Sherritt Reports Financial Results for Q3 2020
Sherritt International Corporation 1
For immediate release
Sherritt Reports Financial Results for Q3 2020
NOT FOR DISTRIBUTION TO UNITED STATES NEWSWIRE SERVICES OR FOR DISSEMINATION IN THE UNITED
STATES
Toronto – November 4, 2020 – Sherritt International Corporation (“Sherritt”, the “Corporation”, the “Company”) (TSX: S), a
world leader in the mining and hydrometallurgical refining of nickel and cobalt from lateritic ores, today reported its financial
results for the three- and nine -month periods ended September 30, 2020. All amounts are in Canadian currency unless
otherwise noted.
During the quarter, pursuant to its plan of arrangement under the Canadian Business Corporations Act, Sherritt announced the
successful closing of the latest step in its program to improve its capital stru cture. Overall, the transaction which closed on
August 31, represented completion of the key Ambatovy part in the broader restructuring of Sherritt’s debt obligations.
In summary, this CBCA restructuring:
eliminated a further $300 million in direct debt;
eliminated debt maturities in 2021, 2023, and 2025, and replaced them with maturities in 2026 and 2029;
reduced our cash interest expense by one-third to approximately $30 million per year;
completed our exit from the Ambatovy project, eliminating the associated direct and indirect debt and the risk
of being required to fund further cash calls with the associated risk of default; and
achieved all of this with no dilution to the current equity of Sherritt.
CHAIRMAN COMMENTARY
Commenting on the debt restructuring program, Sherritt Chairman Sir Richard Lapthorne said, “Preserving adequate liquidity
and rebuilding balance sheet strength have been Sherritt’s top priorities since the current management team and Board have
been in place. This has been a st ep-by-step process requiring a sustained concentration on removing the threats to the
Corporation’s viability, and this process had to focus on Ambatovy. Indeed, final resolution of our Ambatovy position was a k ey
part of the recently completed CBCA arrangement.”
He continued, “Sherritt entered the Ambatovy project in 2007 as a 40% partner with Sumitomo and Kores, our Korean partner,
through the $1.6 billion acquisition of Dynatec. At that time, the project was forecast to require funding of US$3.3 billion. A senior
debt facility of US$2.1 billion with recourse to the three partners was negotiated with the balance to be funded directly by the
partners. However, the capital requirement for Ambatovy grew and, at the last count, had reached US$8.5 billion of w hich the
shareholders funded US$6.4 billion. A feature of the shareholder agreement was that each partner had to meet its calls for cash
from the joint venture or risk a default, which could cross default to its other borrowings; in Sherritt’s case to its publicly traded
debentures. As early as 2009, Sherritt was forced to start mortgaging its future earnings from the project by borrowing from the
other partners in order to finance its cash calls. By 2016, with accrued compound interest, one of these loans had a balance of
$1.4 billion with no direct recourse to Sherritt, whilst the other of $133 million became a liability on Sherritt’s consolidated balance
sheet.”
Sir Richard added, “Over the past six year, the management team has worked tirelessly in seeki ng to reduce these financial
risks created through its Ambatovy commitments. In 2015, a combination of specialists from Sherritt’s Technologies business
and locally-based expatriate management enabled Ambatovy to operate its mine and plant at the required throughput relative
to capacity to enable the senior loans to become without recourse to the partners’ own balance sheets. This removed US$840
million from Sherritt’s debt profile. In 2017, Sherritt negotiated with its partners to reduce its shareholding in Ambatovy to 12%.
As a consequence, the partner loan of $1.4 billion was cancelled and Sherritt’s responsibility for meeting the JV’s total cash calls
dropped from 40% to 12%. Finally, as part of the CBCA Court application completed in August 2020, the 1 2% stake was
surrendered, the remaining partner loan, which had increased to $145 million on Sherritt’s Balance Sheet, was cancelled and
the financial planning uncertainty created by its cash call and potential default exposures from Ambatovy was extinguished.
