TORONTO Oct 28, 2015 (Thomson StreetEvents) -- Edited Transcript of Sherritt International Corporation earnings conference call or presentation Wednesday, October 28, 2015 at 2:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Flora Wood Sherritt International Corporation - Director of Investor Relations * David Pathe Sherritt International Corporation - CEO * Steve Wood Sherritt International Corporation - COO * Dean Chambers Sherritt International Corporation - CFO ================================================================================ Conference Call Participants ================================================================================ * Orest Wowkodaw Scotia Bank - Analyst * Greg Barnes TD Securities - Analyst * Anoop Prihar GMP Securities - Analyst * Sasha Bukacheva BMO Nesbitt Burns - Analyst * Steve Parsons National Bank Financial - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good morning, ladies and gentlemen, thank you for standing by. Welcome to the Sherritt International Corporation Third Quarter 2015 Results Release Conference Call and Webcast. At this time, all participants are in a listen-only mode. Following the presentation, we'll conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions). I would like to remind everyone that this conference call is being recorded today, Wednesday, October 28, 2015 at 10:00 AM Eastern Time. I'll now turn the conference over to Ms. Flora Wood, Director, Investor Relations, please go ahead. -------------------------------------------------------------------------------- Flora Wood, Sherritt International Corporation - Director of Investor Relations [2] -------------------------------------------------------------------------------- Thank you Ron and good morning everybody. Thank you for joining us. I just have a couple housekeeping items. So the presentation and the full financial package including cost breakdown info are on our website. We have the forward-looking information that applies to everything we say during the presentation and during the Q&A. It's slide number two of the presentation and I will now turn over to our CEO, Dave Pathe. -------------------------------------------------------------------------------- David Pathe, Sherritt International Corporation - CEO [3] -------------------------------------------------------------------------------- All right, thanks Flora. Thank you everybody for joining us on a white and stormy morning here in Toronto. I'm going to ask Steve Wood, our Chief Operating Officer to take us through some operational highlights from the quarter and then Dean Chambers, our Chief Financial Officer will touch on some financial highlights, but I want to just take a few minutes here first and touch on a couple of things with you. So skipping over to page four in the slide presentation there. Clearly, it's no surprise to anybody that the difficult commodity pricing environment continued in the third quarter. In fact, we saw the significant deterioration with nickel [down 19% versus] second quarter and 43% year-over-year. Oil down about 25% in the quarter and 51% year-over-year. So we, as all resource companies do, continue to navigate a very difficult commodity pricing environment. Our response has been consistent with what we've been trying to do for the last few quarters and that's a continued focus on driving down costs and preserving liquidity and we've had some success with those in this quarter. Nickel production was up 16% year-over-year largely driven by record production at Ambatovy, but our Moa operations having a very solid year as well. Real progress on the cost numbers on both of our nickel operations. Net direct cash costs at Moa down to $4.07 per pound and a significant drop at Ambatovy with a net direct cash cost coming in there at $4.24 per pound. The best numbers we've seen year-to-date and certainly the best numbers we've seen ever at Ambatovy. Ambatovy net direct cash costs performance continues to perform well against the ranges we gave well over a year ago now in terms of where we thought costs will be coming out and that's $4 per pound to $6 per pound range at the 90% level and $3 per pound to $5 per pound at 100% level of production, at $4.24 per pound I think was against about 87%, 88% of nameplate capacity in the quarter. Oil costs remain in good shape as well. I think we are [$9.04 a barrel in Cuba, $9.76] across all the oil businesses and our success on the cost numbers across the board reflects our continuing operational success and focus on bringing down costs in all of our operations. Liquidity, Dean will talk more about liquidity, but our liquidity position remains strong. We had just under CAD375 million in cash at the end of quarter and we're actually able to increase our overall liquidity available under our credit facilities. Both our credit facilities renewed in the third quarter and we are able to upsize them by about CAD40 million as those all rolled over for another year. By far the most significant operational milestone in the quarter was achieving financial completion at Ambatovy in September. This is one of our biggest and probably our most ambitious objective in 2016. And I think many a year ago would have predicted that we weren't going to be able to achieve it in advance of the September 30, but all 10 of the tests have now been satisfied and the result of that is that the project finance facility at Ambatovy has now become non-recourse to all of the partners including Sherritt. It's an accomplishment that we are tremendously proud of and its really thanks to the efforts of a lot of different people all across Sherritt to deliver not just the production test [for 90] that we hit in the first quarter and again in the third quarter, but all the certificates from production to legal to financial. It was a massive undertaking and a tremendous accomplishment. Funding for Ambatovy for the quarter was $174 million on a 100% basis. That was mainly to finance the fund items that required to get to financial completion, primarily funding the debt service reserve accounts or the senior debt reserve account with six months of principal and interest. Total funding for the year is [up now] $264 million. Our 40% share of that is around $106 million and that's consistent with what you've heard from us last quarter in terms of the range we provided what our financing would be for the year. Now at this point, given funding year-to-date and the cash position at Ambatovy, we're not anticipating any significant funding to Ambatovy for the rest of this year. So that $106 million number should be pretty close to the final number for the year. I know many of you are looking ahead now into 2016 as we are and certainly at these current pricing levels, Ambatovy will have further cash requirements given the current amortization schedule for the project debt and