Sherritt Reports Fourth Quarter and Year End 2017 Results
For immediate release
Sherritt Reports Fourth Quarter and Year End 2017 Results
NOT FOR DISTRIBUTION TO UNITED STATES NEWSWIRE SERVICES OR FOR DISSEMINATION IN THE UNITED STATES
Toronto, Ontario – February 12, 2018 – Sherritt International Corporation (“Sherritt” or the “Corporation”) (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 fourth quarter and year ended December 31, 2017. All amounts are in Canadian currency unless noted.
CEO COMMENTARY
“Sherritt ended 2017 with a significantly strengthened balance sheet and a much improved outlook as a result of a number of key developments over the past year,” said David Pathe, President and CEO of Sherritt International. “Most notably, we completed the restructuring of the Ambatovy Joint Venture, achieved our nickel and cobalt production as well as our unit cost targets at the Moa Joint Venture, and benefitted from higher realized prices for each of the primary commodities that we produce.”
Mr. Pathe added, “We have sustained this momentum since the start of 2018 with our first equity financing in more than a decade, and are currently conducting a modified Dutch auction tender process to reduce our debt even further. With the strong outlook for Class 1 nickel and cobalt given electric vehicle market trends and the maturities on our outstanding debentures not due until the fourth quarter of 2021, we are particularly encouraged by our prospects in 2018 and beyond.”
Q4 HIGHLIGHTS
- Sherritt and its partners successfully completed the restructuring of the Ambatovy Joint Venture. Following the restructuring, Sherritt eliminated $1.4 billion in debt from its balance sheet, retained a 12% ownership interest in Ambatovy and continues to serve as operator.
- Net direct cash cost (NDCC)(1) at the Moa Joint Venture (“Moa JV”) was US$1.80 per pound of finished nickel sold, the lowest total since the third quarter of 2004. The decline was primarily driven by higher cobalt prices and the US$0.50 per pound cost savings achieved with the commissioning of the third acid plant at Moa in the fourth quarter of 2016.
- Sherritt’s share of finished nickel production at the Moa JV was 4,134 tonnes, up 9% from Q4 2016, while its share of finished cobalt was 465 tonnes, up 22% from Q4 2016. Production increased on a year-over-year basis despite the negative impact heavy rains had on lowering mixed sulphide production in November and December 2017.
- Received $19.9 million from the Moa JV as repayment on its working capital facility and US$7.5 million in Cuban energy payments.
- Adjusted EBITDA was $49.6 million, up 33% from Q4 2016.
- Including a gain of $629.0 million related to the Ambatovy restructuring, earnings were $537.8 million, or $1.80 per share outstanding, up from a net loss of $106.7 million, or $0.36 per share outstanding, in Q4 2016.
2017 HIGHLIGHTS
- Sherritt ended the year with cash, cash equivalents and short-term investments of $203.0 million after reflecting payments related to the Ambatovy JV restructuring, interest payments related to outstanding debentures and the $35.0 million repayment of a syndicated revolving-term loan.
- Sherritt’s share of finished nickel and finished cobalt production at the Moa JV were 15,762 tonnes and 1,801 tonnes, respectively. The production totals were in line with guidance for the year.
- NDCC at the Moa Joint Venture was US$2.35 per pound of finished nickel, below the US$2.80 - $3.30 per pound guidance that the Company provided for the year.
- Adjusted EBITDA was $149.8 million, up from $40.0 million in 2016.
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- Including the gain related to the Ambatovy JV restructuring, net earnings were $293.8 million, or $0.99 per share outstanding, up from a net loss of $378.9 million, or $1.29 per share outstanding, in 2016.
- Sherritt’s efforts to strengthen its balance sheet were reflected in a number of improved financial ratios at year end. Net debt to Adjusted EBITDA reduced from 48.9 at the end 2016 to 4.4 at December 31, 2017 while total debt to shareholders’ equity improved from 2.1 at the end of 2016 to 0.8 at December 31, 2017.(2)
HIGHLIGHTS SUBSEQUENT TO YEAR END
- Closed a unit offering financing transaction that generated gross proceeds of $132.0 million. Net proceeds will be used to reduce Sherritt’s outstanding indebtedness, for general corporate purposes and to fund future growth initiatives.
- Launched a modified Dutch Auction tender offer to repurchase up to $75.0 million of outstanding unsecured debentures. The tender offering is expected to close on February 16, 2017.
- Executed a three-year extension of the Puerto Escondido/Yumuri production sharing contract to 2021.
- Although facilities at the Ambatovy Joint Venture in Madagascar were impacted by Tropical Cyclone Ava, a Category 2 hurricane equivalent storm, all personnel were unhurt and safely accounted for. Damage to equipment and the acid production facilities resulted in a temporary halt in production. Repairs have since been completed and partial production has resumed. A ramp up in production is expected through the end of Q2 2018.
(1) For additional information see the Non-GAAP measures section of this press release.
