Sherritt Announces Q1 2017 Results
Sherritt International Corporation 1
For immediate release
Sherritt Announces Q1 2017 Results
NOT FOR DISTRIBUTION TO UNITED STATES NEWSWIRE SERVICES OR FOR DISSEMINATION IN THE UNITED
STATES
Toronto, Ontario – April 26, 2017 – Sherritt International Corporation (“Sherritt” or the “Corporation”) (TSX: S), the world
leader in the mining and refining of nickel from lateritic ores, today reported its financial results for the three months ended
March 31, 2017.
“During the quarter, our nickel, oil and power operations all generated free cash flow(1), allowing us to repay another $20.5
million on our revolving credit facility, and still maintain a cash position of just over $300 million at quarter end,” said David
Pathe, President and CEO of Sherritt International. “While nickel prices remain relatively weak, we have seen a significant
increase in the price of cobalt. As the producer of around 6% of the world's cobalt, this enhances our cash flow generating
capacity going forward.”
Q1 2017 HIGHLIGHTS
Sherritt repaid $20.5 million of recourse borrowings in the first quarter of 2017, ending the quarter with cash, cash
equivalents and sh ort-term investments of $300.7 million, down $8.9 million from their level at year end 2016. The
first quarter of 2017 benefited from a higher level of Cuban energy payments received (US$37.6 million) compared to
payments of US$18.3 million received in the fourth quarter of 2016.
First quarter 2017 Net Direct Cash Costs (NDCC) of US$3.25/lb at the Moa JV and US$3.93/lb at the Ambatovy Joint
Venture are both improvements over their prior year com parables of US$3.34/lb and US$4.41/lb respectively. Moa’s
first quarter NDCC is a significant improvement from fourth quarter 2016 NDCC of US$3.80/lb, while Ambatovy’s
fourth quarter 2016 NDCC represented Ambatovy’s best cost profile since inception.
Average reference prices in the first quarter of 2017 relative to first quarter of 2016 were up 21% in nickel, 85% in
cobalt and 116% in Gulf Coast Fuel Oil 6, the benchmark price for Sherritt’s Cuban oil production . Comparing the
commodity price performance to the fourth quarter 2016, the nickel price fell by 5%, while cobalt prices continued to
increase (up 47% from the fourth quarter 2016 average) and Gulf Coast Fuel Oil 6 increased by 11%.
The Hurricane Matthew impacts that limited mixed sulphides production in the fourth quarter last year had a
continuing effect into the first quarter this year as the reduced mixed sulphide shipments out of Moa to the Fort
Saskatchewan refinery landed and were refined during the first quarter. Moa nickel production was down 9% over
first quarter 2016 production, but consistent with fourth quarter 2016 levels.
Ambatovy nickel production was down 14% compared to first quarter 2016, and down 25% from fourth quarter 2016,
reflecting the impact of a power trip in late January as well as limited acid production in February caused by
unplanned repairs required on a molten sulphur tank. Equipment reliability related to acid production remains a risk in
the second quarter, due to ongoing repairs and maintenance. In early March, Madagascar was also hit by Cyclone
Enawo, the third most damaging cyclone on r ecord in the country. Ambatovy was able to continue operating through
the cyclone event, although production rates were reduced due to the impacts of extreme wind and rain on open pit
mining operations and bulk commodity handling in the process plant. Staf fing was also minimized to allow employees
to be with their families during the cyclone event.
The first results from Block 10 drilling were announced by press release dated March 17, 2017. The well targeted the
previously discovered Lower Veloz formation in the Bay of Cardenas, Province of Matanzas, Cuba. The lower leg of
the well was abandoned due to geotechnical instability in the wellbore. By utilizing part of the first well, the capital
cost to drill the second well, again targeting the Lower Veloz, will be significantly less, estimated at US$8 million. Any
future capital in Block 10 will be contingent upon success in this well, and expected capital spending for the year will
be revised when the well has been completed and results disclosed.
2017 First Quarter Report
Press Release
2 Sherritt International Corporation
The net loss of $72.6 million for the quarter ended March 31, 2017 compares to a net loss of $47.8 million in the first
quarter of 2016 , which benefited from a significant unrealized foreign exchange gain of $76 m illion in financing
expense, compared to an unrealized $7.3 million gain this quarter.