potentially to cover some capital costs and operating costs. What those amounts might also may turn out to be and how they will be funded is something that we are currently in the process of discussing both with our partners and our lenders and we'll provide more clarity around what our 2016 spending might look like as soon as we're able. Over the page on slide five, I want to just take a moment and put into some perspective what we've been able to achieve on the net direct cash cost side of our metals business in the last few quarters. You see in that chart there are the quarterly net direct cash costs for our two metals operations in the orange and green lines there and plotted against it is the 50th percentile on the industry cost curve, what the median price is to produce a pound of nickel in the industry. And that's been coming down as all producers in their cost commodities have been focused on driving cost out of their production and benefiting from lower energy prices. We've seen industry cost curves come down in the last few quarters. What we've been able to achieve both at Moa and at Ambatovy outpaces that though as you can see from the progress we've made at reducing costs. Looking forward, we think there's more potential there yet. At Moa, we still have our acid plant under construction and we think that could knock another $0.50 a pound or $0.60 a pound out of our net direct cash costs. That's still on track to be done in the second half of next year and that will get us down closer to that 25th percentile in terms of net direct cash costs of global nickel producers. Ambatovy continues to make progress as well. There's some opportunity there to get costs down further as we continue to increase production at Ambatovy and we are continuing to get them more efficient in our maintenance practices and our use of contractors as we continue the transition from ramp up to a steady-state operation. Taking a look at that nickel cash cost curve, you can see there the 50th percentile now producing a pound of nickel in the industry according to the Wood Mackenzie people, $5.06 a pound. At this point, that's still above the market price for a pound of nickel. I think nickel yesterday was about $4.75 a pound. So you are still seeing more than half of the world's nickel production is underwater just on a cash margin basis never minding financing costs or sustaining capital expenditures and obviously that's not a situation that we feel is sustainable over the long-term. We now have both of our operations comfortably under that 50th percentile number and we're looking to continue to drive those down further. Nickel industry more broadly, we still believe that ultimately the world is moving here from a period of several years of supply surpluses to potentially [more per year] period of deficits. Clearly that hasn't occurred in any meaningful way yet. The market at the moment is dominated by tremendous amount of uncertainty and lack of clarity both on the supply side and the demand side, particularly with respect to China. We haven't seen any significant movement out of production yet, beyond there are signs that in the Chinese nickel pig iron production is coming offline and no signs that Indonesian nickel pig iron production in the host or export bans is coming online at anywhere near the pace that nickel pig iron production is potentially starting to decline now. We're certainly seeing much higher and stronger imports of both ferronickel and Class 1 nickel into China with big increases year-over-year that the expectation that is displacing Chinese nickel pig iron production. LME inventories continue to be high, but there is some sign now that they have plateaued. We hit about 470,000 tonnes a year on the inventory in June and we're off of that now marked by about 30,000 tonnes or 40,000 tonnes since that time. What that means, I mean we said in the past that we're in the nickel business for the long-term here and we continue to have fundamental belief in terms of how those long-term supply and demand fundamentals are going to play out into a more balanced nickel market than we are today, but short-term just continues to be dominated by volatility and a lot of negative sentiment out there and so we continue to run our business focused on what we can control and that's driving down costs and producing as efficiently and effectively and safely as possible. Cobalt pricing, just to touch on that. We've seen cobalt pricing come off a little bit as well. In US dollar terms, the decline in the Canadian dollar against the US dollar has more or less offset that and our realized pricing in cobalt has been relatively consistent. Before I hand off to Steve and let him take you through some of the operational highlights in a bit more detail, I do just want to touch briefly on one other matter that we raised in our press release and draw that to your attention. We had previously announced a transition in our Chief Financial Officer that was going to take effect after this quarter. At this point in time, we are not going to be proceeding with that. I'm pleased to be able to tell you that Dean Chambers has agreed to stay on and act as our CFO for the foreseeable future here. With the things we have going on in the weeks and months ahead, there is nobody better qualified and more experienced to deal with those kinds of issues than Dean Chambers and I'm delighted that he'll be here to provide that continuity. With that, I'm going to ask Steve to touch on a few operational highlights and then we'll hear from Dean on some few finance matters. Steve? -------------------------------------------------------------------------------- Steve Wood, Sherritt International Corporation - COO [4] -------------------------------------------------------------------------------- Thank you Dave and good morning to everybody on the line. Since we last spoke a few months ago, I've been to the operations in Cuba, Fort Saskatchewan, and Ambatovy several times where we continue to make significant progress in the operations and before I speak to that progress, I would like to touch on a few points on safety and sustainability. Our safety performance expressed as lost time injuries is good. In fact, it's amongst the best in our peer group. However, we've had one fatality in the month of August to a contractor employee. I would like to emphasize that we are committed to everyone going home safe and sound every day. To that end, we have augmented our safety program with enterprise-wide fatality prevention standards and in-depth investigations of safety or sorry significant potential incidents. Also, we published our sustainability report for 2014 in the quarter, which you can see on our website. Slide nine covers the Moa JV highlights. Our refined nickel production was up 17% from Q2 and finished nickel production is on track for the best