Sherritt Reports First Quarter 2018 Results
Sherritt International Corporation 1
For immediate release
Sherritt Reports First Quarter 2018 Results
NOT FOR DISTRIBUTION TO UNITED STATES NEWSWIRE SERVICES OR FOR DISSEMINATION IN THE UNITED
STATES
Toronto, Ontario – April 24, 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
first quarter ended March 31, 2018. All amounts are in Canadian currency unless noted.
CEO COMMENTARY
“Sherritt’s results for Q1 reflect the positive impact of improving commodity prices and our continuing efforts to strengthen our
balance sheet,” said David Pathe, President and CEO of Sherritt International. “We ended the quarter with more cash on
hand, less debt, and higher cash received from the Moa JV – all clear signs of progress.”
Mr. Pathe added, “With production challenges at the Moa JV caused by excessive rainfall and rail transportation delays largely
behind us, we are bullish about our prospects for the balance of 2018 given the favorable outlook for nickel and cobalt prices
due to favorable demand trends, particularly within the electric vehicle battery market.”
Q1 HIGHLIGHTS
Average-realized prices at the Moa Joint Venture (“Moa JV”) for nickel improved 26% to $7.80 per pound while
average-realized prices for cobalt increased 100% to $48.47 per pound.
Sherritt ended the quarter with $237.3 million in cash, cash equivalents and short -term investments, up from $203.0
million at December 31, 2017.
Sherritt strengthened its balance sheet by purchasing for cancellation $121.2 million of outstanding debentu res at an
aggregate cost of $110.3 million through a modified Dutch auction tender offer. The transaction, which was funded by
a unit offering that generated net proceeds of approximately $125 million, brings the total amount of indebtedness
eliminated by the Corporation over the past four years to approximately $2 billion.
Received $16.0 million from the Moa JV as repayment on its working capital facility and US$40.7 million in Cuban
energy payments, lowering overdue scheduled receivables to $126.7 million from $132.6 million at year end 2017.
Net direct cash cost (NDCC) (1) at the Moa Joint Venture was US$2.06 per pound of finished nickel sold, marking the
fourth consecutive quarter that the Moa JV is in the lowest cost quartile.
Sherritt’s share of fini shed nickel production at the Moa JV was 2,854 tonnes in Q1 2018, down 26% from Q1 2017,
while its share of finished cobalt was 336 to nnes, down 23% from Q1 2017. Consistent with previous disclosure, the
decline in production in Q1 2018 was attributable to the reduced availability of mixed sulphides due to the highest
level of rainfall at Moa ’s operations in more than 20 years and rail transportation delays to the refinery in Fort
Saskatchewan, Alberta by the rail service provider. Subsequent to quarter end, delays with rail transportation service
have largely been resolved and mixed sulphides availability has been restored to normal levels.
Executed a three-year extension of the Puerto Escondido/Yumuri oil production sharing contract to 2021.
Adjusted EBITDA was $36.4 million, relatively flat when compared to Q1 2017. Adjusted EBITDA in Q1 2018
reflected the impact of the restructuring of the Ambatovy Joint Venture completed in December 2017 that redu ced
Sherritt’s ownership interest from 40% to 12%.
Net loss for Q1 2018 was $0.6 million or $nil on a per share basis. In Q1 2017, net loss was $72.6 million or $0.25
per share.
Q1 results marked Sherritt’s first full quarter of operations since its ownership interest at Ambatovy was reduced to
12% as a result of the Joint Venture restructuring completed in December 2017.
2018 First Quarter Report
Press Release
2 Sherritt International Corporation
HIGHLIGHTS SUBSEQUENT TO QUARTER END
Sherritt finalized the evaluation of available and proven technology to complete drilling of the second well on Block 10
targeting the Lower Veloz reservoir. A proven technology solution has been selected and will be deployed when
drilling is slated to resume in early July 2018. Preliminary drilling results are expected in Q3 2018. Capital budgeted
to complete the drilling is expected to be approximately US$13 million.
(1) For additional information see the Non-GAAP measures section of this press release.