All amounts are Canadian dollars unless otherwise indicated.
(1) For additional information see the Non-GAAP measures section of this press release.
Sherritt International Corporation 3
Q1 2017 FINANCIAL HIGHLIGHTS
$ millions, except as otherwise noted, for the three months ended March 31 2017 2016 Change
Revenue $ 72.4 $ 58.4 24%
Combined Revenue(1) 228.0 191.3 19%
Net (loss) earnings for the period (72.6) (47.8) (52%)
Adjusted EBITDA(1) 37.2 (9.1) 509%
Cash provided (used) by continuing operations 16.6 (9.7) 271%
Combined adjusted operating cash flow (1) 20.5 (22.2) 192%
Combined free cash flow(1) 10.0 (31.4) 132%
Net (loss) earnings from continuing operations per share (0.25) (0.16) (56%)
(1) For additional information, see the Non-GAAP measures section of this release.
2017 2016
$ millions, except as otherwise noted, as at March 31 December 31 Change
Cash, cash equivalents and short term investments $ 300.7 $ 309.6 (3%)
Non-recourse loans and borrowings 1,356.8 1,367.5 (1%)
Other loans and borrowings 840.2 860.7 (2%)
In the first quarter of 2017, operating cash flow was generated by the Oil and Gas and Metals operations in equal proportion
($14.0 million and $14.1 milllion respectively), and the Power operations provided $12.8 million. Adjusted EBITDA of $9.2
million was generated by the Power operations, and in addition, a positive change in non-cash working capital of $3.9 million
occurred.
During the quarter, US$37.6 million of Cuban energy payments were received compared to US$18.3 million in the fourth
quarter of 2016. Included in this amount was US$25.0 million received by Oil and Gas and US$12.6 million received from
Energas in Power. Overdue receivables in Oil declined to US$22.3 million at quarter end, and a further US$7 million has been
received from the Cubans toward Oil and Gas payments in April.
The US$12.6 million payment was not in the form of CSA interest or repayment of principal, but was against other receivables
and was the first Energas payment received since July of 2016.
Adjusted earnings (loss) from continuing operations(1)
2017 2016
For the three months ended March 31 $ millions $/share $ millions $/share
Net loss from continuing operations (72.6) (0.25) (47.8) (0.16)
Adjusting items, net of tax:
Unrealized foreign exchange (gain) loss (7.3) (0.02) (76.0) (0.26)
Other (2.8) (0.01) (3.1) (0.01)
Adjusted net loss from continuing operations (82.7) (0.28) (126.9) (0.43)
(1) For additional information, see the Non-GAAP measures section of this release.
The net loss from continuing operations in the first quarter of 2017 was $72.6 million, which included a $7.3 million unrealized
foreign exchange gain, and a $3.3 million gain relating to VAT adjustments. A small negative adjustment of $0.5 million was
also recorded for severance changes.