year ever. Moa's net direct cash cost moved down to $4.07 per pound mainly due to fuel oil pricing, which is half of what it was last year. Specifically, fuel accounted for 12% of total mining and processing costs in Q3 as compared to 21% for the same period last year. Cash provided by the operations was CAD22.3 million of which fertilizer pre-sales added CAD20.5 million to cash in the quarter. It should be noted that pre-sales are experienced in first and third quarters typically while the second and fourth quarters are generally strong sales quarters, in line with planting and harvesting. Thus far, October sales are looking good as a low Canadian dollar tends to boost our export sales. On slide 10, you'll see the Ambatovy highlights. Ambatovy achieved record production in the quarter and even achieved 90 for 90 for the second time during the quarter. The NDCC of $4.24 per pound is comparable to Moa's NDCC and clearly has the potential to do even better. At $4.24 per pound, it was at less than 90% of capacity. Previously, we provided broad cash cost guidance of $3 per pound to $5 per pound and as you can see, we're tracking close to $4 per pound at around 87% of capacity. The big trend in reducing cost as Dave mentioned is in the area of maintenance cost as we ramp up our operating efficiencies. This quarter, maintenance costs were 27% of our mining and processing costs as compared to 35% last year. There is still significant room to further reduce these costs when one considers that Moa's maintenance costs are around 15%. You can see all the cost breakdown data in the supplemental information posted on the website. Slide 11 refers to the LME registration of Ambatovy's briquettes. In the quarter, Ambatovy received confirmation that the Ambatovy nickel briquettes were accepted as qualifying for LME delivery of Class 1 nickel. This is a high standard with only 24 facilities in the world meeting that requirement. Moa's nickel shift from our Fort site is also included in the brands listed on the LME website. On slide 12, we cover off oil and gas. Our oil production was down about 5% quarter-over-quarter with the lost production coming from the PSC Extension wells. Eight PSC Extension wells are producing less than we estimated with production down 37% from reserve estimate assumptions. To put this in context however, the Extension wells represent only 7% of the year-to-date production. So they were never expected to be the major contributor to our production profiles. We have revised our guidance to 18,500 gross working interest barrels per day for the year and 11,300 net working interest barrels. We don't normally provide forward-looking guidance on unit operating costs. However, we are this quarter as the increase is likely to be somewhat significant, although most of it will be non-recurring. We have standby costs and increased well work over costs projected to add [around $2 per barrel]. The standby costs are operating expenditures due to the decision to cut drilling. The capital that we save in this case more than offsets this increase in operating expenditures. We realized good free cash flow generation in the quarter as CapEx was relatively low and our Cuban partners are adhering to their scheduled repayments of the overdue receivables. Power is covered on slide 13. Our power generation is up with higher gas availability. We realized a 76% net capacity factor, up from the 68% for the same quarter last year and 69% in Q2 of this year. Looking forward, we expect to receive cash flow from interest and principal repayments in the order of CAD9 million per quarter over the next year, which is down from the CAD15 million received this quarter or the approximately CAD20 million received in Q1 and Q2. After next year, our interest and principal repayments are forecast to return to the levels realized this year. So that's my section of the presentation and with that, I'll hand it over to Dean. Dean? -------------------------------------------------------------------------------- Dean Chambers, Sherritt International Corporation - CFO [5] -------------------------------------------------------------------------------- Thanks Steve and good morning. Undoubtedly, the most important financial metric that we're focused on is our liquidity. And if you look at the waterfall slide on slide 15, it gives you some background in the changes in our balance sheet, cash and short-term investments from the second quarter through to the end of the third quarter of 2015. As forecasted, our cash has declined by approximately CAD25 million to CAD374 million, which does include a CAD25 million draw on our revolving credit facility, but there really are two areas that had significant impact on our cash balance during the quarter. One is changes in working capital and the other is funding of Ambatovy. So let me talk about each of those in a bit more detail. Changes in working capital contributed a positive CAD53.5 million mainly attributable to collection of receivables in our oil and gas business and the booking of deferred revenue in our fertilizer business. In our oil and gas business, we received over $40 million in payments and our total receivables declined by about $20 million. On the last call, I mentioned that we had overdue receivables of approximately $66 million, but that we had an agreed on payment plan with CUPET to reduce those receivables over time. Our overdue receivables in our oil business at the end of the third quarter are approximately $54 million. We expect to continue to receive payments according to that payment plan, which should result in our receivables in our oil business to be close to current by year-end. As Steve mentioned, we have booked about CAD20.5 million of pre-sales or pre-buys in our fertilizer business and this is essentially people making advance payments for fertilizer that will be delivered in the fourth quarter or during the spring planting season in 2016. As you can see from the slide, our Ambatovy funding was almost CAD92 million in the quarter. This included our provider share of funding of the senior debt reserve account that was required to achieve financial completion under the Ambatovy financing. It also included our share of arbitration award settlements of $65 million that occurred during the quarter. As Dave has already mentioned, our total funding for the year-to-date is about $106 million, which is in the range that we had predicted funding for 2015 between $100 million and $135 million and we do not expect any significant funding for the remainder of the year. I think the fact that we are in the lower-end of that range especially considering the arbitration settlement reflects the job our Ambatovy team has done on controlling costs and managing their cash. I would also mention that, of course, Ambatovy now has significant cash on its own balance sheet, CAD200 