Q1 2018 FINANCIAL HIGHLIGHTS
$ millions, except as otherwise noted, for the three months ended March 31 2018 2017 Change
Revenue $ 39.4 $ 72.4 (46%)
Combined Revenue(1) 146.9 228.0 (36%)
Net loss for the period (0.6) (72.6) 99%
Adjusted EBITDA(1) 36.4 37.2 (2%)
Cash provided (used) by continuing operations 11.1 16.6 (33%)
Combined adjusted operating cash flow (1) 5.9 20.5 (71%)
Combined free cash flow(1) 6.1 10.0 (39%)
Average Exchange Rate (CAD/US$) 1.265 1.324 N/A
Net loss from continuing operations per share $0.00 -$0.25 100%
(1) For additional information, see the Non-GAAP measures section of this release.
(2) The amounts for the period ended March 31, 2018 have been prepared in accordance with IFRS 9 and IFRS 15; prior period amounts have not been restated. Refer
to note 3 in the condensed consolidated financial statements for further information.
2018 2017
$ millions, except as otherwise noted, as at March 31 December 31 Change
Cash, cash equivalents and short term investments $ 237.3 $ 203.0 17%
Other loans and borrowings 698.4 824.1 (15%)
In Q1 2018, Sherritt generated consolidated cash flow from operations of $11.1 million. The consolidated total included $7.3
million in positive cash flow from the Oil and Gas division and $11.2 million in positive cash flow contributions from the Power
division. Interest expenses of $11.0 million negatively impacted the consolidated cash flow total for Q1 2018. Although the
Moa JV generated positive cash flow in Q1 2018, the total was distributed to Sherritt as a repayment of its working capital
facility. The repayment does not impact Sherritt’s operating cash flow.
Cash, cash equivalents and short-term investments at March 31, 2018 were $237.3 million, up from $203.0 million at
December 31, 2017. The increase was due to a number of factors, including the close of a unit offering that generated net
proceeds of approximately $125 million, the receipt of $16 million from the Moa JV on its working capital facility and the receipt
of US$40.7 million in Cuban energy payments. In Q4 2017, Sherritt received US7.5 million in Cuban energy payments.
Cuban overdue scheduled receivables at March 31, 2018 totaled $126.7 million, down from $132.6 million at December 31,
2017. Sherritt has experienced variability in its Cuban receivables over the years but has not incurred any losses related to
any scheduled Cuban receivables.
Adjusted earnings (loss) from continuing operations(1)
2018 2017
For the three months ended March 31 $ millions $/share $ millions $/share
Net loss from continuing operations (0.6) (0.00) (72.6) (0.25)
Adjusting items, net of tax:
Unrealized foreign exchange gain (7.7) (0.02) (7.3) (0.02)
Other (6.5) (0.02) (2.8) (0.01)
Adjusted net earnings (loss) from continuing operations (14.8) (0.04) (82.7) (0.28)
(1) For additional information, see the Non-GAAP measures section of this release.
Sherritt International Corporation 3
Sherritt incurred a net loss from operations of $0.6 million, or $nil per share outstanding, in Q1 2018. These compare to a net
loss from operations of $72.6 million, or $0.25 per share, in Q1 2017.
On an adjusted basis, Sherritt incurred a net loss from operations of $14.7 million, or $0.04 per share outstanding, in Q1 2018.
These compare to an adjusted net loss of $82.7 million, or $0.28 per share, for the same period of 2017.
METAL MARKETS
Nickel
Nickel prices continued to rally in Q1 2018, sustaining the momentum established in second half of 2017. The average
reference price in Q1 2018 was US$6.03/lb, up 29% from US$4.66/lb in the first quarter of 2017. The average reference
price for Q1 2018 marked the highest since Q1 2015 when it was US$6.50/lb.
The year-over-year price improvement was driven by a number of developments, Chief among them is the growing
understanding of the important role that Class I nickel will play in the growing electric vehicle (EV) market. Class I nickel,
along with cobalt, are key metals needed to manufacture EV batteries. Demand for Class I 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.