2020 Third Quarter Report
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2 Sherritt International Corporation
“Sherritt has also effectively addressed the non -Ambatovy components in its funding. In 2006 it had borrowed $274 million in
publicly-traded debentures. Through the course of funding Ambatovy, total public debenture debt peaked at $1,158 million in
2013. Following the recently completed restructuring, debenture debt has now fallen to $358 million at the end of September
2020. Bondholders also hold a $75 million 2029 note. In 2014, Sherritt sold its coal business for $814 million of total cash
proceeds. Not only was this a well -timed business decision, but it also assisted the Corporation’s liquidity planning. The cash
proceeds were used to redeem $300 million of debentures with the balance ultimately sustaining Sherritt’s liquidity during th e
prolonged Ambatovy exit program.”
Sir Richard concluded by saying, “In total, since 2014, Sherritt has eliminated approximately $2.4 billion in debt from the balance
sheet along with a further $1.1 billion debt guarantee, and has removed the default risks posed by the Ambatovy agreements.
Had we failed to do these, Sherritt would not exist in its current form today.”
CEO COMMENTARY
“The completion of the balance sheet initiative and the resolution of the Ambatovy legacy debt puts Sherritt in the best possible
position to manage our business through the long term,” said David Pathe, President and CEO of Sherritt. “We have achieved
this outcome despite the significant volatility in nickel and cobalt pricing and the increasingly aggressive U.S. policy towards
Cuba we have seen over the last few years.”
Mr. Pathe added, “With the debt restructuring now behind us, our near-term focus will centre on sustaining the momentum we
have been able to establish at the Moa Joint Venture and achieve our production targets for 2020. That we are on track for this
achievement is a testament to the determination and resiliency of so many Sherritt employees managing the impact of the
COVID-19 pandemic.
“We continue to take proactive actions to manage our liquidity. Since the end of the quarter, we have received a US$15 million
distribution from the Moa JV, representing both our 50% share of US$7.5 million and our Cuban partner’s share of US$7.5
million, which is being redirected towards overdue receivables pursuant to our 2019 receivables agreement. We have also taken
advantage of the recent strength in nickel prices to purchase a derivative contract to provide a floor - but no cap - on 25% of our
share of 2021 nickel production at $6.50 per pound, which protects our 2021 cash flow against downside risk to the nickel price
next year.
“Over the longer term, we anticipate demand for our products to grow given the strong outlook for nickel in the coming years,
particularly as the market adoption of electric vehicles accelerates, and we will bring greater focus to the projects and innovation
of our Technologies Group and look to commercialize those innovations to create new revenue streams for Sherritt.”
SUMMARY OF KEY Q3 2020 DEVELOPMENTS
Sherritt successfully completed its balance sheet initiative, which improved its capital structure and addressed its
Ambatovy investment legacy, following stakeholder approval. As a result of the transaction, Sherritt reduced its total
outstanding debt by approximately $301 million, extended the maturities of its note obligations to 2026 and 2029,
reduced cash annual interest payments by more than $15 million, and terminated its debt obligations relating to the
Ambatovy Joint Venture, all without any dilution of its common shares.
Following close of its balance sheet initiative, Sherritt’s note obligations, totaling $433 million, were reclassified as long-
term debt.
Sherritt’s share of finished nickel production at the Moa Joint Venture (Moa JV) in Q3 2020 was 3,750 tonnes, down
9% from last year, while finished cobalt was 409 tonnes , down 6 % from last year. The decline was due to the
rescheduling of the planned plant shutdown and maintenance activities at the refinery in Fort Saskatchewan from June
to July as previously disclosed. The Moa JV remains on track to meet its production guidance in 2020 and has produced
23,466 tonnes of finished nickel and 2,468 tonnes of finished cobalt on a 100% basis through September 30.
Sherritt ended Q3 2020 with cash and cash equivalen ts of $165.1 million of which $82.1 million was held by Energas
in Cuba. The $7.3 million decrease in Sherritt’s liquidity from $172.4 million at the end of Q2 2020 was largely driven
by costs associated with the balance sheet initiative, including approximately $16 million of cash payments made to
note holders as early consent consideration.
Net earnings from continuing operations totaled $11.4 million, or $0.03 per share, and included a non-cash gain of
$143.4 million on the exchange of debentures relating to the balance sheet initiative, offset by a non-cash impairment
loss of $115.6 million relating to the write down of Block 10 capital assets.