2017 First Quarter Report
Press Release
4 Sherritt International Corporation
REVIEW OF OPERATIONS
METALS
$ millions, except as otherwise noted, for the three months ended March 31 2017 2016
Moa JV and Ambatovy Moa JV and Ambatovy
Fort Site(1) JV Fort Site(1) JV
(50%) (40%) Other(2) Total (50%) (40%) Other(2) Total Change
FINANCIAL HIGHLIGHTS
Revenue $ 90.4 $ 74.8 $ 14.3 $ 179.5 $ 76.7 $ 65.1 $ 11.2 $ 153.0 17%
(Loss) earnings from operations 2.0 (29.0) 0.3 (26.7) (11.3) (49.9) 0.3 (60.9) 56%
Adjusted EBITDA(3) 12.8 8.2 0.3 21.3 (0.2) (12.8) 0.3 (12.7) 268%
Cash provided (used) by operations 14.8 (2.3) 1.6 14.1 (3.0) (5.5) 4.2 (4.3) 428%
Free cash flow(3) 12.6 (6.3) 1.6 7.9 (10.6) (5.5) 4.2 (11.9) 166%
PRODUCTION VOLUMES (tonnes)
Mixed Sulphides 4,282 4,317 - 8,599 4,321 4,571 - 8,892 (3%)
Finished Nickel 3,840 3,817 - 7,657 4,242 4,442 - 8,684 (12%)
Finished Cobalt 436 323 - 759 499 365 - 864 (12%)
Fertilizer 58,868 11,796 - 70,664 70,907 14,355 - 85,262 (17%)
NICKEL RECOVERY (%) 85% 85% 88% 87%
SALES VOLUMES (tonnes)
Finished Nickel 3,862 3,810 - 7,672 4,141 4,491 - 8,632 (11%)
Finished Cobalt 421 354 - 775 468 332 - 800 (3%)
Fertilizer 37,454 12,447 - 49,901 31,713 14,107 - 45,820 9%
AVERAGE EXCHANGE RATE (CAD/USD) 1.324 1.373 (4%)
AVERAGE REFERENCE PRICES (US$ per pound)(3)
Nickel $ 4.66 $ 3.86 21%
Cobalt 19.80 10.70 85%
AVERAGE-REALIZED PRICES(3)
Nickel ($ per pound) $ 6.19 $ 6.15 $ 6.17 $ 5.17 $ 5.15 $ 5.16 20%
Cobalt ($ per pound) 24.19 26.75 25.38 13.84 15.39 14.52 75%
Fertilizer ($ per tonne) 343 164 297 391 186 327 (9%)
UNIT OPERATING COSTS (US$ per pound)(3)
Nickel - net direct cash cost $ 3.25 $ 3.93 3.59 $ 3.34 $ 4.41 $ 3.90 (8%)
SPENDING ON CAPITAL(4)
Sustaining $ 2.1 $ 8.4 $ - $ 10.5 $ 3.8 $ 1.7 $ - $ 5.5 91%
Expansion - - - - 4.0 - - 4.0 (100%)
$ 2.1 $ 8.4 $ - $ 10.5 $ 7.8 $ 1.7 $ - $ 9.5 (25%)
(1) Includes results for certain 100% owned assets at Fort Saskatchewan plant.
(2) Includes results for Sherritt’s marketing organizations for certain Ambatovy and Moa Joint Venture sales.
(3) For additional information, see the Non-GAAP measures section of this release.
(4) Spending on capital includes accruals.
Sherritt International Corporation 5
METAL MARKETS
Nickel
The nickel average reference price for the quarter is up by 21% compared to the same period last year, from US$3.86/lb to
US$4.66/lb, but below the Q4 2016 average of US$4.90/lb.
Although the average price has been relatively flat since the fourth quarter of last year, prices have varied significantly
through the three months. Nickel prices hit a low of US$4.25/lb following the announcement of potential relaxation of the
Indonesian ore export ban in the first half of January and a high of US$5.01/lb in February when the Filipino threat of mine
closures exerted a strong positive influence over market sentiment. After that, prices started to fall again in March due to the
announcement by the Indonesian government that higher than previously announced export quantities may be allowed. The
Filipino and Indonesian announcements will likely continue to influence nickel prices in contrary directions through the rest of
2017 in the absence of fundamental changes to the supply/demand balance.
Fundamental long-term demand remains strong for high quality nickel with a positive trend in the aerospace and the electric
vehicle sectors but the supply/demand short term balance is difficult to predict due to the high level of political uncertainties
around the Philippines and Indonesia.
Cobalt
Cobalt prices have increased dramatically in Q1 2017; the cobalt reference price is up by 66% since the start of the year with
an average reference price at US$19.80/lb for the quarter and an average above US$24/lb in March. Prices breached the
US$25/lb mark in late March, a level not touched since November 2008.
Several factors support this trend, including steady demand from the aerospace segment, strong projections for future cobalt
consumption in batteries and increased interest from financial investors, who have entered the market for physical material as
they are bullish longer term. In addition to this strong demand, supply issues should lead to a deficit in 2017 and contribute to
the current price rally with quality issues at one of the high grade producers and growing pressure from consumers to ensure
cobalt supplies from the DRC are not in contravention of any human rights laws. For instance, after the 2016 publication of
several reports on child labour in the country, Apple has required its cobalt suppliers to suspend sourcing raw material feed
from unverified artisanal miners. If other suppliers follow this same practice, available supply from mainstream producers will
be strained over the mid to long term.