(2) Net debt is defined as debt due within one year plus the book value of long-term debt, less cash, cash equivalents and short-term investments, as shown in Sherritt’s consolidated statement of financial position. Total debt is defined as debt due within one year plus the book value of long-term debt plus the non-recourse debt.
Q4 AND 2017 FINANCIAL HIGHLIGHTS
For the three months ended For the years ended
| 2017 | 2016 | 2017 | 2016 | |||
| $ millions, except per share amount | December 31 | December 31 | Change | December 31 | December 31 | Change |
| Revenue | 54.8 | 70.5 | (22%) $ | 267.3 $ | 262.3 | 2% |
| Combined Revenue(1) | 223.8 | 240.3 | (7%) | 917.5 | 820.2 | 12% |
| Net earnings (loss) for the period | 537.8 | (106.7) | 604% | 293.8 | (378.9) | 178% |
| Adjusted EBITDA(1) | 49.6 | 37.4 | 33% | 149.8 | 40.0 | 275% |
| Cash provided (used) by continuing operations | (33.9) | (22.6) | (50%) | (9.6) | 1.6 | (700%) |
| Combined free cash flow(1) | (41.2) | (45.5) | 9% | (62.1) | (111.9) | 45% |
| Net earnings (loss) from continuing operations per share | 1.85 | (0.37) | 600% | 1.04 | (1.30) | 180% |
(1) For additional information, see the Non-GAAP measures section of this release.
| $ millions, except as otherwise noted, as at December 31 | 2017 | 2016 | Change |
| Cash, cash equivalents and short-term investments | 203.0 | 308.6 | (34%) |
| Non-recourse loans and borrowings | - | 1,367.5 | (100%) |
| Other loans and borrowings | 824.1 | 860.7 | (4%) |
In Q4 2017, Sherritt generated negative cash flow from operations of $33.9 million. The consolidated total included $32.5 million in positive cash flow contributions from the Moa JV and Fort Site and $5.4 million in positive cash flow contributions from the Power division. Total transaction costs of $11.3 million related to the restructuring of the Ambatovy JV contributed negatively to the consolidated total.
Cash, cash equivalents and short-term investments at year end were $203.0 million, down from $290.3 million at September 30, 2017. The decrease was primarily driven by payments related to the restructuring of the Ambatovy JV, lower Cuban energy payments received and the repayment of $8.0 million in Q4 on the Company’s syndicated revolving-term loan and partly offset by a $19.9 million repayment from the Moa JV on its working capital facility to Sherritt.
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During Q4, US$7.5 million of Cuban energy payments were received compared to US$32.6 million in the third quarter of 2017. Total Cuban overdue receivables were US$132.6 million at December 31, 2017 compared to US$100.5 million at September 30, 2017. The increase in overdue receivables was attributable to a number of factors, including the impact of Hurricane Irma and resulting recovery costs on Cuba’s economy. Sherritt has experienced variability in its Cuban receivables over the years but has not incurred any losses related to any Cuban receivables.
Adjusted earnings (loss) from continuing operations(1)
2017 2016 For the three months ended December 31 $ millions $/share $ millions $/share Net earnings (loss) from continuing operations 552.9 1.85 (109.6) (0.37)
Adjusting items, net of tax:
| Unrealized foreign exchange (gain) loss | 24.1 | 0.08 | 25.7 | 0.09 |
| Gain on Ambatovy restructuring | (629.0) | (2.11) | - | - |
| Other | 1.8 | 0.01 | 2.6 | 0.01 |
| Adjusted net earnings (loss) from continuing operations | (50.2) | (0.17) | (81.3) | (0.28) |
2017 2016 For the year ended December 31 $ millions $/share $ millions $/share Net earnings (loss) from continuing operations 308.9 1.04 (381.8) (1.30)
Adjusting items, net of tax:
| Unrealized foreign exchange (gain) loss | 7.7 | 0.03 | (35.9) | (0.12) |
| Gain on Ambatovy restructuring | (629.0) | (2.12) | - | - |
| Other | (4.7) | (0.02) | (10.2) | (0.03) |
| Adjusted net earnings (loss) from continuing operations | (317.1) | (1.07) | (427.9) | (1.46) |
(1) For additional information, see the Non-GAAP measures section of this release.
Excluding the gain from the restructuring of the Ambatovy JV, Sherritt incurred an adjusted net loss from operations of $50.2 million, or $0.17 per share outstanding, in Q4 2017. These compare to an adjusted net loss of $81.3 million, or $0.28 per share, for the same period of 2016.
Sherritt’s adjusted net loss for the 12-month period of 2017 was $317.1 million or $1.07 per share outstanding. These compare to an adjusted net loss of $427.9 million, or $1.46 per share outstanding, for 2016.