The rise in the nickel reference price was also driven by the decline in inventories. Combined LME and SHFE nickel
inventories at March 31 2018, declined to 367,694 tonnes (from 410,828 tonnes) at the start of the year. A further decline in
visible inventories is expected to sustain the price increase momentum through the end of 2018.
Beyond 2018, nickel supply deficits are expected to widen as stainless steel sector growth is expected to outpace nickel
production. The supply deficit is expected to be exacerbated with the rise of the electric vehicle market and the need for
Class I nickel for battery production.
Cobalt
Cobalt prices rose in Q1 2018, marking the seventh consecutive quarter of higher reference prices. The average-reference
price for Q1 2018 was US$39.01/lb, up 97% from US$19.80/lb for Q1 2017.
The near doubling of cobalt prices over the past year is primarily linked to the growing strong demand emanating from the EV
battery market. Higher cobalt prices were 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 I nickel.
Because of the cobalt market’s limited size, significant product orders cause price surges. As end-users are trying to build
cobalt positions or to secure long-term supply, spot metal availability is sporadic and prices are expected to remain elevated
in the near term.
2018 First Quarter Report
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4 Sherritt International Corporation
REVIEW OF OPERATIONS
Moa Joint Venture (50% interest) and Fort Site (100%)
For the three months ended
2018 2017
$ millions, except as otherwise noted March 31 March 31 Change
FINANCIAL HIGHLIGHTS
Revenue $ 96.3 $ 90.4 7%
Earnings from operations 16.3 2.0 715%
Adjusted EBITDA(1) 27.1 12.8 112%
CASH FLOW
Cash provided by operations $ 18.1 $ 14.8 22%
Free cash flow(1) 13.6 12.6 8%
Adjusted operating cash flow(1) 26.8 9.1 195%
PRODUCTION VOLUMES (tonnes)
Mixed Sulphides 3,882 4,282 (9%)
Finished Nickel 2,854 3,840 (26%)
Finished Cobalt 336 436 (23%)
Fertilizer 52,440 58,868 (11%)
NICKEL RECOVERY (%) 79% 85% (7%)
SALES VOLUMES (tonnes)
Finished Nickel 2,910 3,862 (25%)
Finished Cobalt 325 421 (23%)
Fertilizer 25,472 37,454 (32%)
AVERAGE-REFERENCE PRICES (US$ per pound)
Nickel $ 6.03 $ 4.66 29%
Cobalt(2) 39.01 19.80 97%
AVERAGE REALIZED PRICE
Nickel ($ per pound) 7.80 6.19 26%
Cobalt ($ per pound) 48.47 24.19 100%
Fertilizer ($ per tonne) 358 343 4%
UNIT OPERATING COSTS(1) (US$ per pound)
Nickel - net direct cash cost 2.06 3.25 (37%)
SPENDING ON CAPITAL
Sustaining 4.5 2.1 114%
Expansion - - -
4.5 2.1 114%
(1) For additional information, see the Non-GAAP measures section of this release.
(2) Average low-grade cobalt published price per Metals Bulletin.
The Moa JV produced 2,854 tonnes of finished nickel in Q1 2018, down 26% from 3,840 tonnes produced in Q1 2017.
Finished cobalt production in Q1 2018 was 336 tonnes, down 23% from 436 tonnes produced in Q1 2017.
The production decline in Q1 2018 was principally due to reduced availability of mixed sulphides caused by the highest level of
rainfall at Moa’s operations in more than 20 years that limited access to planned mining areas as well as by transportation
delays to the refinery by the rail service provider. The adverse impact of excessive rain fall and rail transportation delays have
been alleviated since the start of the second quarter, and Sherritt expects to achieve the lower end of its 2018 production
guidance for finished nickel and finished cobalt at the Moa JV. Second quarter production will be impacted, however, by the
annual shutdown of the refinery in Fort Saskatchewan due to scheduled maintenance activities. This year’s shutdown is
expected to be similar in duration to prior years.