million equivalent and because of our equity accounting for Ambatovy, that's not reflected in our cash balance. As Dave also mentioned the fact that we've been able to renew and increase our credit facilities by CAD40 million is a great development for us and if we include undrawn amounts available on our credit facilities, our total liquidity is over CAD450 million. Slide 16 gives you a reconciliation of our combined adjusted operating cash flow from the second quarter to the third quarter. It really shows the impact of lower commodity prices and their impact on cash flow from operations. A couple of things about the quarter with the way our interest payments work, typically we have lower semi-annual payments in Q1 and Q3 of about CAD9 million and higher payments closer to CAD19 million in Q2 and Q4. So this is obviously a quarter where our payments were at the lower-end of that range. I would also mention that this is the last quarter in which we make a dividend payment of CAD3 million as we have announced suspension of our dividends. We announced that in September. We did have a number of adjustments this quarter and those are summarized on slide 17. Obviously, the most significant adjustment is our impairment that we took in our oil and gas business of CAD0.27 a share, approximately CAD81 million. I'm going to talk about that in a little bit more detail in a minute, but we also took an impairment of almost CAD14 million related to the Ambatovy call option. SNC-Lavalin has exercised their right to put their 5% interest. Sherritt has declined to participate in that put, and Sumitomo has acquired SNC-Lavalin's 5% interest in the Ambatovy project. With all of that, our call option is therefore expired and this is simply the write-down on the remaining value in that call option. The good news is that we will no longer have to revalue that option on a quarterly basis and so, we won't see this adjustment in future periods. The unrealized foreign exchange loss from continuing operations this quarter was a little over CAD10 million as the Canadian dollar weakened by [about $0.08] in the quarter. We also show a small inventory adjustment for Ambatovy inventory. We also had that in the second quarter this year and that simply reflects the fact that the value of the inventory on a dollar per pound basis is exceeding the current nickel price. But with the decline in operating costs at Ambatovy, the likelihood of this impairment adjustment is decreasing. In fact, I would anticipate that we may not have this adjustment going forward. It well depend on production and operating costs and the nickel price environment. While the arbitration awards themselves are capitalized, things like the legal costs are expensed and so we had CAD4.5 million adjustment for that and there was also CAD4.4 million of tax adjustments. This largely arises from us writing down net deferred tax assets that are related to the oil and gas impairment. So if you take out all those adjustments of over CAD91 million and of course, most of them are one-time or hard to forecast, it gets our earnings per share to about CAD0.31 a share, which is pretty close to the analyst consensus. On slide 18, there is some additional information regarding our oil and gas impairment in the quarter and this is really split between realizing our use of lower forecasted oil prices and the lower production from the Extension wells for the capital spent on those wells. I think Steve has already covered the production results from those extension wells, which resulted in about 40% of the oil and gas impairment and prices contributed about 60% of the impairment charge. What we've done with prices is we've essentially used McDaniel & Associates WTI forecast through to 2018. And a relevant period here is through to 2018 because our existing PSC wells work to CUPET in 2017 and 2018. So, we've used McDaniel's WTI forecast. As you know, our benchmark in Cuba is Gulf Coast fuel oil number 6, which historically has run around 85% of WTI and our own Cuban production is heavier than fuel oil number 6 and so we generally realize between 70% and 75% of fuel oil number 6 depending on the field and the quality of the oil. So essentially we've done that calculation through to expected realized pricing in our impairment calculation. Depreciation in oil business is on a unit of production basis and with the decline of the drop in the value of our assets, we would expect depreciation to decline by about CAD7 million in the last quarter this year compared to the third quarter and CAD28 million in 2016 and CAD21 million in 2017. With the impairment charge we've taken in the oil and gas business, it raises the obvious question about impairments in our other businesses and particularly our nickel business and in particular Ambatovy. We do look at indicators for impairment at every quarter, every reporting period. There are number of factors that go into calculating fair value of our business in our nickel business and we look at all those variables every quarter, but by far the most important now variable is the long-term nickel price and we do look at a variety of consensus forecasts for the long-term nickel price and we determined in the third quarter that there were no indicators of impairment. Having said that, if nickel prices continue to be depressed, well, we will be taking a very serious look at our long-term nickel price forecasts in the fourth quarter that we are using in our impairment analysis in determining whether or not there will be an impairment going forward. That's my last slide for today. Before we open up to line for questions, I'm going to turn the call back over to David. -------------------------------------------------------------------------------- David Pathe, Sherritt International Corporation - CEO [6] -------------------------------------------------------------------------------- All right thanks, Steve, Dean. We'll take your questions now but just to sum up, we continue to operate in a very challenging commodity price environment. Our focus here remains as it has been for the last few quarters now on driving down costs and maintaining strong production, safely and efficiently and preserving liquidity. That was our focus last quarter, that's our focus now and what we are focused into 2016. Nickel markets, we still seeing solid demand but at the moment, fear and negative sentiment is rampant and that is driving volatility, which has been prevalent in the nickel and all base metal markets for a while. It's become more extreme this quarter and we don't at this point see what is the immediate trigger that's going to turn that around. So we expect that condition to continue in the short-term here, and we continue to run our businesses by focusing what we can control on the production and the cost side. With that operator, we're happy to take any questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Orest Wowkodaw, Scotia Bank. -------------------------------------------------------------------------------- Orest Wowkodaw, Scotia Bank - Analyst [2] -------------------------------------------------------------------------------- A couple of questions on Ambatovy. First one is, a little surprised to hear your comments that you don't expect to have to put any cash into the asset in Q4 especially given I think there is a [$100 million] principal repayment on the project level debt in Q4, the cash balance that Ambatovy is showing [$200 million] as of Q3, does that not need to be maintained at that level going forward or cause that now dropped moving forward. Thank you. -------------------------------------------------------------------------------- David Pathe, Sherritt International Corporation - CEO [3] -------------------------------------------------------------------------------- The obligation of the project is to keep the SDRA full, but in the absence -- with the achievement of financial completion, there is no obligation to put in additional funds to maintain the SDRA full. It's only an obligation of the project to keep that account at the levels it needs to be at before cash could be available for distribution to shareholders. At the present time, there are discussions going on, but as the December payment becomes due, if it continues to be payable, the intention would be that, that would get paid out of the SDRA and we'll move forward from there. -------------------------------------------------------------------------------- Orest Wowkodaw, Scotia Bank - Analyst [4] -------------------------------------------------------------------------------- So there's no obligation then to maintain this $120 million cash buffer plus like working capital cash at the asset level moving forward? -------------------------------------------------------------------------------- David Pathe, Sherritt International Corporation - CEO [5] -------------------------------------------------------------------------------- It's required as I understand it to before excess cash could to be distributed to shareholders. So that SDRA full were once again full up to six months principal and interest. The project would be barred from distributing cash out to its shareholders, but I frankly don't anticipate that to be an issue next year. -------------------------------------------------------------------------------- Orest Wowkodaw, Scotia Bank - Analyst [6] -------------------------------------------------------------------------------- Oh I see. So as long as you don't distribute cash or have plans to distribute cash that balance could drop to whatever it needs to from a working capital perspective. Is that correct? -------------------------------------------------------------------------------- David Pathe, Sherritt International Corporation - CEO [7] -------------------------------------------------------------------------------- Yes. -------------------------------------------------------------------------------- Orest Wowkodaw, Scotia Bank - Analyst [8] -------------------------------------------------------------------------------- In terms of the oil and gas business, obviously with the cut in CapEx and some of the write-down share, I would anticipate that production will also be lower moving forward. Do you a rough guide of what we could expect that production profile in Cuba to look like next couple of years now? -------------------------------------------------------------------------------- David Pathe, Sherritt International Corporation - CEO [9] -------------------------------------------------------------------------------- There's a couple of factors that will go into that Orest and early next year, we'll put out some production guidance for 2016. The other production, obviously the drilling on the extension lines that we've done over the past 12 months has not fully met our expectations and that's what's led to scaling back of some of the drilling there, some of the scaling back of the capital spending and the reduction in guidance for this year that we announced today. Overall production is holding in reasonably well though, but really the future of the oil business is in Block 10 and production in part for 2016 will be dependent on how much drilling we do on Block 10 next year and how soon in the year we do that drilling. So, that will all be part and parcel of what we're figuring out here as we plan our capital spending for 2016. It is our intention at this point in time to do at least some drilling on Block 10 as we have a pretty high degree of optimism of the possibilities there but we'll be able to give you more clarity on that sometime early next year. -------------------------------------------------------------------------------- Operator [10] -------------------------------------------------------------------------------- Greg Barnes, TD Securities. -------------------------------------------------------------------------------- Greg Barnes, TD Securities - Analyst [11] -------------------------------------------------------------------------------- Along the lines of the oil and gas business, I know that cost is going up in Q4 by [$2 a barrel]. Is that going to continue given the standby charges that you have there or is that going to disappear when we get to 2016? -------------------------------------------------------------------------------- David Pathe, Sherritt International Corporation - CEO [12] -------------------------------------------------------------------------------- Most of that should come back off again. There's always a bit of variation in the costs quarter-to-quarter just depending on how much work over activity is going on and work over's depending on exactly what they are tend to flip back and forth between capital and OpEx but the standby charges, which I think is probably [about $1.5 of the $2 number] that Steve mentioned really should be a one-time shot. -------------------------------------------------------------------------------- Greg Barnes, TD Securities - Analyst [13] -------------------------------------------------------------------------------- Okay. And just a question for Dean. It's like your almost never gone, Dean. Welcome back. -------------------------------------------------------------------------------- Dean Chambers, Sherritt International Corporation - CFO [14] -------------------------------------------------------------------------------- I [haven't quit just yet]. -------------------------------------------------------------------------------- Greg Barnes, TD Securities - Analyst [15] -------------------------------------------------------------------------------- So the debt repayment, principal and interest at Ambatovy in 2016 on the senior debt facility is