Sherritt International Corporation 3
Sherritt recognized earnings from discontinued operations of $217.1 million related to the disposition of its 12%
ownership interest in the Ambatovy Joint Venture as part of the balance sheet initiative and reclassification as
discontinued operations.
Sherritt received US$16.3 million in Cuban energy payments as part of the overdue receivables agreement with its
Cuban partners. Payments, which included US$14.0 million received in Canada and US$2.3 million accepted in Cuba
to support local costs for Sherritt’s Oil and Gas operations, were lower than expected as the spread of COVID-19 and
the ongoing impact of U.S. sanctions limited Cuba’s access to foreign currency in Q3 2020.
Sherritt completed the analysis on a second set of samples from Block 10 that confirmed that the water produced during
the test period is from the loss circulation zone, which is located at a depth of approximately 5,300 meters and above
the target oil reservoir. The analysis also confirmed that no viable technical solution to prevent the further flow of water
into the existing well is possible. While Sherritt still believes that the Block 10 reservoir contains oil, the existing well
cannot be used for future production purposes. Sherritt is currently reviewing its options with respect to Block 10,
including seeking an earn -in partner. At this time, Sherritt is not contemplating any further investments in Block 10
without first securing an earn-in partner.
Sherritt released its 2019 Sustainability Report that showed progress against the Company’s Environmental, Social
and Governance targets, including efforts to reduce greenhouse house emissions, maintain peer-leading safety
metrics, and commit to doubling the number of female employees by 2030.
DEVELOPMENTS SUBSEQUENT TO THE QUARTER END
The Moa JV paid a US$15 million distribution to its shareholders in November. Sherritt received its 50% share of this
distribution, or US$7.5 million, directly. In addition, General Nickel Company, Sherritt’s joint venture partner, re-directed
its US$7.5 million share of this distribution to the Corporation to be applied against amounts owing to Sherritt from
Energas. The re-direction was secured through negotiations between Sherritt and its Cuban partners, and was made
in accordance with the June 2019 overdue receivables agreement.
Sherritt purchased put options on 25% of its share of attributable finished nickel production from the Moa JV for 2021
at a strike price of US$6.50/lb. Any cash settlements will be completed on a monthly basis against the average monthly
nickel price on the London Metals Exchange and will involve no physical delivery. The hedging strategy, which will be
in effect for a 12-month period starting January 1, 2021, is designed to provide Sherritt with cash flow security in 2021
against major downward changes in nickel prices.
Sherritt employee members of Unifor at the refinery in Fort Saskatchewan ratified a new collective agreement through
March 31, 2022 . The new agreement extends Sherritt’s track record of no labour disruptions at t he refinery since it
began operations in 1954.
Sherritt agreed to an extension for the maturity of its $70 million credit facility from its syndicate of lenders to December
31, 2020. A longer-term extension is expected to be finalized in Q4 2020.
Sherritt continues to be in discussion with its Spanish partners on a potential alternative arrangement relating to the
expired $47.0 million letter of credit for reclamation costs associated with Sherritt’s Spanish oil assets.
(1) For additional information see the Non-GAAP measures section of this press release.
Q3 2020 FINANCIAL HIGHLIGHTS(1)
For the three months ended For the nine months ended
2020 2019 2020 2019
$ millions, except per share amount September 30 September 30 Change September 30 September 30 Change
Revenue 24.9 27.6 (10%) $ 91.6 $ 105.3 (13%)
Combined revenue(2) 115.3 133.7 (14%) (36.4) 401.9 (109%)
Net earnings (loss) from continuing operations for the period 11.4 (15.4) 174% (36.4) (76.8) 53%
Net earnings (loss) for the period 228.5 (30.0) 862% 71.8 (182.2) 139%
Adjusted EBITDA(2) 15.5 20.9 (26%) 28.2 28.5 (1%)
Cash provided (used) by continuing operations 25.3 1.5 nm(3) 35.3 (18.2) 294%
Combined adjusted operating cash flow(2) 21.5 15.4 40% 45.9 (2.7) nm(3)
Combined free cash flow(2) 27.1 (12.3) 320% 29.5 (52.3) 156%
Average exchange rate (CAD/US$) 1.332 1.320 - 1.354 1.329 -
Net earnings (loss) from continuing operations per share 0.03 (0.04) 175% (0.09) (0.19) 53%
(1) All non-GAAP measures exclude the Joint Venture performance. As a result of the transaction, Ambatovy Joint Venture’s share of loss of an associate and other
statement of comprehensive income (loss) items related to the Ambatovy Joint Venture were reclassified to the loss on discontinued operations in the current and
comparative periods. The loss on discontinued operations also includes the gain on disposal of Ambatovy Joint Venture Interests in the current period.