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REVIEW OF OPERATIONS
METALS
| $ millions except as otherwise noted, for the three months ended December 31 | 2017 | 2016 | |||
| Moa JV & | Ambatov | Moa JV and | Ambatovy | ||
| Fort Site(1) | JV(2) | Total | Fort Site(1) | JV(2) | |
| (50%) | (12%) Other(3) | (50%) | (40%) Other(3) | Total Change |
FINANCIAL HIGHLIGHTS
Revenue 122.9 $ 58.1 $ 3.0 $ 184.0 $ 92.5 $ 88.2 $ 14.9 $ 195.6 (6%) $
| Earnings (loss) from operations | 19.9 | (7.7) | - | 12.2 | (7.6) | (15.0) | 0.2 | (22.4) | 154% |
| Adjusted EBITDA(4) | 32.1 | 18.1 | - | 50.2 | 5.6 | 24.4 | 0.2 | 30.2 | 66% |
| Cash provided (used) by operations | 32.5 | (3.4) | (0.5) | 28.6 | (6.1) | (0.8) | 3.3 | (3.6) | 894% |
| Free cash flow(4) | 24.9 | (20.7) | (0.5) | 3.7 | (9.8) | (10.6) | 3.3 | (17.1) | 122% |
PRODUCTION VOLUMES (tonnes)
| Mixed Sulphides | 4,090 | 3,329 | - | 7,419 | 3,674 | 6,036 | - | 9,710 | (24%) |
| Finished Nickel | 4,134 | 3,111 | - | 7,245 | 3,782 | 5,111 | - | 8,893 | (19%) |
| Finished Cobalt | 465 | 245 | - | 710 | 382 | 404 | - | 786 | (10%) |
| Fertilizer | 61,923 | 10,011 | - | 71,934 | 61,460 | 16,650 | - | 78,110 | (8%) |
| NICKEL RECOVERY(%) | 79% | 84% | 85% | 87% |
SALES VOLUMES (tonnes)
| Finished Nickel | 4,129 | 2,602 | - | 6,731 | 3,975 | 4,935 | - | 8,910 | (24%) |
| Finished Cobalt | 480 | 225 | - | 705 | 487 | 360 | - | 847 | (17%) |
| Fertilizer | 51,141 | 8,114 | - | 59,255 | 45,698 | 15,485 | - | 61,183 | (3%) |
| AVERAGE EXCHANGE RATE(CAD/US) | 1.271 | 1.334 | (5%) |
AVERAGE REFERENCE PRICES (US$ per pound)
Nickel $ 5.25 $ 4.90 7% Cobalt 31.60 13.51 134%
AVERAGE-REALIZED PRICES(4)
| Nickel ($ per pound) | $ 6.72 $ | 6.56 $ | - $ | 6.66 $ | 6.39 $ | 6.50 $ | - $ | 6.45 | 3% |
| 38.78 | 39.03 | - | 38.86 | ||||||
| Cobalt ($ per pound) | 16.85 | 18.73 | - | 17.68 | 120% | ||||
| Fertilizer ($ per tonne) | 348 | 173 | - | 324 | 326 | 160 | - | 284 | 14% |
UNIT OPERATING COSTS(4) (US$ per pound)
$ 1.80 $ 3.27 -
Nickel - net direct cash cost 2.37 $ 3.80 $ 3.10 - 3.41 (31%)
SPENDING ON CAPITAL
| Sustaining | $ 7.7 $ | 10.0 $ | - $ | 17.7 $ | 4.7 $ | 19.0 $ | - $ | 23.7 | (25%) |
| - | - | - | - | ||||||
| Expansion | (2.1) | - | - | (2.1) | 100% |
$
7.7 $ 10.0 $ - $ 17.7 $ 2.6 $ 19.0 $ - $ 21.6 (15%)
(1) Includes results for certain 100% owned assets at Fort Saskatchewan plant.
(2) Sherritt’s share for Ambatovy Joint Venture reflects its interest at 40% to December 10, 2017 and 12% thereafter.
(3) Includes results for Sherritt’s marketing organizations for certain Ambatovy and Moa Joint Venture sales.
(4) For additional information, see the Non-GAAP measures section of this release.