what? -------------------------------------------------------------------------------- Dean Chambers, Sherritt International Corporation - CFO [16] -------------------------------------------------------------------------------- Principal repayment is $188 million, its $94 million in June and December. That really hasn't changed. That amortization now is consistent throughout and then plus interest probably closer a total of say $220 million to $230 million for the year. -------------------------------------------------------------------------------- Greg Barnes, TD Securities - Analyst [17] -------------------------------------------------------------------------------- $220 million to $230 million? -------------------------------------------------------------------------------- Dean Chambers, Sherritt International Corporation - CFO [18] -------------------------------------------------------------------------------- Depending on and interest rates, yes. The margin of course goes up being now that we're post completion by [about 100 basis points]. -------------------------------------------------------------------------------- Greg Barnes, TD Securities - Analyst [19] -------------------------------------------------------------------------------- Have you done a calculation on what the breakeven nickel prices for Ambatovy in 2016 on an all-in basis, sustaining capital, debt repayment, everything? -------------------------------------------------------------------------------- Dean Chambers, Sherritt International Corporation - CFO [20] -------------------------------------------------------------------------------- Well, we do look at that obviously somewhat higher than these prices. If you're saying to pay -- have a sufficient cash flow to pay your senior debt service. -------------------------------------------------------------------------------- Greg Barnes, TD Securities - Analyst [21] -------------------------------------------------------------------------------- Yes, and to cover operating costs obviously and sustaining capital. -------------------------------------------------------------------------------- Dean Chambers, Sherritt International Corporation - CFO [22] -------------------------------------------------------------------------------- Yes, its obviously a couple of dollars or so higher than where we are now. -------------------------------------------------------------------------------- Greg Barnes, TD Securities - Analyst [23] -------------------------------------------------------------------------------- Okay and just finally Dean, the long-term nickel price that you did use in the impairment test on Ambatovy in the quarter, what was it? -------------------------------------------------------------------------------- Dean Chambers, Sherritt International Corporation - CFO [24] -------------------------------------------------------------------------------- Well, as I said, we look at a number of consensus forecasts. I think you would ask me if it was in the kind of a [$9 to $10] range on the last call, we have looked at some of the forecasts, its still generally in that area I would say. -------------------------------------------------------------------------------- Operator [25] -------------------------------------------------------------------------------- (Operator instructions) Anoop Prihar, GMP Securities -------------------------------------------------------------------------------- Anoop Prihar, GMP Securities - Analyst [26] -------------------------------------------------------------------------------- Just two questions. First of all, with respect to the SNC put, those dollar number of CAD600 million mentioned in the press release, but that includes debt and equity? Can you break that CAD600 million between those two components for us? -------------------------------------------------------------------------------- David Pathe, Sherritt International Corporation - CEO [27] -------------------------------------------------------------------------------- I don't know that off the top of my head, I'm looking at Dean, it was about $500 million all-in I think right? -------------------------------------------------------------------------------- Dean Chambers, Sherritt International Corporation - CFO [28] -------------------------------------------------------------------------------- Yes. I don't have that number because we had declined the offer, we really didn't participate. It's essentially based on the total investment that SNC-Lavalin had put in the combination of either debt or subordinated debt or equity. -------------------------------------------------------------------------------- David Pathe, Sherritt International Corporation - CEO [29] -------------------------------------------------------------------------------- For that, they were able to put their 5% equity interest in the project which was funded as a combination of actual equity and subordinated loans. And they also bought their pro rata share of the partner loans that all three partners provided to us in 2009. So it was the equity and the loans to us but I don't know off the top what the split was amongst those three components. -------------------------------------------------------------------------------- Anoop Prihar, GMP Securities - Analyst [30] -------------------------------------------------------------------------------- I'm just wondering if I can work my way back to an implied value for the project based on this. Was this dollar value -- is it formulaic? -------------------------------------------------------------------------------- Dean Chambers, Sherritt International Corporation - CFO [31] -------------------------------------------------------------------------------- It's essentially book plus modest implied rate of return. -------------------------------------------------------------------------------- Anoop Prihar, GMP Securities - Analyst [32] -------------------------------------------------------------------------------- And then in the MD&A, you talked about your lenders having the right to challenge financial completion. Is that just something you're putting in there for information sake or are they actually challenging it? -------------------------------------------------------------------------------- David Pathe, Sherritt International Corporation - CEO [33] -------------------------------------------------------------------------------- Well, they haven't challenged yet. It is a right that the agreements contemplate once financial completion has been achieved. We highlighted it there just because of the possibility even if they do choose to challenge, we didn't want people taken by surprise by that. If following question of that is, are they going to challenge? We obviously don't know the answer to that. What I will say is if nickel were $10 a pound, I don't think we'd be talking