenance costs primarily reflected the timing of the annual maintenance shutdown at the refinery which occurred in the second quarter of 2022 compared to the third quarter of 2021.
Net direct cash cost (NDCC)(1) per pound of nickel sold decreased by 52% to US$2.19/lb in Q2 2022 from US$4.58/lb for Q2 2021. The improvement was primarily due to higher cobalt and net fertilizer by-product credits generated by higher averagerealized prices which offset lower sales volumes and higher input commodity prices as discussed above. NDCC for Q2 2022, which was the lowest since the third quarter of 2018, continued to rank Sherritt in the lowest cost quartile of all nickel producers according to annualized information tracked by Wood Mackenzie. Guidance for NDCC remains unchanged; however, it is expected to be at the higher end of the US$4.00 – US$4.50/lb range with finished cobalt production estimated to be at the lower end of the guidance range.
Sustaining spending on capital in Q2 2022 was $12.5 million, up 62% from $7.7 million in Q2 2021. The year-over-year increase was due primarily to higher planned spending at both the Moa JV and Fort Site. Growth spending on capital, which represents spending on the joint venture’s expansion projects, was $0.8 million. Of that, $0.6 million was spending on the slurry preparation plant. The Corporation revised its guidance for sustaining spending on capital at Moa JV and Fort Site from $75 million to $60 million as a result of freight and order delays and lower contractor availability.
(1) Non-GAAP financial measures. For additional information see the Non-GAAP and other financial measures section of this press release.
Expansion and growth update
The Moa JV advanced with its expansion strategy aimed at growing annual nickel and cobalt production by 15 to 20% from the combined 34,710 tonnes produced in FY2021, which should result in an increase in annual nickel production by approximately 4,700 to 6,200 tonnes (100% basis), once all projects are completed, and extending the life of mine at Moa beyond 2040. Progress in Q2 2022 included:
Slurry Preparation Plant
- Construction of the slurry preparation plant at Moa is progressing on schedule with civil construction 50% complete, 85% of the contracts for supply of materials and services have been awarded and the slurry pipeline design has been completed and all materials have been ordered. In addition, the structural steel has arrived at site and pre-fabrication will commence in early Q3 with field assembly in the latter half of Q4.
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- The project cost and schedule remain on track at an estimated cost of US$27 million (100% basis) with expected completion in early 2024. In 2022, US$9 million (100% basis) in growth spending on capital, all of which has been committed, will be used for long lead materials and equipment, civil and mechanical construction.
- The project is expected to deliver a number of benefits, including reduced ore haulage, lower carbon intensity from mining, and increased annual production of nickel and cobalt contained in mixed sulphides of approximately 1,700 tonnes commencing in mid-2024.
Moa Processing
- The feasibility study for a leach plant sixth train has been completed and approved by the Cuban authorities. Inspection of previously installed equipment has been completed by third party experts and determined to be in acceptable condition.
- Basic engineering continues on the acid plants to meet the acid requirements from the expansion projects.
- Initiated assessment of plant capacity and other infrastructure with expected completion in Q3.
Refinery
- An external engineering firm has been contracted and basic engineering has commenced.
Economic Cut-Off Grade and Life of Mine
- External consultants continued to advance on the initial pit designs for reserves.
- Continued to engage with the Oficina Nacional de Recursos Minerales (ONRM), Cuba’s Natural Resources Ministry, with expected approval during the second half of the year.
- Sherritt plans to release an updated NI 43-101 Technical Report before the end of year.
Sherritt continues to evaluate its growth capital spend estimates in light of supply chain challenges and inflationary price pressures on construction materials, equipment, and labour costs. Additional engineering and design work continues and will facilitate more accurate cost estimates. The most recent assessment of expansion capital costs continues to indicate that costs are expected to be approximately US$25,000 per tonne of new nickel capacity consistent with previous disclosure. Sherritt will review additional ESG considerations in the expansion plans as engineering advances.