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| $ millions, except as otherwise noted, for the years ended December 31 | 2017 | 2016 | |||
| Moa JV and Ambatovy | Moa JV and | Ambatovy | |||
| Fort Site(1) | JV(2) | Fort Site(1) | JV(2) | ||
| (50%) | (12%) Other(3) | Total | (50%) | (40%) Other(3) | Total Change |
FINANCIAL HIGHLIGHTS
| Revenue | $ 417.0 $ | 279.2 $ | 43.1 $ | 739.3 $ | 339.3 $ | 264.8 $ | 48.0 $ | 652.1 | 13% |
| Earnings (loss) from operations | 31.3 | (109.5) | 0.9 | (77.3) | (28.4) | (150.9) | 0.8 | (178.5) | 57% |
| Adjusted EBITDA(4) | 80.5 | 26.0 | 0.9 | 107.4 | 19.6 | (7.0) | 0.8 | 13.4 | 701% |
| Cash provided (used) by operations | 58.3 | (26.7) | 3.0 | 34.6 | (2.7) | (34.6) | 3.1 | (34.2) | 201% |
| Free cash flow(4) | 37.4 | (55.6) | 3.0 | (15.2) | (33.9) | (55.9) | 3.1 | (86.7) | 82% |
PRODUCTION VOLUMES (tonnes)
| Mixed Sulphides | 17,297 | 14,836 | - | 32,133 | 16,923 | 18,271 | - | 35,194 | (9%) |
| Finished Nickel | 15,762 | 13,618 | - | 29,380 | 16,464 | 16,842 | - | 33,306 | (12%) |
| Finished Cobalt | 1,801 | 1,173 | - | 2,974 | 1,847 | 1,309 | - | 3,156 | (6%) |
| Fertilizer | 243,682 | 43,118 | - | 286,800 | 256,812 | 53,908 | - | 310,720 | (8%) |
| NICKEL RECOVERY(%) | 85% | 85% | 87% | 86% |
SALES VOLUMES (tonnes)
| Finished Nickel | 15,679 | 13,694 | - | 29,373 | 16,402 | 16,844 | - | 33,246 | (12%) |
| Finished Cobalt | 1,783 | 1,220 | - | 3,003 | 1,846 | 1,281 | - | 3,127 | (4%) |
| Fertilizer | 178,491 | 42,016 | - | 220,507 | 167,525 | 52,482 | - | 220,007 | - |
| AVERAGE EXCHANGE RATE(CAD/USD) | 1.299 | 1.325 | (2%) |
AVERAGE REFERENCE PRICES (US$ per pound)
Nickel $ 4.72 $ 4.36 8% Cobalt 26.53 11.77 125%
AVERAGE-REALIZED PRICES(4)
| Nickel ($ per pound) | $ 6.14 $ | 6.05 $ | - $ | 6.10 $ | 5.63 $ | 5.66 $ | - $ | 5.65 | 8% |
| Cobalt ($ per pound) | 32.98 | 33.35 | - | 33.13 | 14.82 | 16.08 | - | 15.33 | 116% |
| Fertilizer ($ per tonne) | 361 | 168 | - | 325 | 377 | 164 | - | 326 | - |
UNIT OPERATING COSTS (US$ per pound)(4)
Nickel - net direct cash cost $ 2.35 $ 3.83 $ - $ 3.04 $ 3.42 $ 4.27 $ - $ 3.85 (21%)
SPENDING ON CAPITAL
Sustaining $ 20.9 $ 44.2 $ - $ 65.1 $ 22.6 $ 33.1 $ - $ 55.7 17% Expansion - - - - 10.3 - - 10.3 (100%)
$
20.9 $ 44.2 $ - $ 65.1 $ 32.9 $ 33.1 $ - $ 66.0 (25%)
(1) Includes results for certain 100% owned assets at Fort Saskatchewan plant.
(2) Sherritt’s share for Ambatovy Joint Venture reflects its interest at 40% to December 10, 2017 and 12% thereafter.
(3) Includes results for Sherritt’s marketing organizations for certain Ambatovy and Moa Joint Venture sales.
(4) For additional information, see the Non-GAAP measures section of this release.
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METAL MARKETS
Nickel
Nickel prices rallied in the second half of 2017 after experiencing considerable volatility in the first six months of the year. The average nickel reference price in the fourth quarter was US$5.25 per pound, up 7% from US$4.90 for Q4 2016. The average nickel reference price for the 12-months of 2017 was US$4.72 per pound, up 8% from US$4.36 per pound for 2016.
The year-over-year price improvements were largely driven by the growing understanding of the important role that Class 1 nickel will play in the burgeoning electric vehicle (EV) market. Class 1 nickel, along with cobalt, are key elements needed to manufacture EV batteries. Demand for Class 1 nickel and cobalt are expected to grow significantly beginning in 2019 when China expects to begin production quotas requiring that 10% of all vehicles manufactured be electric.
During Q4, the nickel price was supported by news that nickel pig iron (NPI) producers in China were asked to reduce production to alleviate pollution with China’s largest NPI-only producer ordered to halve production from November 2017 to March 2018. Actual and anticipated reductions from existing nickel producers also continued to help underpin the nickel price, with nickel supply expected to be in a deficit for 2018 and 2019.
Nickel reference price improvements in the second half were also driven by the decline in inventories. Combined LME and SHFE nickel inventories at year-end declined to 410,828 tonnes (from 464,696 tonnes at the beginning of the year). Any further decline in visible inventories could give momentum to nickel price increases in the future.
Cobalt
Cobalt prices strengthened considerably in 2017. The average reference price in the fourth quarter was US$31.60 per pound for 2017, up 134% from Q4 2016. The average reference cobalt price for the 12-month period of 2017 was US$26.53, up 125% from US$11.77 per pound for 2016.
The price increase is primarily linked to the growing strong demand emanating from the EV battery market. The double-digit price growth experienced over the past year was also driven by geopolitical and supply risk concerns given that the Democratic Republic of Congo is currently the world’s largest source of cobalt.