about this, we'd be happily taking the extra 90 basis points or 100 basis points and we'd be having some sort of celebration in Madagascar. At $4.75 a pound, I think it's a possibility. Overall, we're highly confident in our position. Eight of the 10 certificates were signed off by the lenders' independent engineer. The other two are the legal certificate and just filling up the debt service reserve account and we are confident in the position. Even if it is challenged, financial completion stands until such time the successful challenge is fully litigated out some point down the road. -------------------------------------------------------------------------------- Anoop Prihar, GMP Securities - Analyst [34] -------------------------------------------------------------------------------- Okay and then just lastly, I mean, in the event that these commodity prices prevail for another 12 to 15 months or so. I mean your operations are basically cash flow breakeven, which means that when we factor it debt repayment and CapEx and what not, you're going to be burning [at least a couple of CAD100 million] and your cash balance now is about CAD400 million give or take. So what should we assume in terms of how you guys are likely to respond to that and how much longer you're willing to wait before you start really applying pressure to your lenders, your partners or making those sorts of decisions? -------------------------------------------------------------------------------- David Pathe, Sherritt International Corporation - CEO [35] -------------------------------------------------------------------------------- The biggest potential demand on our liquidity and our cash position in 2016 is Ambatovy funding given the amortization schedule as it stands today and where commodity prices are at the moment. And all I can tell you right now is that, that's something that we're actively discussing with partners and lenders. -------------------------------------------------------------------------------- Anoop Prihar, GMP Securities - Analyst [36] -------------------------------------------------------------------------------- Well, is it fair to say you're not going sit around waiting for a bounce in commodity prices? You are going to be much more proactive than that? -------------------------------------------------------------------------------- David Pathe, Sherritt International Corporation - CEO [37] -------------------------------------------------------------------------------- It's fair to say that sitting around and hoping the nickel price goes up is not a strategy. -------------------------------------------------------------------------------- Operator [38] -------------------------------------------------------------------------------- Sasha Bukacheva, BMO Nesbitt Burns. -------------------------------------------------------------------------------- Sasha Bukacheva, BMO Nesbitt Burns - Analyst [39] -------------------------------------------------------------------------------- Hi. Dean, I think you've been handling most of the questions. So, I got another one for you. What is the total amount of impairment that could potentially put you at risk with the debt covenants that you currently have? -------------------------------------------------------------------------------- Dean Chambers, Sherritt International Corporation - CFO [40] -------------------------------------------------------------------------------- You're talking about further impairments from what we've already taken in oil and gas business? -------------------------------------------------------------------------------- Sasha Bukacheva, BMO Nesbitt Burns - Analyst [41] -------------------------------------------------------------------------------- That's correct. -------------------------------------------------------------------------------- Dean Chambers, Sherritt International Corporation - CFO [42] -------------------------------------------------------------------------------- Yes, while we are looking at potential -- what potential impairments could look like, and the impact on covenants, at this moment, we are not anticipating a problem with our financial covenants, but we'll provide more in the following quarters. -------------------------------------------------------------------------------- Sasha Bukacheva, BMO Nesbitt Burns - Analyst [43] -------------------------------------------------------------------------------- Fair enough, but do you have a sense of what is the maximum amount that would put you at risk? -------------------------------------------------------------------------------- Dean Chambers, Sherritt International Corporation - CFO [44] -------------------------------------------------------------------------------- We've done a lot of analysis, but I'm not going to talk about it on the call today. -------------------------------------------------------------------------------- Sasha Bukacheva, BMO Nesbitt Burns - Analyst [45] -------------------------------------------------------------------------------- Okay, fair enough. So then, in terms of things you could do next year at Ambatovy, what are the options in terms of -- are we talking about deferring, re-sequencing some of those principal and interest payments or what are the options that you could employ to alleviate balance sheet stress? -------------------------------------------------------------------------------- David Pathe, Sherritt International Corporation - CEO [46] -------------------------------------------------------------------------------- Sasha, I think all we can really tell you today is that there's a whole range of options that could be employed and we've had lots of suggestions from shareholders and bondholders as well. There's nothing that isn't done on the table at this point from our perspective and as there's something to talk about of that discussion, we'll come back and tell everybody what's going on, but from my perspective, anything you can think of is something that would potentially be discussed. -------------------------------------------------------------------------------- Sasha Bukacheva, BMO Nesbitt Burns - Analyst [47] -------------------------------------------------------------------------------- Okay and then just looking further ahead, are you currently in discussions with regards to refinancing or the options for the (inaudible)? -------------------------------------------------------------------------------- David Pathe, Sherritt International Corporation - CEO [48] -------------------------------------------------------------------------------- Whether I was or I wasn't, I wouldn't tell you right now anyway Sasha but right now we're focused on our capital spending plans for 2016 and a big piece of that at the moment is what our requirements maybe for Ambatovy. -------------------------------------------------------------------------------- Operator [49] -------------------------------------------------------------------------------- Steve Parsons, National Bank Financial. -------------------------------------------------------------------------------- Steve Parsons, National Bank Financial - Analyst [50] -------------------------------------------------------------------------------- Yes, thank you. Just a question on cash costs. There was guidance previously that Ambatovy's cash costs should be as good, if not better than Moa. In Moa we're seeing costs decline there and potential for cost to be another $0.50 to $0.60 lower with the acid plant and that would bring Moa's cash cost to kind of [350, 360]. Is the expectation then that Ambatovy could be at the [350 to 360 range] as well and what would you need to do to get there? -------------------------------------------------------------------------------- David Pathe, Sherritt International Corporation - CEO [51] -------------------------------------------------------------------------------- I'll touch on it a bit and if Steve has anything to add, he can add his thoughts as well. We reduced our belief and have for quite some time that wherever we're at from a net direct cash cost perspective at Moa we have the capacity to do better than that at Ambatovy based on larger scale, shorter haul distances, and lower transportation costs and at the moment Ambatovy has the capability to produce [all its own assets] which, Moa does not yet have. So with Moa soon to have the capacity to produce all its own asset that gap or potential gap between the two will close somewhat, but even with the completion of the acid plant at Moa, our hope and expectation would be that Ambatovy running up at full capacity could still be matching what Moa's doing and beating it. -------------------------------------------------------------------------------- Steve Parsons, National Bank Financial - Analyst [52] -------------------------------------------------------------------------------- Okay, are there any specific items, I think you mentioned maintenance notably. Are those the main items that could get the cash cost down at Ambatovy next year? -------------------------------------------------------------------------------- David Pathe, Sherritt International Corporation - CEO [53] -------------------------------------------------------------------------------- The biggest opportunities I think at Ambatovy now are improved maintenance and just increasing production getting up to that 100 % of nameplate capacity and spreading the fixed cost across more units. -------------------------------------------------------------------------------- Operator [54] -------------------------------------------------------------------------------- (Operation instructions) Orest Wowkodaw, Scotia Bank. -------------------------------------------------------------------------------- Orest Wowkodaw, Scotia Bank - Analyst [55] -------------------------------------------------------------------------------- Thanks for taking the follow-up, just given that you're one of the few producers that's actually selling finished product to end customers. Can you offer any kind of color on what you're seeing on the demand side for nickel right now? -------------------------------------------------------------------------------- Dean Chambers, Sherritt International Corporation - CFO [56] -------------------------------------------------------------------------------- Yes, on the demand side and actually moving physical material, we've actually got a pretty good book right now. We're sold a few months out in the future, which is only about as far as we ever get. Historically that has happened in the past that has typically been followed by bit of an uptick in pricing but we haven't really seen that yet, but we are seeing good demand for physical product particularly in China. I mentioned last quarter I think that we've sold more physical product into China in the first six months than we did all of last year and that trend just continues and I think the broader industry statistics show that Chinese imports of ferronickel and finished nickel are up significantly over last year. So the demand has actually been decent and we're not having any trouble placing nickel but we place it at market prices and take that for better or for worse. Stainless is the big driver of the market, about two-thirds of nickel production goes to stainless and stainless demand is, while not as robust as people we're looking for, it is still positive. Demand is up this year over last year for stainless modestly. And so, although the world seems to be in a mood to assume the worst, we are still seeing a decent physical demand. -------------------------------------------------------------------------------- Orest Wowkodaw, Scotia Bank - Analyst [57] -------------------------------------------------------------------------------- Well, that's good to hear. Thank you for that. And then just one more question for Dean. Could you just remind us again what your existing debt covenants are? Thank you very much. -------------------------------------------------------------------------------- Dean Chambers, Sherritt International Corporation - CFO [58] -------------------------------------------------------------------------------- Well, we have covenants in our public debentures but most of those really just dictate restricted payments and there are number of baskets in those debentures that allow us to do certain things to take on additional debt, make certain payments. Our two credit facilities are described in a bit more detail on page 24 of the MD&A and we do have EBITDA to total asset ratios and some other covenants there. We can talk more about those offline, if you'd like. -------------------------------------------------------------------------------- Operator [59] -------------------------------------------------------------------------------- And this concludes today's question-and-answer session. Ms. Wood, at this time, I will turn the conference back to you for any additional or closing remarks. -------------------------------------------------------------------------------- Flora Wood, Sherritt International Corporation - Director of Investor Relations [60] -------------------------------------------------------------------------------- Okay. Thank you, Ron and thank you to everybody who joined us and we'll look forward to talking to you next quarter at year-end. -------------------------------------------------------------------------------- Operator [61] -------------------------------------------------------------------------------- Ladies and gentlemen, this does conclude the conference call for today. Thanks for your participation. You may now disconnect your lines.
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