Q1 2018 revenue for the Moa JV and the Fort Site totaled $96.3 million, up 7% from $90.4 million for the comparable period of
2017. The growth was driven by higher realized prices in 2018 for nickel (+26%), cobalt (+100%) and fertilizer (+4%) although
offset by lower sales volume and a higher Canadian dollar relative to the U.S. dollar.
Nickel sales represented 52% of total Q1 2018 revenue while cobalt sales represented 36%. Fertilizer sales in Q1 2018 were
down 29% from last year, reflecting lower demand and timing of shipments ahead of the spring season.
Sherritt International Corporation 5
Mining, processing and refining (MPR) costs for Q1 2018 were US$5.26 per pound, up 11% from US$4.75 per pound for Q1
2017. The increase was due to the impact of lower production as well to higher input costs, including increased sulphur and
energy costs.
Despite higher energy and sulphur input costs and lower production, Moa’s NDCC of US$2.06/lb for Q1 2018 was in the
lowest cost quartile relative to other nickel producers, marking the fourth consecutive quarter of such distinction. NDCC in Q1
2018 declined by 37% compared to the prior year period, largely because of a higher cobalt by-product credit. The cobalt
credit of US$4.27/lb reflects Moa’s high cobalt to nickel production ratio as well as the 100% growth in cobalt prices since Q1
2017.
Given current commodity prices and the expected rate of production for the balance of the year, NDCC guidance at Moa for
2018 has been lowered to US$1.75/lb to US$2.25/lb from US$2.50/lb to US$3.00/lb of finished nickel previously announced.
Cash provided by operations in Q1 2018 totaled $18.1 million, up 22% from $14.8, reflecting the year-over-year improvement
in commodity prices.
Moa’s sustaining capital spending in Q1 2018 was $4.5 million, up from $2.1 million in Q1 last year. The increase was due to
planned spending, including the start of work at a new slurry preparation plant dump pocket at Moa. The Moa JV is expected
to continue to operate and fund capital expenditures through cash flow generated by the joint venture, or external loans.
Investment in Ambatovy Joint Venture (12% interest effective December 11, 2017)
For the three months ended
2018 2017
$ millions, except as otherwise noted March 31 March 31 Change
FINANCIAL HIGHLIGHTS
Revenue $ 17.8 $ 74.8 (76%)
Earnings (loss) from operations (9.0) (29.0) 69%
Adjusted EBITDA(2) 0.9 8.2 (89%)
CASH FLOW
Cash provided by operations $ (6.0) $ (2.3) (161%)
Free cash flow(2) (8.9) (6.3) (41%)
Adjusted operating cash flow(2) (0.8) 7.1 (111%)
PRODUCTION VOLUMES (tonnes)(3)
Mixed Sulphides 675 1,295 (48%)
Finished Nickel 668 1,145 (42%)
Finished Cobalt 49 97 (85%)
Fertilizer 1,989 3,539 (44%)
NICKEL RECOVERY (%) 85% 85% -
SALES VOLUMES (tonnes)(3)
Finished Nickel 665 1,143 (42%)
Finished Cobalt 53 106 (50%)
Fertilizer 1,479 3,734 (60%)
AVERAGE-REFERENCE PRICES (US$ per pound)
Nickel $ 6.03 $ 4.66 29%
Cobalt(4) 39.01 19.80 97%
AVERAGE-REALIZED PRICE
Nickel ($ per pound) 7.11 6.15 16%
Cobalt ($ per pound) 63.74 26.75 138%
Fertilizer ($ per tonne) 200.99 164 23%
UNIT OPERATING COSTS(2) (US$ per pound)
Nickel - net direct cash cost 5.34 3.93 36%
SPENDING ON CAPITAL
Sustaining 2.5 8.4 (70%)
Expansion - - -
2.5 8.4 (70%)
(1) Sherritt’s share for Ambatovy Joint Venture reflects its interest at 40% through December 10, 2017 and 12% thereafter.
(2) For additional information, see the Non-GAAP measures section of this release.