As cobalt prices have a limited impact on overall battery pack costs, high prices are not expected to cause supply-chain disruptions or delay EV market growth. As a result, the risk of cobalt substitution in EV battery production in the near term is relatively low given cobalt’s unique energy transference properties. While battery manufacturers continue to explore alternatives to cobalt, the likely beneficiary of any substitution is expected to be Class 1 nickel.
Cobalt supply deficits are expected to continue over the next few years. In addition to demand from industrial end users, speculative investors are also driving up cobalt prices by stockpiling inventory, further exacerbating supply deficit concerns.
Moa Joint Venture (50% interest) and Fort Site (100%)
The Moa JV produced 4,134 tonnes of finished nickel in Q4 2017, up from 3,782 tonnes produced in Q4 2016, despite mixed sulphides production being negatively impacted by abnormally heavy rainfalls in November and December 2017. Finished nickel production on a 12-month basis was 15,679 tonnes in 2017, in line with expectations for the year.
Q4 2017 revenue for the Moa JV and the Fort Site totaled $123.0 million, up 32% from $92.5 million last year. The growth was driven by higher production and higher realized prices for nickel, cobalt and fertilizer. Nickel sales represented 50% of total Q4 2017 revenue while cobalt sales represented 33%. Fertilizer sales in Q4 2017 were up 19% from last year, reflecting stronger demand and higher realized prices.
Mining, processing and refining (MPR) costs for Q4 2017 were US$4.89 per pound, down from US$4.93 per pound for Q4 2016. The decline was largely due to higher production volumes in Q4 2017. MPR costs on the full-year basis were US$4.80 per pound for 2017, up from US$4.63 per pound for 2016. The US$0.17 increase per pound in 2017 was attributable to higher energy costs, although partly offset by cost savings of approximately US$0.50 per pound achieved with the commissioning of the third acid plant at Moa in the fourth quarter of 2016.
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Despite higher energy and sulphur input costs, Moa’s NDCC of US$1.80/lb of finished nickel in Q4 2017 was the lowest experienced since Q3 2004. The cobalt credit of US$3.54/lb reflects Moa’s high cobalt to nickel production ratio as well as the 125% growth in cobalt prices since Q4 2016. NDCC improvement also benefited from the commissioning of a third sulphuric acid plant at Moa in 2016 that generated approximate savings of US$0.50/lb. NDCC on a 12-month basis was $2.35/lb, down from $3.42/lb for 2016. NDCC for 2017 was significantly lower than expectations for the year, due largely to higher cobalt byproduct credits.
Cash provided by operations in Q4 2017 totaled $32.5 million, up from a loss in Q4 2016 when Hurricane Matthew and the subsequent collapse of bridge infrastructure negatively impacted production. Cash flow from operations in Q4 2017 was also positively impacted higher realized nickel and cobalt prices..
Moa’s sustaining capital spending in Q4 2017 was $7.7 million, up from $4.7 million in Q4 last year. The increase was attributable to the timing of expenditures.
Ambatovy Joint Venture (12% interest effective December 11, 2017)
Along with its partners, Sherritt completed the restructuring of the Ambatovy Joint Venture on December 11, 2017. The restructuring led to Sherritt’s ownership interest being reduced to 12% in exchange for the elimination of $1.4 billion of debt. Sherritt’s financial and operational results at Ambatovy are presented on a 40% basis to December 10, 2017 and on a 12% basis effective December 11, 2017. Sherritt will continue to serve as operator of Ambatovy at least through 2024, however, as a result of the reduction in its ownership interest, Sherritt’s ability to direct local decision-making at Ambatovy has diminished.
Finished nickel production at Ambatovy in Q4 2017 was 3,111 tonnes, down from 5,111 tonnes for the comparable period of 2016, which represented Ambatovy’s highest ever production total. The year-over-year decline was due to a number of developments that impacted plant reliability. Most notably, the failure of an economizer in one of the acid plants reduced production capacity to approximately 50% during November and December of 2017.
Finished nickel production on a 12-month basis for 2017 was 13,618 tonnes, down from 16,842 tonnes for 2016. The yearover-year decline was primarily due to equipment failures that reduced the reliability of Ambatovy’s acid plant and pressure acid leach circuit. Maintenance activities and replacement of equipment completed in 2017 are expected to improve plant reliability and production stability over time.
Finished cobalt production in Q4 2017 was 245 tonnes, down from 404 tonnes for the same period of 2016. The decrease was tied to plant reliability issues previously cited that lowered production. Cobalt production for 2017 was 1,173 tonnes, down from 1,309 tonnes for 2016.
MPR costs for Q4 2017 were US$5.76 per pound, up from US$3.97 per pound in Q4 2016. MPR costs on a full-year basis were US$6.01 per pound in 2017, up from US$4.89 per pound in 2016. The year-over-year increases were largely due to higher input costs as well as lower production volumes in 2017.
NDCC for finished nickel at Ambatovy in Q4 2017 was $3.26/lb, up from the $3.10/lb for Q4 2016. The increase was due to lower production, higher maintenance costs, higher energy and sulphur input costs offset by higher cobalt by-product credits. NDCC on a 12-month basis $3.83/lb for 2017, down from $4.27/lb for 2016. Ambatovy’s NDCC for 2017 places it slightly above the 50th percentile of industry average cost.