Spending on growth capital is expected to be self-funded by the Moa JV primarily using operating cash flows with the option to utilize Sherritt’s revolving credit facility for up to $30 million at the refinery in Fort Saskatchewan. Total growth spending on capital of US$30 million (100% basis) is expected in 2022 for the slurry preparation plant, ordering of long lead items, and engineering work related to finalizing costs of the remaining expansion projects.
Sherritt expects to provide an update on the rollout and spending on capital related to the expansion strategy with each of its quarterly results with full project approval expected in the second half of 2022.
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Power
2022 2021 2022 2021 $ millions (33 ⅓% basis), except as otherwise noted June 30 June 30 Change June 30 June 30 Change
FINANCIAL HIGHLIGHTS
| Revenue | $ 8.6 $ | 7.0 | 23% $ | 17.6 $ | 12.9 | 36% |
| Cost of sales | 6.5 | 6.2 | 5% | 12.5 | 12.6 | (1%) |
| Earnings (loss) from operations | 2.3 | (0.2) | nm(1) | 2.8 | (1.3) | 315% |
| Adjusted EBITDA(2) | 6.3 | 3.7 | 70% | 10.7 | 6.5 | 65% |
CASH FLOW
Cash provided by continuing operations for operating activities $ 6.1 $ 11.5 (47%) $ 14.8 $ 14.3 3% Free cash flow(1) 6.1 11.5 (47%) 14.3 14.3 -
PRODUCTION AND SALES
Electricity (GWh(3)) 133 115 16% 270 210 29%
AVERAGE-REALIZED PRICE(2)
Electricity ($/MWh(3)) $ 55.21 $ 52.60 5% $ 54.97 $ 53.60 3%
UNIT OPERATING COSTS(2)
Electricity ($/MWh) 20.10 21.03 (4%) 17.86 23.23 (23%)
NET CAPACITY FACTOR (%) 41 37 11% 42 33 27%
SPENDING ON CAPITAL(2)
Sustaining $ - $ - - $ 0.5 $ - - $ - $ - - $ 0.5 $ - -
(1) Not meaningful (nm).
(2) Non-GAAP financial measures. For additional information see the Non-GAAP and other financial measures section of this press release.
(3) Gigawatt hours (GWh), Megawatt hours (MWh).
Power production in Q2 2022 was 133 gigawatt hours (GWh) of electricity, up 16% from 115 GWh produced in the comparable period of 2021 primarily as a result of timing of maintenance activities. In Q2 2021 maintenance at the Boca facility reduced production and sales volumes. Accordingly, revenue in Q2 2022 totalling $8.6 million, was up 23% from $7 million for the same quarter last year as a result of the higher power production.
Unit operating costs(1) in Q2 2022 were $20.10/MWh, down 4% from $21.03/MWh for Q2 2021. The year-over-year improvement was driven by higher power production and sales volumes.
Sherritt received US$12.2 million ($15.6 million) in the quarter, all of which was used to facilitate foreign currency payments for the Energas operations. Subsequent to the quarter end, Sherritt received an additional payment of US$4.2 million ($5.4 million) and expects to continue to receive sufficient liquidity to support operations for the remainder of the year.
The Power business unit had negligible spending on capital in the second quarter of 2022. Spending on capital at the Power business in FY2022 is forecast at $5 million, which will be primarily earmarked towards maintenance activities in Q4.
Sherritt continues in discussion with its Cuban partners to expedite payment of overdue receivables and increase availability of natural gas needed to increase power production. The formal approvals process remains underway through the Cuban government to extend the power generation agreement with Energas, which is currently slated to expire in March 2023. The requisite feasibility study was submitted to the Cuban government in Q1 2022 and has been approved by eight of nine impacted ministries. Sherritt anticipates a final decision on extending the power generation agreement from Cuba’s Executive Council before the end of the year.
(1) Non-GAAP financial measure. For additional information see the Non-GAAP and other financial measures section of this press release.