(3) To allow for easier comparison, Ambatovy production volume information for the quarter ended March 31, 2017 is presented on a 12% basis.
(4) Average low-grade cobalt published price per Metals Bulletin.
2018 First Quarter Report
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6 Sherritt International Corporation
Sherritt’s financial results at Ambatovy are presented on a 12% basis for Q1 2018 and on a 40% basis for Q1 2017.
Production totals are presented on a 12% for both periods for better comparison purposes. 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 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.
On January 6, the operations of the Ambatovy Joint Venture were significantly impacted by Tropical Cyclone Ava, a Category
2 hurricane equivalent storm. The cyclone necessitated a plant shutdown and caused extensive damage to facilities and
equipment. Production resumed at the end of January following the completion of critical repairs. Repairs to damage caused
by Cyclone Ava are still ongoing. Metal production in Q1 2018 was also lower due to limited production of sulphuric acid as a
result of a failed economizer in Acid Plant.
Consistent with previous disclosure, metal production at Ambatovy will continue to be constrained by lower production of
sulphuric acid in Q2 2018. Lower production of sulphuric acid is due to the failed economizer in Acid Plant 1, which is currently
operating at approximately 50% of capacity. Acid Plant 2 is operating at 100% capacity. Production capacity is expected to be
back to normal once the economizer in Acid Plant 1 is replaced in May 2018. Replacement of the economizer will necessitate
a shutdown of Acid Plant 1 for approximately three weeks.
Finished nickel production at Ambatovy in Q1 2018 was 668 tonnes (12% basis), down from 1,145 tonnes (12% basis)
produced in Q1 2017. Finished cobalt production in Q1 2018 was 49 tonnes (12% basis), down from 97 tonnes (12% basis) for
Q1 2017. The decline was principally due to the impact of Cyclone Ava and effects of the failed economizer.
MPR costs for Q1 2017 were US$7.90 per pound, up from US$5.53 per pound in Q1 2017. The year-over-year increase was
largely due to the impact of lower production volumes in 2018.
NDCC for finished nickel at Ambatovy in Q1 2018 was US$5.34/lb, up from the US$3.93/lb for Q1 2017. The increase was due
to lower production, higher maintenance costs and higher energy and sulphur input costs offset by higher cobalt by-product
credits.
In light of current commodity prices and the expected rate of production for the balance of the year, NDCC guidance at
Ambatovy for 2018 has been lowered to US$2.50/lb to US$3.00/lb from US$3.00/lb to US$3.50/lb of finished nickel previously
announced.
Sherritt International Corporation 7
OIL AND GAS
$ millions, except as otherwise noted, for the three months ended March 31 2018 2017 Change
FINANCIAL HIGHLIGHTS
Revenue $ 18.1 $ 35.3 (49%)
Earnings from operations 1.7 11.0 (85%)
Adjusted EBITDA(1) 4.6 19.6 (77%)
Cash provided by operations 7.3 14.0 (48%)
Free cash flow(1) 4.2 10.3 (59%)
PRODUCTION AND SALES (boepd)
Gross working-interest (GWI) - Cuba 5,572 15,213 (63%)
Total net working-interest (NWI) 3,916 8,889 (56%)
AVERAGE-REFERENCE PRICE (US$ per barrel)
West Texas Intermediate (WTI) $ 62.85 $ 51.62 22%
U.S. Gulf Coast High Sulphur Fuel Oil (USGC HSFO) (2) 55.13 45.52 21%
Brent 66.88 53.33 25%
AVERAGE-REALIZED PRICE(1) (NWI)
Cuba ($ per barrel) 51.11 $ 43.62 17%
UNIT OPERATING COSTS(1) (GWI)
Cuba ($ per barrel) 20.83 $ 8.66 141%
SPENDING ON CAPITAL
Development, facilities and other $ (0.3) $ (0.8) 63%
Exploration 2.6 3.8 (32%)
$ 2.3 $ 3.0 (23%)
(1) For additional information, see the Non-GAAP measures section of this release.