Subsequent to year end, facilities at the Ambatovy Joint Venture were impacted by Tropical Cyclone Ava, a Category 2 hurricane equivalent storm. Damage to equipment and the acid production facilities resulted in a temporary halt in production. Repairs have since been completed and partial production has resumed. A ramp up in production is expected through the end of Q2 2018.
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OIL AND GAS
For the three months ended For the years ended 2017 2016 2017 2016 $ millions, except as otherwise noted December 31 December 31 Change December 31 December 31 Change
FINANCIAL HIGHLIGHTS
| Revenue | $ 27.7 $ | 30.6 | (9%) $ | 127.0 $ | 108.6 | 17% |
| Earnings (loss) from operations | 7.9 | 2.8 | 182% | 33.6 | (16.3) | 306% |
| Adjusted EBITDA(1) | 10.5 | 11.6 | (9%) | 61.9 | 35.6 | 74% |
| Cash provided by operations | (2.3) | 11.4 | 30.8 | 76.4 |
(120%) (60%) Free cash flow(1) (9.9) 3.3 (400%) 8.9 50.4 (82%)
PRODUCTION AND SALES (bopd)
| Gross working-interest (GWI) - Cuba | 10,378 | 14,470 | (28%) | 13,479 | 15,452 | (13%) |
| Total net working-interest (NWI) | 6,101 | 8,163 | (25%) | 7,856 | 9,483 | (17%) |
| AVERAGE EXCHANGE RATE(CAD/USD) | 1.271 | 1.334 | (5%) | 1.299 | 1.325 | (2%) |
AVERAGE REFERENCE PRICE (US$ per barrel)
| West Texas Intermediate (WTI) | $ 55.19 $ | 49.21 | 12% $ | 50.78 $ | 43.37 | 17% |
| Gulf Coast Fuel Oil No. 6 | 52.81 | 41.12 | 28% | 47.02 | 32.13 | 46% |
| Brent | 61.77 | 48.53 | 27% | 54.18 | 43.31 | 25% |
AVERAGE-REALIZED PRICE(1) (NWI)
Cuba ($ per barrel) $ 48.82 $ 39.75 23% $ 43.81 $ 29.93 46%
UNIT OPERATING COSTS(1) (GWI)
Cuba ($ per barrel) $ 12.24 $ 10.95 12% $ 9.78 $ 9.75 -
SPENDING ON CAPITAL(2)
| Development, facilities and other | $ | (1.4) $ | 0.4 (450%) $ | (1.7) $ | 8.9 (119%) | ||
|---|---|---|---|---|---|---|---|
| Exploration | 8.6 | 7.8 | 10% | 21.1 | 17.0 | 24% | |
| $ | 7.2 $ | 8.2 | (12%) $ | 19.4 $ | 25.9 | (25%) |
(1) For additional information, see the Non-GAAP measures section of this release.
(2) Spending on capital includes accruals.
Gross working-interest oil production in Q4 2017 in Cuba was 10,378 barrels of oil per day (bopd), down from 14,470 bopd for the comparable period of 2016. The decrease was primarily due to the expiration of the Varadero West Production Sharing Contract (PSC) in November 2017 and natural reservoir declines. Gross working-interest oil production on a 12-month basis for 2017 was 13,479 bopd, in line with guidance for the year.
Revenue in Q4 2017 was $27.7 million, down 9% from $30.6 million for last year. The decline was due to lowered production, partially offset by an increase in realized prices of 23% to $48.82 per barrel in Cuba, though partially offset by the negative impact of a stronger Canadian dollar. Revenue on a full-year basis was $127.0 million, up 17%. The increase was driven largely by higher realized prices.
Total net working interest production for Q4 2017 was 6,101 barrels of oil equivalent per day, down from 8,163 barrels in the same period of 2016. The decline was due to lower cost-recovery spending, the impact of the expiration of the Varadero West PSC already cited and the impact of higher oil prices in the current year period.
Unit operating costs in Q4 2017 in Cuba were $12.24 per barrel, up 12% from $10.95 in Q4 2016, driven largely by reduced production. On a full-year basis, unit costs in Cuba were $9.78 in line with 2017 guidance.
Capital spending in Q4 2017 totaled $7.2 million and was largely focused on Block 10 drilling activities. Drilling of the second development well began in August and was temporarily suspended in December 2017. Drilling results for the second well on Block 10 are expected in Q3 of 2018.
