TORONTO Jul 29, 2015 (Thomson StreetEvents) -- Edited Transcript of Sherritt International Corporation earnings conference call or presentation Wednesday, July 29, 2015 at 2:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Flora Wood Sherritt International Corporation - Director, IR * Steve Wood Sherritt International Corporation - EVP & COO * David Pathe Sherritt International Corporation - President & CEO * Dean Chambers Sherritt International Corporation - EVP & CFO ================================================================================ Conference Call Participants ================================================================================ * Greg Barnes TD Securities Inc. - Analyst * Sasha Bukacheva BMO Capital Markets - Analsyt * Steve Parsons National Bank Financial - Analyst * Cliff Hale-Sanders Cormark Securities Inc. - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good morning ladies and gentlemen. Thank you for standing by. Welcome to the Sherritt International Corporation Second Quarter 2015 Results Release Conference Call and Webcast. At this time, all participants are in a listen-only mode. Following the presentation, we will 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, July 29 2015 at 10:00 AM Eastern Time. I will now turn the conference over to Ms. Flora Wood, Director, Investor Relations. Please go ahead. -------------------------------------------------------------------------------- Flora Wood, Sherritt International Corporation - Director, IR [2] -------------------------------------------------------------------------------- Thank you, Ron. Good morning, everyone. Welcome to our second quarter results conference call. Our results were released yesterday at 5:00 and a copy of the press release, the MD&A, financial statements and the presentation are all on the website. Also available on website are (inaudible) slides. Today's conference call is being webcast. So, in addition to those on the line, anyone may listen to the call by accessing our website homepage and clicking on the webcast link. A replay of the webcast will be available on the website later today. Before we begin our comments, I'd like to remind everyone that today's press release and certain comments on this call will include forward-looking statements. We would like to refer everyone to the cautionary language included in our press release and to the risk factors described in our SEDAR filings. Steve Wood, our Executive VP and Chief Operating Officer is here today and will speak after David Pathe, President and CEO with Dean Chambers, our CFO, speaking last. And with that, I will turn over to David. -------------------------------------------------------------------------------- David Pathe, Sherritt International Corporation - President & CEO [3] -------------------------------------------------------------------------------- Thanks, Flora, and good morning everyone. Before I get into the quarter here, let me start with the obvious. It's been a tough first half of the year in the commodities business and particularly tough for last few weeks. For the quarter, the nickel price was off some 40% from the same quarter last year and the oil price was off closer to 50%. In the weeks since the end of the quarter, we've seen a further deterioration in the pricing environment. It's been a tough time to be a shareholder as the stock has touched multi-year lows. Our focus remains the same however. We're focused on driving down costs while ramping up production in Ambatovy and protecting our liquidity. And now that Steve has been here with us for a couple of months, I'm going to ask him to touch on a few operational highlights and Dean will speak to the financial results and our cash position. But first, there are a few things I do want to touch on. The highlights on slide 4 capture our finished nickel production of little over 8,000 tonnes in the quarter. It was a quarter that had its share of challenges both planned and unplanned. Moa joint venture production was strong particularly in the context of the once-in-10 year planned maintenance shutdown at the refinery in Fort Saskatchewan that we mentioned last quarter, required 11 maintenance days compared to a more normal 5 or 6 days for our annual June turnaround. We had a number of events that we told you about in our monthly Ambatovy releases that affected production for the quarter in Madagascar. Notwithstanding these events, we saw net direct cash cost come down in both of our nickel operations this quarter, most importantly, since getting one of our two thickeners back online in early July, we've seen ore throughput numbers in Ambatovy return to the levels we were seeing in January. And Steve will speak more about that in a few moments. Given our great focus on costs, I wanted to highlight trend we're seeing in net direct cash costs for the last two quarters out of our two nickel operations. You can see that trend on slide 5. Cash costs at Ambatovy generally get a lot of attention as we've come to the ramp-up but the reliability of the trend at Moa is very visible here. The Moa operations have benefited from the drop in oil prices as all producers have, but you're still seeing a very stable disciplined operation where a focus on efficiency continues to payoff even this quarter when production is 11% lower than Q1. Ambatovy costs have also moved down despite lower production and we still expect that Ambatovy can be posting cost numbers comparable to Moa as we get closer to full production. We also continue to reduce combined administrative expenses, which you'll see are down 37% year-over-year. Slide 6 shows the most recent industry cost curve for global nickel production. Given generally lower energy prices and the focus on costs across the industry, net direct cash costs at 50th percentile are down CAD0.28 or about 5% from Q1. Importantly though, our operations have more than kept the pace and remain firmly in the second quartile. I am going to speak about the nickel market in a moment, but the other important message from this slide is that at current nickel prices, more than half