Moa Joint Venture (50% interest) and Fort Site (100%)
The Moa JV finished nickel production of 3,840 tonnes (50% basis) in the first quarter is 9% lower than its level last year and
up 2% from fourth quarter 2016 production. The discussion in the fourth quarter 2016 MD&A concerning impacts from
Hurricane Matthew and the subsequent bridge collapse carries over into the first quarter this year. Lower mixed sulphides
production in the fourth quarter of 2016 (3,674 tonnes) was shipped to the Fort Site for refining, with all shipments after the first
week in December landing at the Fort Site in the first quarter this year. Mixed sulphide production has recovered to 4,282
tonnes in the first quarter, which is consistent with plan, and is expected to trend higher as the year progresses, and new
mining equipment arrives. Similar to the fourth quarter 2016 pattern, the Fort Site refinery utilized more third party feed to
compensate for lower mixed sulphides from Moa, which is generally reflected in higher third party feed costs as has been seen
in Q4 2016 and Q1 2017.
Revenue in the quarter is up 18% from its comparable period last year, mainly reflecting the change in cobalt pricing, but is flat
from fourth quarter 2016 revenue despite the increased cobalt price. This is mainly due to cobalt sales volumes down by 14%
compared to fourth quarter 2016 levels where timing of shipments resulted in 105 tonnes of sales higher than production in the
fourth quarter 2016. Fertilizer sales volumes were up 18% compared to first quarter 2016 levels in anticipation of a stronger
spring season, but fertilizer prices are lower than their year-ago levels, although they have increased over the last two
consecutive quarters. The stronger Canadian dollar in the first quarter of 2017 compared to 2016 also has a negative impact
on revenue, as the exchange rate has strengthened by approximately five cents from $1.373 to $1.324 per USD.
2017 First Quarter Report
Press Release
6 Sherritt International Corporation
The NDCC of US$3.25/lb of nickel in the first quarter is an improvement on the year-ago level of US$3.34/lb despite lower
levels of production and a lower fertilizer credit. The lower production levels are the main factor behind the higher Mining,
Processing & Refining costs of US$4.75/lb, combined with higher planned maintenance activity and higher energy costs,
partially offset by the benefits of the third acid plant. Going forward, higher energy costs are expected to persist along with the
higher planned maintenance activity, while the third acid plant continues to deliver an approximate US$0.50/lb benefit. Higher
energy costs also impact the fertilizer margins, as can be seen in the lower NDCC credit. Third party feed costs of US$0.49/lb
are similar to their levels in the fourth quarter of 2016. The cobalt credit was US$1.99/lb despite lower cobalt sales volume in
the quarter, and is expected to remain strong with robust cobalt prices. For the Moa JV’s cash contribution, an approximately
US$8/lb change in the cobalt price equals a US$1/lb change in the nickel price.
Cash provided by operations of $14.8 million in the first quarter includes a positive change in non-cash working capital of $5.7
million, which is mainly pre-buys of fertilizer.
Capital spending of $2.1 million in the quarter is expected to increase next quarter and over the course of the year. The Moa
JV is expected to operate and to fund capital expenditures through internally generated cash flow and/or external loans.
The annual planned refinery shutdown is scheduled to last for one week in the second quarter, at which time planned
maintenance will be carried out.
Ambatovy Joint Venture (40% interest)(1)
Nickel production was 14% lower than first quarter 2016, and 25% lower than fourth quarter 2016, reflecting the impact of a
power trip in late January as well as limited acid production in February caused by unplanned repairs required on a molten
sulphur tank. In early March, Madagascar was also hit by Cyclone Enawo, the third most damaging cyclone on record in the
country. Ambatovy was able to continue operating through the cyclone event, although production rates were impacted by
extreme wind and rain on open pit mining operations and bulk commodity handling in the process plant. Staffing was also
minimized to allow employees to be with their families during the cyclone event. Production returned to normal levels at the
end of the quarter, although ongoing repairs and equipment reliability issues in the sulphuric acid production area continue to
affect production into the second quarter. Ambatovy PAL ore throughput in the first quarter operated at 67% of design
capacity.