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| POWER | For the three months ended | For the years ended |
| 2017 2016 | 2017 2016 | |
| $ millions (33 ⅓% basis), except as otherwise noted | December 31 December 31 | Change December 31 December 31 Change |
FINANCIAL HIGHLIGHTS
| Revenue | $ 12.0 $ | 13.7 | (12%) $ | 51.2 $ | 58.6 | (13%) |
| Earnings (loss) from operations | (0.6) | (1.3) | 54% | 5.2 | (5.3) | 198% |
| Adjusted EBITDA(1) | 5.5 | 7.4 | (26%) | 30.1 | 29.5 | 2% |
| Cash provided by operations | 5.4 | (3.3) | 264% | 44.5 | 8.0 | 456% |
| Free cash flow(1) | 5.3 | (3.7) | 243% | 43.0 | 7.0 | 514% |
PRODUCTION AND SALES
Electricity (GWh) 201 224 (10%) 848 894 (5%)
AVERAGE-REALIZED PRICE(1)
Electricity ($/MWh) $ 54.01 $ 56.24 (4%) $ 55.15 $ 56.10 (2%)
UNIT OPERATING COSTS(1) ($/MWh)
| Base | 20.66 | 22.39 | (8%) | 16.48 | 17.70 | (7%) |
| Non-base(2) | 2.77 | 2.34 | 18% | 2.81 | 5.24 | (46%) |
| 23.43 | 24.73 | (5%) | 19.29 | 22.94 | (16%) | |
| NET CAPACITY FACTOR (%) | 62 | 66 | (6%) | 67 | 70 | (4%) |
SPENDING ON CAPITAL AND SERVICE CONCESSION ARRANGEMENTS(3)
| Sustaining | $ | 0.1 $ | 0.4 | (75%) $ | 1.5 $ | 1.0 | 50% |
| Service concession arrangements | - | 0.1 (100%) | - | 4.6 (100%) | |||
| $ | 0.1 $ | 0.5 | (80%) $ | 1.5 $ | 5.6 | (73%) |
(1) For additional information see the Non-GAAP measures section of this release.
(2) Costs incurred at the Boca de Jaruco and Puerto Escondido facilities that otherwise would have been capitalized if these facilities were not accounted for as service concession arrangements.
(3) Spending on capital includes accruals.
Power production in Q4 2017 was 201 gigawatt hours (“GWh”) of electricity, down 10% from 224 GWh for the comparable period of 2016. The decline was largely due to reduced gas supply. Power production on a 12-month basis was 848 GWh for 2017, down from 894 GWh for 2016.
Average realized prices in Q4 2017 declined to $54.01 per Megawatt hour (“MWh’) of electricity from $56.24 per MWh in Q4 2016. The decline was due to the appreciation of the Canadian dollar relative to the U.S. currency.
Revenue in Q4 2017 totaled $12.0 million, down 15% from $13.7 million for Q4 2016. The decrease is attributable to lower production and lower realized prices. Revenue on a full-year basis was $51.2 million, down from $58.6 million for 2016.
Cash flow from operations in Q4 2017 grew by 264% to $5.3 million due to changes in working capital in the quarter.
Unit operating cost in Q4 2017 was $23.43 per MWh of electricity, down 5% from $24.73 per MWh for Q4 2016. The decrease was due principally to reduced maintenance activities at the Boca and Puerto Escondido facilities this year.
Total capital spending in Q4 2017 was $0.1 million, down from $0.4 million for the comparable period of last year. For the full year, the decline in capital spending was primarily due to the absence of service concession spending this year.
2017 REVIEW OF STRATEGIC PRIORITIES
The table below lists Sherritt’s Strategic Priorities in 2017, and summarizes how the Corporation performed against those priorities in 2017.
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Strategic Priorities 2017 Actions Status
PRESERVE LIQUIDITY AND Finalize long-term Ambatovy equity and Restructuring of the Ambatovy Joint Venture BUILD BALANCE SHEET funding structure was completed on December 11, 2017 and STRENGTH resulted in the elimination of $1.4 billion of debt and reduction of Sherritt’s ownership interest to 12% from 40%.
Optimize working capital and receivables Management continues to take action to collection expedite Cuban energy receipts. Outstanding receivables at year end were US$132.6 million. The year-over-year growth was due to Cuba’s reduced liquidity, including the impact of Hurricane Irma and resulting recovery costs had on the country’s economy.
Operate Metals and Power businesses to The Oil and Gas and Power divisions be free cash flow neutral or better generated positive free cash flow in 2017. The Moa JV generated sufficient operating cash flow to repay $31.7 million on its working capital facility.
OPTIMIZE OPPORTUNITIES IN Determine future capital allocation based The results from the first well have provided CUBAN ENERGY BUSINESS on results from first two wells drilled on constructive data to optimize the drilling of the Block 10 second well, again targeting the Lower Veloz formation. Drilling on the second well at Block 10 has been temporarily suspended to determine the best option to reach the target reservoir. Drilling results from the second well are expected in Q3 2018.
UPHOLD GLOBAL Further reduce NDCC at Moa and Q4 NDCC of US$1.80/lb at the Moa JV is the OPERATIONAL LEADERSHIP IN Ambatovy towards the goal of achieving lowest since Q3 2004. Moa’s NDCC ranked it FINISHED NICKEL LATERITE or remaining in the lowest quartile of within the lowest cost quartile for the third PRODUCTION global nickel cash costs consecutive quarter. Ambatovy’s NDCC of US$3.83/lb for 2017 marked an improvement from last year, but was below expectations due to lower production and higher maintenance costs.