the industry is under water on a cash margin basis, never mind they're sustaining capital and financing requirements and that's not a situation that can persist indefinitely. Looking at the nickel market, the chart on the right hand side of slide 7 may look the same as the chart we've been showing you for the past year or so but it's actually been updated recently. The supply deficits that have been anticipated for some time have obviously not yet materialized, but our belief in the longer term supply and demand fundamentals has not changed. There has obviously been greater uncertainty on the demand side as the world has tried to determine what to make of China and we've seen lots of financial speculation against nickel as we have in most commodities in recent weeks. I think the market is being driven at least in part and particularly in recent weeks by short term sentiment and speculation rather than supply and demand fundamentals for physical product. There are some things I could point out that should be positive for the nickel market. Chinese nickel pig iron production is falling as ore stockpiles are depleted though there's still not great clarity on how long that process could take. LME inventories are down a bit from their peaks earlier this year and there's some signs that that may be plateauing and starting to come off a little bit. We've seen a significant uptick in Chinese finished nickel imports in the last couple of months. Just anecdotally from us, finished nickel exports from Ambatovy to Chinese end-users so far in 2015 already significantly exceed sales to that same end user group for all of 2014. In Indonesia, the construction of NPI facilities was thought to be a real threat to the nickel price when the original ore ban came into place. However, it seems that only about half of the announced projects are proceeding along their expected timeline and most haven't yet broken ground. Given the significant infrastructure required every time one of these projects is permitted, no significant production of those Indonesian smelters is really expected now until at least 2018, some analysts are talking more about 2020. Overall, we've seen a lot of volatility. It was already a pretty volatile market and obviously the volatility is difficult to predict. We have long life, low cost assets though and I've said in the past we're in the nickel business for the next 30 years and those assets should give us the ability to ride out the volatility. I also want to update you on financial completion at Ambatovy. This is something we're currently very focused on. We got sign-off from the independent engineer on three certificates in the quarter being the efficiency, environmental and production certificates and we're now down to two certificates remaining neither of which requires independent sign-off. Still outstanding are the legal certificate, which covers a number of compliance items most of which are already done; includes regulatory approvals which have already been received, registration of security interest over the project's assets and real property and reconfirmation of various legal matters. This certificate does require some registrations to be filed in the land registry offices in Madagascar, and one impediment to that at the moment is some of those offices are currently on strike. We don't have any particular insight on when that strike will end although some progress appears to being made with one location just recently returning to work. The final certificate simply requires the funding of a senior debt reserve account covering six months of principal and interest. That account can be funded by the partners to the extent the operation is not producing sufficient free cash flow. This point, we are very focused on financial completion and still expect to be able achieve it advance of the September 30 deadline. Upon submission of the final certificates, the CAD1.7 billion in senior debt outstanding becomes non-recourse to be the Ambatovy partners as the guarantees fall away. This is the point at which financial completion becomes official. There is a 45-day period in which all the final certificates submitted can be challenged by the lenders but the challenge has to come from a super majority of the lenders and has to be on the grounds that one or more of the certificates is false in any material adverse -- in any respect that's material adverse to the interest of the lenders. Finally, before I let Steve and Dean update you on operations and finance, I just want to touch briefly on our other press release from yesterday morning. Dean Chambers is going to be retiring from Sherritt in early 2016. So, to that end, we announced the hiring of a new Chief Financial Officer yesterday. Dean has been with Sherritt for over eight years and spent a couple years before that as the CFO of Dynetek. Dean will continue as CFO through the third quarter, so you'll hear from him again when we do our Q3 results and we'll save our goodbyes for then, but I'm very excited to have David Bacon join us in September and (technical difficulty) to introducing you to him then. With that, I'm going to let Steve step up here and give you a bit of a run through of highlights in the operations for the quarter. Steve? -------------------------------------------------------------------------------- Steve Wood, Sherritt International Corporation - EVP & COO [4] -------------------------------------------------------------------------------- Thank you, David and good morning everyone. It's my first time speaking on the call and I hope to meet or talk by phone with a number of you over the coming year. Before I get to my slides, let me lead with safety. Overall, health and safety performance at Sherritt is industry and peer leading. However, it is with sadness that I say that we had a fatality in the second quarter and that it was the second at Ambatovy this year. Obviously, we expect every employee to get home safely at the end of their day and these incidents have prompted us to take a closer look at our environment health and safety focus. We know that it is possible