Despite this decrease in production, revenue is up by 15% on a year-over-year basis, as the lower production was more than
offset by the increase in realized prices with a 19% increase in nickel average realized prices and a 74% increase in cobalt
average realized prices compared to the same period in the prior year. The increases on a U.S. dollar basis are more
significant, but the average exchange rate in the first quarter of 2017 is approximately five cents higher than its comparable
level in the first quarter of 2016. Sales of cobalt in the first quarter this year were higher than production as one shipment was
delayed at the end of 2016 and shipped in 2017. Cobalt revenue accounted for 28% of total Ambatovy revenue in the first
quarter of 2017 compared to 17% in the comparable quarter last year.
The NDCC of US$3.93/lb for the first quarter is an 11% improvement over the comparable period last year, but is US$0.83/lb
higher compared to Q4 2016, which was the best quarter since inception, and is above the 2017 guidance range due to the
weaker production.
Capital spending was as expected, with 2017 estimated capital spending all relating to sustaining capital required for mining
and production equipment, including the purchase of articulated dump trucks.
Sherritt has not funded any cash calls since achieving financial completion, with total post-completion funding provided by
Sumitomo and KORES of US$173 million as of March 31, 2017. This amount is unchanged from year end 2016, as no
additional cash call funding was provided in the first quarter this year. Funding is intended to cover operating losses, capital
spending and interest (amounting to US$59.5 million annually) on the Ambatovy Joint Venture project financing. As of March
31, 2017, the cash position at Ambatovy was $65 million (100% basis).
By agreement amongst the partners, Sherritt is not considered to be a defaulting shareholder under the Shareholders
Agreement for amounts not funded through May 2, 2017 Discussions continue regarding the partnership structure and future
funding arrangements.
(1) 70% of Sherritt’s distributable cash flow from Ambatovy (after opex, capex and project debt service) goes to Partner Loan repayment, leaving Sherritt with 30%; 30%
of Sherritt’s 40% ownership = 12%.
Sherritt International Corporation 7
OIL AND GAS
$ millions, except as otherwise noted, for the three months ended March 31 2017 2016 Change
FINANCIAL HIGHLIGHTS
Revenue $ 35.3 $ 22.4 58%
Earnings (loss) from operations 11.0 (8.7) 226%
Adjusted EBITDA(1) 19.6 4.0 390%
Cash provided by operations 14.0 2.6 438%
Free cash flow(1) 10.3 (2.4) 529%
PRODUCTION AND SALES (boepd)
Gross working-interest (GWI) - Cuba 15,213 16,449 (8%)
Total net working-interest (NWI) 8,889 10,504 (15%)
AVERAGE EXCHANGE RATE (CAD/USD) 1.324 1.373 (4%)
AVERAGE REFERENCE PRICE (US$ per barrel)
West Texas Intermediate (WTI) $ 51.62 $ 33.40 55%
Gulf Coast Fuel Oil No. 6 45.63 21.13 116%
Brent 53.33 33.64 59%
AVERAGE-REALIZED PRICE(1) (NWI)
Cuba ($ per barrel) 43.62 $ 21.80 100%
UNIT OPERATING COSTS(1) (GWI)
Cuba ($ per barrel) 8.66 $ 9.53 (9%)
SPENDING ON CAPITAL(2)
Development, facilities and other $ (0.8) $ 4.1 (120%)
Exploration 3.8 0.6 533%
$ 3.0 $ 4.7 (36%)
(1) For additional information, see the Non-GAAP measures section of this release.
(2) Spending on capital includes accruals.
Cuba gross working-interest oil production of 15,213 bopd in the first quarter is down 8% from the same period last year,
reflecting natural reservoir declines. This is an improvement over Q4 2016 levels, due to well optimization and production
guidance is unchanged for 2017.