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Technologies
During the three months ended June 30, 2022, Sherritt Technologies (Technologies) continued to support the Moa JV’s expansion strategy. These activities included establishing an economic cut-off grade for determining reserves to optimize mine planning and upgrade resources into reserves, and supporting on-going process plant capacity testing and debottlenecking work at both Moa and the Fort Site locations.
In addition, Sherritt Technologies continued to advance development and commercialization of its most promising and innovative proprietary technologies:
- “Chimera”/”D-POX” – suite of processes for the treatment of complex copper concentrates (or other high arsenic content feeds) that enable high recoveries of base and precious metals while providing a significant step change in the stabilization of arsenic bearing solid waste. Chimera combines complex copper concentrate and laterite processing into a single facility that enables additional environmental and economic benefits and the production of nickel and cobalt intermediate by-products. D-POX is a pressure oxidation process that enables treatment of higher arsenic concentrations while simplifying silver recovery.
During the quarter, Technologies continued discussions with potential interested parties on the selection of the optimal process and commercialization routes as well as potential batch testing and piloting programs;
- Dense slurry hydroprocessing (DSH) – metallurgical reactor technology being applied to the processing of bio-oils into second-generation renewable fuels, upgrading of refinery vacuum residue to create value add products and upgrading heavy oils and bitumen.
During the quarter, Technologies commenced batch testing on the bio-fuels/refinery vacuum residue applications to quantify the performance of the technology on these streams, and continued front-end engineering work to assess different scale facilities to satisfy the technical assessment requirements of potential partners;
- Next-generation laterite (NGL) processing – novel processing flowsheet with the potential to make processing of lateritic ores more economically viable and sustainable while enabling the supply of nickel and cobalt products from lateritic ores to the battery sector.
During the quarter, Technologies completed initial unit operation pilot testing with results demonstrating the ability for selective leaching of nickel and cobalt from both saprolite and limonite ores.
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2022 REVIEW OF STRATEGIC PRIORITIES
The table below lists Sherritt’s Strategic Priorities for 2022, and summarizes how the Corporation has performed against those priorities.
2022 Strategic Priorities Selected Actions Status
ESTABLISH SHERRITT AS A Accelerate plans to expand Moa JV Continued with construction and awarding of material and LEADING GREEN METALS nickel and cobalt production by up to services supply contracts for slurry preparation plant; PRODUCER 20% from the combined 34,710 tonnes completed feasibility study confirming previously installed produced in 2021. equipment acceptable for use for leach plant sixth train. Most recent estimates confirm total expansion costs to be approximately US$25,000 per tonne of new nickel capacity. Rank in lowest quartile of HPAL nickel Q2 2022’s NDCC(1) of US$2.19/lb continued to rank Sherritt in producers for NDCC. the lowest cost quartile of all nickel producers.
LEVERAGE TECHNOLOGIES Support Moa JV expansion, Continued to support the planning for the Moa JV growth FOR TRANSFORMATIONAL operational improvements, and life of strategy and life of mine extension at Moa.
GROWTH mine extension.
Advance Technologies solutions Continued to advance development and commercialization of toward commercialization. most promising and innovative technologies, including Chimera/D-POX – Continued discussions with parties on commercialization routes, potential batch testing and piloting programs for treatment of complex copper concentrates. DSH – Commenced batch testing on bio-fuels/refinery vacuum residue applications and continued front-end engineering.
NGL – Completed initial unit operation pilot testing with results demonstrating the ability for selective leaching of nickel and cobalt from both saprolite and limonite ores.
ACHIEVE BALANCE SHEET Maximize collections of overdue Continued discussions with Cuban partners to accelerate STRENGTH Cuban receivables. collections of overdue amounts owed.
Maximize available liquidity to support Purchased $59.2 million principal amount of notes at a growth strategy. discount reducing annualized interest expense by $5.5 million.
Continue to optimize costs to reflect Implemented measures relating to director compensation and operating footprint. employee costs that will result in annual savings of $3 million.
BE RECOGNIZED AS A Deliver on actions identified in the Completed the first of the London Metal Exchange’s (LME) SUSTAINABLE ORGANIZATION Sustainability Report. Responsible Sourcing requirements for LME-Listed Brands. The 2021 Sustainability Report is expected to be released by the end of Q3 2022.