to ensure a safe workplace as prior to these two incidents, Ambatovy had experienced more than 18.5 million hours without a lost-time incident. My slides start with metals and end with power. Looking at the Moa JV on slide 10, our production and costs were good in a quarter that included 11 days of planned maintenance at Fort Saskatchewan as we took our once-in-10 year shutdown. The shutdown at the refinery also impacted fertilizer production this quarter, but margins were seasonally strong with average realized prices of CAD503 per tonne. Dave showed the slide earlier of our cash cost since Q4 of 2013. Our overall cost profile improved for the second consecutive quarter this year. Compared to Q1, higher mining, processing and refining costs due to the lower unit volumes and downtime were more than offset by higher cobalt and fertilizer credits. The next slide, page 11, shows a new photo from the acid plant under construction at Moa which will eliminate the dependence on imported sulfuric acid. Dave talked in the first quarter about the economic benefit of what will be our third acid plant. We continue to estimate a savings of around 15% on an NDCC-basis, giving us very attractive payback terms. I was in Cuba a few weeks ago and the timeline is to have the acid plant in operation in the second half of next year. Now, onto Ambatovy on slide 12. Our 40% share of production in the quarter was 4,158 tonnes of finished nickel at a net direct cash cost of $5.48 per pound. Average realized prices of cobalt in the quarter were CAD18.08 per pound which reminds me of a question we had in the first quarter about why the cobalt prices vary significantly between Moa and Ambatovy. In the first quarter, Moa realized prices were CAD1.80 per pound higher than the realized prices at Ambatovy, and in the second quarter, that trend is reversed. In general, these differences reflect sales contract differences in shipping times to customers with Ambatovy deliveries to the biggest customers taking a much longer time. Looking at the metrics, including power throughput and recoveries, you can see that the thickener damage and limitation of running unthickened ore through the HPAL circuit adversely impacted throughput and therefore metal production, but did not impact overall recovery and did not materially impact on costs, which continue to trend favorably. We've been operating ore thickener number one online since July 7, immediately increasing the HPAL autoclave speed density to levels we experienced before we commissioned the second thickener in January this year. Performance is excellent so far. To give you a couple of examples, we've now had a couple of weeks of the PAL operating at better than 100% of nameplate ore throughput, which was the same rate we saw in the record month of January. We're also seeing normal metals recoveries and 100% of nickel production meeting the LME specification. The repairs to the ore thickener number two are progressing to plan currently and are expected to be completed by mid-September. On to Oil and Gas, when Dave talked about nickel's lagging performance among the base metals, he did not mention oil, which is doing even worse. However, despite the commodity price drop, we continue to have a healthy net back even at these prices, which are now closer to where they were in the first quarter this year. Our oil business contributed CAD29.9 million to adjusted EBITDA this quarter, up 39% over Q1 as WTI and Brent prices recovered in Q2 but are trending lower again since the end of Q2. Cuba gross working interest production was down by 6% or roughly 1,100 barrels of oil, but the split between cost recovery oil and profit oil at a much higher cost recovery allocation, which meant higher net working interest production out of Cuba and steady production from Pakistan and Spain contributing to our total net working interest production of 11,948 barrels of oil equivalent per day. Unit operating cost in Cuba increased over Q1, as we had higher well workover costs and lower gross working interest production. Roughly a CAD1.33 per barrel of the increase comes from well workover costs that were anticipated to be capitalized. However, it has been determined that under IFRS treatment, these costs are more (technical difficulty). Our capital budget for the year is about CAD2 million lower as a result of this accounting treatment. Capital spending year-to-date of CAD43.5 million is more than half of our full year outlook, which has been revised downward for the second consecutive quarter as drilling results are evaluated and adjusted for the OpEx and CapEx change I just described. We said last quarter that some of initial drilling results in the Yumuri extension PSCs were not meeting our expectations. Year-to-date, we have drilled six wells on the area covered by the extension of which four are producing, one was a dry hole, and one is still to be evaluated. A seventh well is in progress and will also require evaluation. At the end of this year, counting the well that is currently in progress, we have drilled, completed and evaluated the seven commitment wells required under the terms of the extension area PSC. We have also performed three workovers of existing wells, where two have incrementally increased production and the third is still being evaluated. We may have additional workovers that now make economic sense as a result of the extension. Turning to Power on slide 14, we saw production levels higher than they were in Q1, an adjusted EBITDA of CAD7.6 million, consistent with Q1. Operating costs were up over their levels in Q1, mainly from equipment repairs and replacement. Power continues to be a stable business unit with additional capacity that could be increased with higher availability of gas from neighboring oil fields, including our own. Dean will have some explanation of the cash flow changes from Power. And with that, I'll turn it over to Dean. -------------------------------------------------------------------------------- Dean Chambers, Sherritt International Corporation - EVP & CFO [5] -------------------------------------------------------------------------------- Thank