Revenue in the first quarter of 2017 was up 58% from its comparable quarter last year, with Gulf Coast Fuel Oil 6 (GCF6)
prices averaging US$45.63/barrel compared to US$21.13/barrel in the first quarter last year, which was the low point of the
year. GCF6 prices averaged 88% of WTI crude prices in the first quarter of 2017, compared to only 63% in the first quarter last
year.
Cost-recovery oil production in Cuba in the first quarter of 2017 was down 46% from its comparable level a year ago, due to
the combination of lower spending and higher oil prices which result in fewer cost recovery barrels.
Despite the decrease in production, the unit operating costs are down by 9% on a year-over-year basis, reflecting lower labour
and treatment and transportation costs.
The results from the first well in Block 10 were announced by press release during the first quarter, as described in the
“Highlights” earlier. The well targeted the previously discovered Lower Veloz formation, but the lower section of the well was
abandoned due to geotechnical instability in the wellbore. The capital cost associated with drilling the well was approximately
$24.1 million, reflecting the complexity encountered. Analysis of the logging data has been integrated into the seismic model,
and these results along with the technical solutions associated with the geotechnical issues will be incorporated in the drilling
of the next well which will utilize part of the cased section of the first well drilled at a different trajectory, again targeting the
Lower Veloz. By utilizing part of the first well, the capital cost of the second well will be significantly less, estimated at US$8
million ($10.6 million Canadian). Any future capital in Block 10 will be contingent upon success in this well, and expected
capital spending for the year will be revised when the well has been completed and results disclosed.
2017 First Quarter Report
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8 Sherritt International Corporation
Capital spending is down 36% in this quarter compared to the first quarter of 2016 and reflects a delay in seismic survey
activity on Block 8A, which was budgeted to start in January and is now scheduled to commence in October.
POWER
$ millions (33⅓% basis), except as otherwise noted, for the three months ended March 31 2017 2016 Change
FINANCIAL HIGHLIGHTS
Revenue $ 13.4 $ 15.6 (14%)
Earnings (loss) from operations 2.8 (0.2) 1,500%
Adjusted EBITDA(1) 9.2 8.7 6%
Cash provided by operations 12.8 0.9 1,322%
Free cash flow(1) 12.0 0.8 1,400%
PRODUCTION AND SALES
Electricity (GWh) 217 217 -
AVERAGE-REALIZED PRICE(1)
Electricity ($/MWh) $ 56.30 $ 58.27 (3%)
UNIT OPERATING COSTS(1) ($/MWh)
Base 15.50 14.86 4%
Non-base(2) 0.45 2.00 (78%)
15.95 16.86 (5%)
NET CAPACITY FACTOR (%) 67 67 -
SPENDING ON CAPITAL AND SERVICE CONCESSION ARRANGEMENTS(3)
Sustaining $ 0.8 $ 0.1 700%
Service concession arrangements - 1.9 (100%)
$ 0.8 $ 2.0 (60%)
(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 faci lities were not accounted for as service
concession arrangements.
(3) Includes accruals.
Power production in the first quarter of 217 GWh is unchanged from its year-ago quarterly level, and down marginally from its
level in the fourth quarter of 2016. Average-realized prices are lower than the prior year comparable by 3%, due to the
strengthening of the Canadian dollar against the U.S. dollar.
First quarter 2017 revenue of $13.4 million is down 14% from its comparable level in 2016, because of first quarter 2016
revenue from construction activity, which had offsetting construction activity expenses recorded in cost of goods sold. This
construction activity related to the Puerto Escondido/ Yumuri pipeline under a service concession arrangement, and was
completed in 2016.
Unit operating costs in the first quarter of 2017 declined by 5% from their comparable period in 2016, mainly due to the
strengthening of the Canadian dollar.
Adjusted EBITDA of $9.2 million in the first quarter of 2017 is up 6% from its comparable level in the first quarter of 2016.
Cash provided by operations of $12.8 million in the first quarter of 2017 compares to cash provided by operations of $0.9
million in the first quarter of 2016. Although no CSA interest or principal payments were made by Energas to Sherritt in the first
quarter this year, Energas did make a US$12.6 million payment on other receivables due to Sherritt.
Spending on capital in the first quarter of 2017 was lower than its comparable level a year ago, due to the absence of any
service concession spending in the first quarter of 2017.