(2) For additional information see the Non-GAAP measures section.
(3) Not meaningful (nm)
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4 Sherritt International Corporation
2020 2019
$ millions, as at September 30 December 31 Change
Cash, cash equivalents and short term investments $ 165.1 $ 166.1 (1%)
Loans and borrowings 440.7 713.6 (38%)
Cash, cash equivalents and short -term investments at September 30, 2020 were $165.1 million, down from $172.4 million at
June 30, 2020. The decrease was due to a number of factors including, cash payments of approximately $16 million made to
noteholders as early consent consideration and capital expenditures totaling $2.5 million, partially offset by higher Cuban energy
payments. In addition, interest payments owed to holders of Sherritt’s series of debentures maturing in 2021, 2023 and 2025
were deferred as a result of the balance sheet initiative. Upon close of the transaction, all unpaid and accrued interest amounts
were added to the principal amounts of second lien notes exchanged to holders for old notes.
As at September 30, 2020, $82.1 million of Sherritt’s cash and cash equivalents was held by Energas in Cuba, down from $82.2
million at the end of Q2 2020.
Sherritt received US$16.3 million in Cuban energy payments as part of its overdue receivables agreement wi th its Cuban
partners in Q3 2020. Payments, which included US$14.0 million received in Canada and US$2.3 million acc epted in Cuba to
support local costs relating to Sherritt’s Oil and Gas operations, were lower than expected as the spread of COVID -19 and the
ongoing impact of U.S. sanctions limited Cuba’s access to foreign currency in Q3 2020. Total overdue scheduled receivables at
September 30, 2020 were US$159.1 million, unchanged from June 30, 2020 due to the timing of payments received and
scheduling of expected payments. Subsequent to September 30, 2020, the Corporation received US$2.6 million in Canada from
the Cuban overdue receivables agreement and US$2.4 million in Cuba to support local costs.
In Q3 2020, the Moa JV declared dividends of US$15 million, which were subsequently distributed in Q4 2020. In addition to
Sherritt receiving its US$7.5 million share of this distribution, General Nickel Company, the Corporation’s joint venture partner,
re-directed its share of this distribution to Sherritt to be applied against amounts owing to Sherritt from Energas. This re-direction
was secured through negotiations between Sherritt and its Cuban partners, and was made in accordance with the June 2019
overdue receivables agreement. Sherritt anticipates receiving further dividend distributions in Q4 2020 given prevailing nick el
and cobalt prices.
Sherritt anticipates that its liquidity position through the end of 2020 will largely be dependent on its ability to collect on amounts
owed to it by its Cuban energy partners and dividends received from the Moa JV.
Adjusted net loss(1)
2020 2019
For the three months ended September 30 $ millions $/share $ millions $/share
Net earnings (loss) from continuing operations 11.4 0.03 (15.4) (0.04)
Adjusting items:
Unrealized foreign exchange (gain) loss (3.6) (0.01) (5.5) (0.01)
Gain on debenture exchange (143.4) (0.36) - -
Impairment of Oil assets 115.6 0.29 - -
Other 3.9 0.01 0.3 -
Adjusted net loss from continuing operations (16.1) (0.04) (20.6) (0.05)
2020 2019
For the nine months ended September 30 $ millions $/share $ millions $/share
Net earnings (loss) from continuing operations (36.4) (0.09) (76.8) (0.19)
Adjusting items:
Unrealized foreign exchange (gain) loss (8.7) (0.02) (0.8) -
Gain on debenture exchange (143.4) (0.36) - -
Moa JV expansion loans ACL revaluation (6.4) (0.02) - -
Impairment of Oil assets 115.6 0.29 - -
Other 6.3 0.02 (1.2) (0.01)
Adjusted net loss from continuing operations (73.0) (0.18) (78.8) (0.20)
(1) For additional information see the Non-GAAP measures section.