Increase Ambatovy production and Ambatovy production in 2017 experienced a predictability over 2016 number of unanticipated challenges and resulted in several unplanned maintenance activities. Initiatives, such as replacing certain equipment, are being implemented to improve asset reliability.
In 2017, Sherritt joined the Mining Association Achieve peer leading performance in of Canada (MAC) and began implementing environmental, health, safety and MAC’s Towards Sustainable Mining program, sustainability an internationally recognized sustainability standard. In safety, Sherritt met its recordable incident frequency target, but exceeded its injury frequency target for the year. No significant environmental or community-related incidents were recorded in 2017. The company received five distinct honours for leadership in sustainability management and reporting during the year.
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2018 STRATEGIC PRIORITIES
The table below lists Sherritt’s Strategic Priorities for 2018. As we execute on our 2018 Strategic Priorities, protecting the health and safety of our employees, contractors and communities will continue to be our top priority. Sherritt’s purpose is to be a leader in the
low-cost production of finished nickel and cobalt that creates sustainable prosperity for our employees, investors and communities.
Strategic Priorities 2018 Actions
PRESERVE LIQUIDITY AND BUILD Continue to emphasize de-leveraging of the balance sheet
BALANCE SHEET STRENGTH
Optimize working capital and maximize receivables collection
Operate Metals businesses to maintain a leadership position as a low-cost producer of finished nickel and cobalt while maximizing Free Cash Flow
OPTIMIZE OPPORTUNITIES IN Successfully execute Block 10 drilling program
CUBAN ENERGY BUSINESS
Review opportunities to leverage Oil and Gas experience and relationships
Continue to maintain strong relationships in Cuba
UPHOLD GLOBAL OPERATIONAL Protect the health and safety of all employees in all operations
LEADERSHIP IN FINISHED NICKEL
Achieve peer-leading performance in environmental, health, safety and
PRODUCTION FROM LATERITES
sustainability
Maximize production of finished nickel and cobalt and improve predictability over 2017 results
Continue to maintain strong relationships with battery manufacturers
Further reduce NDCC towards the goal of being consistently in the lowest cost quartile
Leverage technical innovation for the purposes of reducing operating costs and identifying new market opportunities
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OUTLOOK
2018 PRODUCTION, UNIT OPERATING COST AND CAPITAL SPENDING GUIDANCE
The guidance for 2018 reflects Sherritt’s targets for production, unit costs and capital spending announced on January 12, 2018.
Guidance at Actual Guidance for 2017 2017 2018 Production volumes, unit operating costs and spending on capital
Production volumes
Nickel, finished (tonnes, 100% basis)
Moa Joint Venture 31,500-32,500 31,524 31,500-32,500 Ambatovy Joint Venture 36,000-39,000 35,474 40,000-43,000 Cobalt, finished (tonnes, 100% basis)
| Moa Joint Venture | 3,500-3,800 | 3,601 | 3,500-3,800 |
| Ambatovy Joint Venture | 3,300-3,600 | 3,053 | 3,900-4,200 |
| Oil – Cuba (gross working-interest, bopd) | 13,000-14,000 | 13,479 | 4,300-4,800 |
| Oil and Gas – All operations (net working-interest, boepd) | 7,500-8,000 | 7,855 | 1,900-2,100 |
| Electricity (GWh, 33⅓% basis) | 850-900 | 848 | 750-800 |
Unit operating costs
NDCC (US$ per pound)
| Moa Joint Venture | 2.80-3.30 | 2.35 | 2.50-3,00 |
| Ambatovy Joint Venture | 3.10-3.70 | 3.83 | 3.00-3.50 |
| Oil and Gas - Cuba (unit operating costs, $ per barrel) | 11.00-12.00 | 9.78 | 22.00-23.50 |
| Electricity (unit operating cost, $ per MWh) | 18.75-19.50 | 19.29 | 20.75-21.50 |
Spending on capital (US$ millions)
Metals – Moa Joint Venture (50% basis), Fort Site (100% basis)(1) US$28 (CDN$38) US$17 (CDN$21) US$41 (CDN$52) Metals – Ambatovy Joint Venture (40% basis then 12% basis)(2) US$45 (CDN$61) US$35 (CDN$44) US$13 (CDN$17) Oil and Gas US$35 (CDN$47) US$15 (CDN$19) US$39 (CDN$50) Power (33⅓% basis) US$1 (CDN$2) US$1 (CDN$2) US$1 (CDN$1) Spending on capital (excluding Corporate) US$109 ($CDN148) US$68 (CDN$86) US$94 (CDN$120)
(1) Spending is 50% of US$ expenditures for Moa JV and 100% expenditures for Fort Site fertilizer and utilities.
(2) Sherritt’s share for Ambatovy Joint Venture reflects its interest at 40% to December 10, 2017 and 12% thereafter.
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