Achieve year-over-year ESG Initiated plans for site climate risk and opportunity improvements including reduction of assessments at Sherritt’s operations.
carbon intensity.
Began replacing vehicles and equipment with EVs and electric equipment at Moa and the Fort Site.
Deliver on ‘Diversity and Inclusion’ Continued year three implementation of the five-year D&I global framework Framework with the successful launch of a company-wide mentorship program and updated governance parameters. Improved gender balance in the operations senior management team.
MAXIMIZE VALUE FROM Extend economically beneficial Submitted feasibility study and received approval from eight CUBAN ENERGY BUSINESSES Energas power generation contract of nine ministries for extension of the power generation beyond 2023. agreement. A final decision from Cuba’s Executive Council is anticipated before end of year.
(1) Non-GAAP financial measure. For additional information see the Non-GAAP and other financial measures section of this press release.
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OUTLOOK 2022 production volumes, unit operating costs and spending on capital guidance
Guidance Year-to-date Updated for 2022 - actuals - 2022 guidance - Production volumes, unit operating costs and spending on capital Total Total Total
Production volumes
Moa Joint Venture (tonnes, 100% basis)
| Nickel, finished | 32,000 - 34,000 | 15,158 | No change |
| Cobalt, finished | 3,400 - 3,700 | 1,684 | No change |
| Electricity (GWh, 33⅓% basis) | 450 - 500 | 270 | No change |
Unit operating costs(1)
Moa Joint Venture - NDCC (US$ per pound) $4.00 - $4.50 $2.85 No change Electricity (unit operating cost, $ per MWh) $26.50 - $28.00 $17.86 No change
Spending on capital(1)($ millions)
Sustaining Moa Joint Venture (50% basis), Fort Site (100% basis)(2) $75.0 $28.2 $60.0 Power (33⅓% basis) $5.0 $0.5 No change Growth Moa Joint Venture (50% basis), Fort Site (100% basis)(2) $19.0 $1.1 No change Spending on capital(3) $99.0 $29.8 $84.0
(1) Non-GAAP financial measures. For additional information see the Non-GAAP and other financial measures section of this press release.
(2) Spending is 50% of expenditures for the Moa Joint Venture and 100% expenditures for Fort Site fertilizer and utilities.
(3) Excludes spending on capital of the Metals Other, Oil and Gas, Technologies and Corporate segments.
Guidance for nickel and cobalt production remains unchanged; however, based on the expected nickel to cobalt ratio in the ore, cobalt production is estimated to be at the lower end of the 3,400 – 3,700 tonne range.
Guidance for NDCC remains unchanged; however, is expected to be at the higher end of the US$4.00 – US$4.50/lb range with cobalt production estimated to be at the lower end of the guidance range.
The Corporation revised its guidance for sustaining spending on capital at Moa JV and Fort Site from $75 million to $60 million primarily as a result of freight and order delays and lower contractor availability.
Growth spending on capital in 2022 for the Moa Joint Venture and Fort Site are primarily related to expansion spending for the slurry preparation plant, ordering of long lead items and engineering work related to finalizing costs of the remaining expansion projects. Additional expenditures related to expansion activities are currently being assessed. Sherritt expects to provide updates on the rollout and spending on capital related to the expansion strategy with each of its quarterly results.
CONFERENCE CALL AND WEBCAST
Sherritt will hold its conference call and webcast July 28, 2022 at 10:00 a.m. Eastern Time to review its Q2 2022 results. Dial-in and webcast details are as follows:
North American callers, please dial: 1 (888) 396-8049 Passcode: 89786551
International callers, please dial: 1 (416) 764-8646 Passcode: 89786551
Live webcast: www.sherritt.com
Please dial in 15 minutes before the start of the call to secure a line. Alternatively, listeners can access the conference call and presentation via the webcast available on Sherritt’s website.
An archive of the webcast and replay of the conference call will also be available on the website.
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