Sherritt International Corporation 5
Net earnings from continuing operations for Q3 2020 was $11.4 million, or $0.03 per share, compared to a net loss of $15.4
million, or $0.04 per share, for the same period last year. Net earnings for Q3 2020 includes a gain of $143.4 million on the
exchange of debentures as part of the balance sheet initiative offset by an impairment loss recognized on the write down of
exploration and evaluation assets and capitalized spare parts relating to Block 10 drilling activities totaling $115.6 million.
Adjusted net loss from continuing operations was $16.1 million, or $0.04 per share, for the three months ended September 30,
2020 compared to an adjusted net loss from continuing operations of $20.6 million, or $0.05 per share, for Q3 2019.
On the close of the balance sheet initiative, Sherritt exchanged its 12% ownership interest and its loans and operator fee
receivables in the Ambatovy Joint Venture for $145.6 million owed to its partners. Consistent with IFRS standards, Sherritt’s
investment in the Ambatovy Joint Venture met the criteria to be classified and presented as discontinued operations for
accounting purposes. As a result, Sherritt’s share of loss of an associate, net of tax, and other components of comprehensive
income (loss) related to the Ambatovy Joint Venture were reclassified to the earnings (loss) on discontinued operations, net of
tax, in the current and comparative periods. Sherritt recognized earnings on the disposition and reclassification of $217.1 million
in Q3 2020 as a result.
METALS MARKET
Nickel
Nickel market conditions continued to improve in the third quarter of 2020, sustaining the trend started in Q2 with the easing
of lock-down restrictions related to the COVID-19 pandemic and the restart of economic and manufacturing activities,
particularly in China.
Nickel prices on the London Metals Exchange (LME) opened at US$5.69/lb on July 1 and closed on September 30 at
US$6.52/lb, representing a growth of 15%.
While nickel prices climbed during Q3, nickel inventory levels on the London Metals Exchange (LME) and the Shanghai Future
Exchange (SHFE) remained relatively flat. Combined inventory levels at September 30 totaled approximately 263,000 tonnes,
up from approximately 262,000 tonnes at June 30. Nickel inventories on the LME and SHFE have stayed relatively flat despite
the reduced production of stainless steel globally on a year to date basis largely because a number of nickel mines around the
world have either significantly reduced production or have gone into care and maintenance as a result of the spread of COVID-
19. Production at the Moa JV has largely been unaffected by the spread of COVID-19 through September 30.
Renewed interest in electric vehicles and bullish forecasts for accelerated demand growth in the coming years have triggered
speculative purchasing from commodity investors, sustaining the nickel price momentum into the fourth quarter. A number of
carmakers, in particular, have indicated that high purity nickel will be the primary metal in their battery chemistries. At October
20, nickel prices had risen to US$7.16/lb, the highest price since the start of 2020. This renewed interest in nickel is expected
to contribute to higher prices into 2021.
Over the medium term, nickel prices are expected to be volatile given the ongoing economic uncertainty caused by the
pandemic. As mining operations resume production activities, nickel inventory levels may rise given that supply could exceed
demand as a number of industries that are large consumers of stainless steel, such as food and hospitality sector, will
experience a delayed or slower economic recovery, particularly if the second wave of the pandemic is prolonged.
In light of this uncertainty, a number of industry analysts have lowered their forecasts for nickel demand from end consumers,
reflecting negative market sentiment through the end of 2021. Previously, demand for nickel through 2025 was expected to
grow by approximately 3% per year to 2.8 million tonnes according to market research by Wood Mackenzie.
Added to this uncertainty is the substantial increase in nickel pig iron production, leading some industry analysts to predict an
oversupplied nickel market in the near term. This development is putting additional pressure on producers of lower-grade
material such as ferronickel, which is currently selling at significant discount. As a result, it remains unclear how nickel prices
will fare in the near term.
Over the longer term, demand for nickel is expected to increase with the increased adoption of electric vehicles since nickel –
along with cobalt – is a key metal needed to manufacture assorted energy storage batteries.