(2) Starting in 2018, the Oil and Gas division uses U.S. Gulf Coast High Sulphur Fuel Oil for pricing purposes, replacing U.S. Gu lf Coast Fuel Oil #6 used previously. The
comparative period has been adjusted accordingly.
Gross working-interest oil production in Q1 2018 in Cuba was 5,572 barrels of oil per day (“bopd”), down 63% from 15,213
bopd for the comparable period of 2017. The decrease was primarily due to the expiration of the Varadero West Production
Sharing Contract (PSC) in November 2017, natural reservoir declines and the absence of new development drilling.
Revenue in Q1 2018 was $18.1 million, down 49% from $35.3 million for last year. The decline was due to lowered production,
partially offset by an increase in realized prices of 17% to $51.11 per barrel in Cuba, though partially offset by the negative
impact of a stronger Canadian dollar.
Total net working-interest production for Q1 2018 was 3,916 barrels of oil equivalent per day (“boepd”), down from 8,889
boepd in the same period of 2017. The decline was due to the impact of the expiration of the Varadero West PSC already
noted and the impact of higher oil prices in 2018.
Unit operating costs in Q1 2018 in Cuba were $20.83 per barrel, up 141% from $8.66 in Q1 2017, driven largely by reduced
production. Costs were positively impacted by the strengthening Canadian dollar relative to the U.S. dollar in Q1 2018.
Exploration spending in Q1 2018 was lower than in the comparable period of 2017 as spending was primarily focused on
detailed engineering for the next well on Block 10. In Q1 2017, drilling on the first well on Block 10 was being completed.
Subsequent to quarter end, Sherritt finalized the evaluation of available and proven technology to complete drilling of the
second well on Block 10 targeting the Lower Veloz reservoir. A proventechnology solution, has been selected and will be
deployed when drilling is slated to resume in early July 2018. Preliminary drilling results are expected in Q3 2018. Capital
budgeted to complete the drilling is expected to be approximately US$13 million.
2018 First Quarter Report
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8 Sherritt International Corporation
POWER
$ millions (33⅓% basis), except as otherwise noted, for the three months ended March 31 2018 2017 Change
FINANCIAL HIGHLIGHTS
Revenue $ 11.9 $ 13.4 (11%)
Earnings from operations 1.8 2.8 (36%)
Adjusted EBITDA(1) 7.8 9.2 (15%)
Cash provided by operations 11.2 12.8 (13%)
Free cash flow(1) 11.1 12.0 (8%)
PRODUCTION AND SALES
Electricity (GWh) 202 217 (7%)
AVERAGE-REALIZED PRICE(1)
Electricity ($/MWh) $ 53.24 $ 56.30 (5%)
UNIT OPERATING COSTS(1) ($/MWh)
Base 14.44 15.50 (7%)
Non-base(2) 2.78 0.45 518%
17.22 15.95 8%
NET CAPACITY FACTOR (%) 63 67 (6%)
SPENDING ON CAPITAL AND SERVICE CONCESSION ARRANGEMENTS
Sustaining $ 0.1 $ 0.8 (88%)
$ 0.1 $ 0.8 (88%)
(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.
Power production in Q1 2018 was 202 gigawatt hours (“GWh”) of electricity, down 7% from 217 GWh for the comparable
period of 2017. The decline was largely due to reduced gas supply.
Average-realized prices in Q1 2018 declined to $53.24 per Megawatt hour (“MWh’) of electricity from $56.30 per MWh in Q1
2017. The decline was due to the appreciation of the Canadian dollar relative to the U.S. currency.
Revenue in Q1 2018 totaled $11.9 million, down 11% from $13.4 million for Q1 2017. The decrease is attributable to lower
production and lower realized prices.
Cash flow from operations in Q1 2018 declined by 13% to $11.1 million due to changes in working capital in the quarter.
Unit operating cost in Q1 2018 was $17.22 per MWh of electricity, up 8% from $15.95 per MWh for Q1 2017. The increase
was due to the impact of lower sales volume.
Total capital spending in Q1 2018 was negligible.