Cobalt
Cobalt prices experienced a turnaround in Q3 following an extended period of softness through much of the first half of the
year as a result of the impact COVID-19 on consumer demand. Standard grade cobalt prices, in fact, rose 9% ending the
quarter at US$15.65/lb according to data collected by Fastmarkets MB. Standard grade cobalt prices on July 1 closed at
US$14.30/lb, widely believed by industry watchers and traders to be a floor-level price.
2020 Third Quarter Report
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6 Sherritt International Corporation
It is speculated that market conditions have improved for a number of factors, including growing demand from battery
manufacturers as a result of higher demand for electronics and computer equipment due to the growing trend of working from
home accelerated since the start of the COVID-19 pandemic.
Increasing cobalt demand from battery makers has helped to offset demand softness from other industries, such as the
aerospace sector, that make extensive use of cobalt as a key component to manufacturing activities as a super alloy. With
recovery of these sectors expected to be slow or delayed, it is anticipated that cobalt market conditions will experience some
volatility.
Over the longer term, the outlook for cobalt remains strong given the accelerated growth of electric vehicle demand expected
in the coming years. Cobalt, in particular, is a key component of rechargeable batteries providing energy density and stability.
REVIEW OF OPERATIONS
Moa Joint Venture (50% interest) and Fort Site (100%)
For the three months ended For the nine months ended
2020 2019 2020 2019
$ millions, except as otherwise noted September 30 September 30 Change September 30 September 30 Change
FINANCIAL HIGHLIGHTS
Revenue $ 97.7 $ 112.2 (13%) $ 306.7 $ 337.6 (9%)
(Loss) earnings from operations 3.0 12.2 (75%) (0.5) 2.3 (122%)
Adjusted EBITDA(1) 17.4 25.5 (32%) 43.9 43.9 -
CASH FLOW
Cash provided by operations $ 23.1 $ 4.4 425% $ 40.3 $ 8.0 404%
Adjusted operating cash flow(1) 17.0 24.7 (31%) 39.8 42.3 (6%)
Free cash flow(1) 16.3 (0.6) nm(4) 20.4 (11.1) 284%
Distributions and repayments to Sherritt from the Moa JV - 11.6 (100%) 13.3 28.4 (53%)
PRODUCTION VOLUMES (tonnes)
Mixed Sulphides 4,671 4,165 12% 13,008 12,807 2%
Finished Nickel 3,750 4,139 (9%) 11,733 12,505 (6%)
Finished Cobalt 409 436 (6%) 1,234 1,277 (3%)
Fertilizer 53,743 66,296 (19%) 179,609 192,923 (7%)
NICKEL RECOVERY (%) 90% 85% 6% 86% 85% 1%
SALES VOLUMES (tonnes)
Finished Nickel 3,568 4,145 (14%) 11,510 12,609 (9%)
Finished Cobalt 501 440 14% 1,235 1,329 (7%)
Fertilizer 36,169 25,186 44% 139,380 118,695 17%
AVERAGE-REFERENCE PRICES (US$ per pound)
Nickel $ 6.45 $ 7.08 (9%) $ 5.93 $ 6.09 (3%)
Cobalt(2) 14.87 15.20 (2%) 15.52 16.46 (6%)
AVERAGE REALIZED PRICE(1)
Nickel ($ per pound) $ 8.36 $ 9.11 (8%) $ 7.80 $ 8.04 (3%)
Cobalt ($ per pound) 16.71 17.54 (5%) 17.95 17.18 4%
Fertilizer ($ per tonne) 289 345 (16%) 359 444 (19%)
UNIT OPERATING COSTS(1) (US$ per pound)
Nickel - net direct cash cost $ 4.04 $ 4.37 (8%) $ 4.09 $ 4.25 (4%)
SPENDING ON CAPITAL(3)
Sustaining $ 6.8 $ 4.9 39% $ 22.9 $ 26.7 (14%)
$ 6.8 $ 4.9 39% $ 22.9 $ 26.7 (14%)
(1) For additional information see the Non-GAAP measures section.
(2) Average standard grade cobalt published price per Fastmarkets MB.
(3) Spending on capital for the nine months ended September 30, 2019 excludes right of use assets recognized on adoption of IFRS 16. Refer to note 4 of the audited
consolidated financial statements for the year ended December 31, 2019 for additional information.
(4) Not meaningful (nm)
Sherritt International Corporation 7
Mixed sulphides production at the Moa JV in Q3 2020 was 4,671 tonnes, up 12% from 4,165 tonnes produced in Q3 2019. The
increase was largely due to the normalized availability of diesel fuel supply at Moa, resulting in the greater use of mining
equipment and better access to higher grade material compared to last year. In Q3 2019, mixed sulphides production at Moa
was negatively impacted by diesel fuel conservation measures implemented in response to reduced diesel fuel supply availability
caused by economic and trade sanctions imposed on Venezuela, Cuba’s largest oil supplier. The diesel conservation measures
in Q3 2019 included reduced use of mining equipment and increased draw down of lower grade ore stockpiles.
Finished nickel production in Q3 2020 totaled 3,750 tonnes, down 9% from 4,139 tonnes produced in Q3 2019. Finished cobalt
production for Q3 2020 was 409 tonnes, down 6% from 436 tonnes produced in Q3 2019.
Consistent with previous disclosure, finished nickel and cobalt production totals in Q3 2020 were impacted by the rescheduling
of the planned plant shutdown and maintenance activities at the refinery at Fort Saskatchewan from June to July, and by the
extension of the shutdown by four days. The shutdown extension was caused by limited local contractor availability and
additional repair scope identified. The decision to reschedule the shutdown and maintenance activities was taken as a safety
measure to prevent the spread of COVID-19.
The Moa JV remains on track to achieve its production targets for 2020 based on year-to-date finished nickel production of
23,466 tonnes and finished cobalt production of 2,468 tonnes on a 100% basis through September 30, 2020.
Sales volume for finished nickel in Q3 2020 was 3,568 tonnes, down 14% from 4,145 tonnes for last year. The decline was
largely driven by the shutdown of the refinery in Fort Saskatchewan and by the timing of nickel deliveries. Sales volume for
finished cobalt was up 14% to 501 tonnes and fertilizer sales volume was up 44% to 36,169 tonnes in Q3 2020. The respective
increases were due to the timing of deliveries and strong market demand.
Largely as a result of the 14% decrease in nickel sales volume and the 8% decrease in average realized nickel prices, revenue
at the Moa JV declined by 13% to $97.7 million in Q3 2020 when compared to $112.2 million for Q3 2019. The revenue decline
was partly offset by higher cobalt and fertilizer sales volumes, although cobalt and fertilizer realized prices declined 5% and
16%, respectively, in Q3 2020 from last year.
Mining, processing and refining (MPR) costs for Q3 2020 were US$4.90/lb, down 6% from US$5.22/lb for Q3 2019. MPR costs
declined primarily due to lower input costs related to sulphur and fuel oil as well as due to austerity measures undertaken to
reduce operating expenses.
NDCC in Q3 2020 was US$4.04/lb, down 8% from US$4.37/lb for the same period last year reflecting the decline in MPR costs,
lower third-party feed costs and a 25% increase in cobalt by-product credits.
Sustaining capital spending in Q3 2020 was $6.8 million, up 39% from $4.9 million in Q3 2019. The year-over-year increase was
due primarily to the timing of planned capital expenditures.
Sherritt’s share of planned capital spend for 2020 at the Moa JV (50% basis) and Fort Site (100%) is expected to be US$22
million, down from US$34 million initially forecasted at the start of the year. The reduction in planned capital spend is due to
austerity measures implemented earlier in 2020, including the decision to defer a number of capital spend projects.
In addition to being on track with its production targets for 2020, the Moa JV also expects to meet its guidance for unit costs and
planned capital spend for the year.
In Q3 2020 Sherritt and the General Nickel Company S.A., the two Moa JV shareholders, considered amendments to the Moa
JV expansion loans, and mutually agreed to convert $548.0 million of loans receivable into equity. Based on Sherritt’s 50%
equity interest in the Moa JV, the agreement resulted in a decrease of the Corporation’s expansion loans receivable and
commensurate increase in the Corporation’s investment in the Moa JV. The conversion of the expansion loans into equity,
which did not result in any change to the ownership interest percentage of either Moa JV shareholder, results in a simpler capital
structure for the Moa JV, and results in all future distributions to shareholders being in the form of dividends.
2020 Third Quarter Report
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8 Sherritt International Corporation
Oil and Gas
For the three months ended For the nine months ended
2020 2019 2020 2019
$ millions, except as otherwise noted September 30 September 30 Change September 30 September 30 Change
FINANCIAL HIGHLIGHTS
Revenue $ 5.6 $ 6.9 (19%) $ 18.7 $ 23.4 (20%)
Earnings (loss) from operations (120.4) (6.5) nm(3) (130.5) (17.6) nm(3)
Adjusted EBITDA(1) (3.2) (3.8) 16% (9.9) (9.2) (8%)
CASH FLOW
Cash (used) provided by operations (5.2) (9.2) 43% (21.2) 4.3 (593%)
Adjusted operating cash flow(1) (2.7) (4.8) 44% (10.1) (11.6) 13%
Free cash flow(1) (5.8) (13.7) 58% (25.4) (17.4) (46%)
PRODUCTION AND SALES (bopd)
Gross working-interest (GWI) – Cuba 2,886 4,060 (29%) 3,063 4,306 (29%)
Total net working-interest (NWI) 1,554 1,199 30% 1,744 1,496 17%
AVERAGE REFERENCE PRICE (US$ per barrel)
U.S. Gulf Coast High Sulphur Fuel Oil (USGC HSFO) 37.95 51.49 (26%) 33.35 57.90 (42%)
AVERAGE-REALIZED PRICE(1) (NWI)
Cuba ($ per barrel) $ 34.38 $ 50.38 (32%) $ 32.92 $ 57.22 (42%)
UNIT OPERATING COSTS(1) (GWI)
Cuba ($ per barrel) $ 30.93 $ 21.40 45% $ 28.32 $ 20.83 36%
SPENDING ON CAPITAL(2)
Development, facilities and other $ (2.1) $ (0.2) nm(3) $ (2.1) $ 0.8 nm(3)
Exploration 0.3 5.1 (94%) 3.1 21.1 (85%)
$ (1.8) $ 4.9 (137%) $ 1.0 $ 21.9 (95%)
(1) For additional information see the Non-GAAP measures section.
(2) Spending on capital for the nine months ended September 30, 2019 excludes right of use assets recognized on adoption of IFRS 16. Refer to note 4 of the audited
consolidated financial statements for the year ended December 31, 2019 for additional information.
(3) Not meaningful (nm)
Gross working-interest oil production in Cuba in Q3 2020 was 2,886 barrels of oil per day (bopd) , down 29% from 4,060 bopd
for Q3 2019. Lower production in the current year period was primarily due to natural reservoir declines and the absence of new
development drilling.
Revenue in Q3 2020 was $5.6 million, down 19% when compared to Q3 2019 due to lower production and lower realized
average prices in Cuba, but partially offset by a weaker Canadian dollar relative to the U.S. dollar.
Unit operating costs in Cuba in Q3 2020 were $30.93 per barrel, up 45% when compared to Q3 2019 as a result of lower GWI
production and the impact of a weaker Canadian dollar relative to the U.S. dollar. Costs in Cuba are generally denominated in
U.S. currency.
In Q3 2020, Sherritt reversed accruals of capital spending previously made totaling $2.1 million and recognized a total
impairment loss of $115.6 million in the Oil and Gas segment relating to Block 10 drilling activities. The impairment loss consisted
of a $95.0 million impairment on exploration and evaluation assets and a $20.6 million impairment on capital spare parts included
within property, plant and equipment.
In Q3 2020, Sherritt completed the analysis on a second set of samples from Block 10 that confirmed that the water produced
during the test period is from the loss circulation zone, which located at a depth of approximately 5,300 meters and above th e
target oil reservoir. While Sherritt still believes that the Block 10 reservoir contains oil, the existing well cannot be used for future
production purposes. The analysis confirmed conditions existing in Q3 2020 that resulted in the impairment record. Sh erritt is
currently reviewing its options with respect to Block 10, including seeking an earn -in partner. At this time, Sherritt is not
contemplating any further investments in Block 10 drilling without first securing an earn-in partner.
Based on performance through September 30, the Oil and Gas business remains on track to achieve its 2020 guidance for
production and unit costs. As a result of the analysis completed at Block 10 in Q3, planned capital spend for 2020 has been
lowered to US$1.5 million from US$4.0 million at the start of the year.