you, Steve and good morning everyone. I normally start by directing your attention to any changes we've made in an effort to enhance our public disclosure. This quarter, there's really nothing substantive. We've not introduced any new non-GAAP measures this quarter. However, we have made a few minor presentation changes and I will highlight those as I go through my comments this morning. One item is that you will see a change in revenue and cost of sales under the Moa Joint Venture shown on page 14 and 15 of the MD&A. Recognizing that some confusion exists in how we formerly included sulfuric acid under the fertilizer category, this quarter and going forward, we have reclassified sulfuric acid revenue and cost of sales from the fertilizer category to other and adjusted prior periods accordingly. Now on to slide 16, which maybe my most important slide of this quarter. The prospect of us burning through CAD80 million of cash each quarter at current commodity price levels is unsettling to me as it is to shareholders and bondholders. The purpose of this slide is to go through the major categories that generated or consumed cash in the quarter and the implications for the future. The operating cash flow of CAD26.7 million that we start with excludes items that are singled out in the waterfall. It is also net of approximately CAD11 million between the dividend payment and corporate expenses. Changes in working capital of CAD63.7 million is the most significant impact upon cash. Looking at the cash flow, note 21 to the financial statements, you can see a summary of changes in working capital. Trade receivables increased by approximately CAD27 million. We do have a buildup of oil and gas receivables of approximately $66 million that are past due. But we have received payments in July of approximately $13.5 million and we expect oil and gas receivables to be close to current by year-end based on an agreed payment plan. The other big change in working capital comes from fertilizer pre-buys where customers pay in advance for fertilizer they expect to receive in time for planting season. We received the cash for those prepayments in Q4 and Q1 and deliveries then took place this quarter. This is booked as deferred revenue and represent over CAD34 million of the working capital change. Interest payments on our publicly traded debentures were CAD19.9 million in the quarter on the 2018 and 2022 debentures compared to CAD9.4 million last quarter on the 2020s. Given the semi-annual payment obligations on these debentures, we pay interest of approximately CAD20 million in Q2 and Q4 and approximately CAD10 million in Q1 and Q3. Interest and principal repayment that we receive from loans to our Cuban businesses break down as follows: We received CAD4.9 million in interest on the Moa JV loan and a total of CAD23.7 million in the form of principal repayments and interest on the Energas CSA loan in our Power business. The total CSA payment of CAD23.7 million is similar to what we received in Q1, but in Q1 the payment was mainly in the form of interest, which makes the cash flow and the cash flow per share much higher because interest received is a component of cash provided by operating activities while principal payments are included in cash provided by investing activities. In Q2, the breakdown was CAD15.5 million as principal repayment and CAD8.2 million in interest. Now, we have made a small change to our cash flow statement, such that interest received on the CSA loan is now included in the interest received line. Previously it was netted with interest paid. This does not change the total cash flow from operations, it's simply a reclassification. I will point out that we've also made related changes to our net finance expense note, note 8 to the financial statements, but I will not go into those details now. The point to emphasize with these repayments is that we continue to see regular cash flow from our Power business. Our share of Ambatovy funding for the quarter was CAD43.9 million or $36 million. This funding requirement was primarily due to the principal interest payment on the senior project debt which was paid in June. Let's talk about Ambatovy funding. I have previously disclosed that we had forecasted Sherritt's funding for 2015 to be in CAD50 million to CAD100 million range. On our last call, I indicated that it would be at the high end of that range. To be frank, we had not expected in our analysis for nickel prices to be consistently below $5.50 a pound. Using current nickel prices and our revised production outlook, I now expect total funding for the year to be in the range of $100 million to $135 million. Significant amount of the total is expected to occur in the third quarter, including our pro-rata share of funding of the senior debt reserve account, which is approximately $48 million, and of course is necessary in order to achieve financial completion. We are working closely with our partners in the project to mitigate future funding requirements. Capital spending expenditures in the quarter account for CAD28 million of the cash use and finally the net proceeds from the sale of the corporate office was approximately CAD21 million. I would also mention that both Ambatovy and the Moa JV have an excess of CAD50 million on a 100% basis on their respective balance sheets which is not included in our consolidated cash. So, looking forward to our liquidity position, if current nickel and oil prices persist and with Ambatovy funding requirements in particular to achieve financial completion, I do expect our cash balance to be somewhat lower by year-end, but still with substantial liquidity. We have a range of options available to us to manage our liquidity throughout the rest of 2015 and 2016. And we do plan to manage capital spending to match available cash generated. My next two slides are also waterfalls. The first showing the change in combined adjusted operating cash flow, which is similar to what we covered in the previous slide, excluding any reference to changes in working capital. The waterfall on slide 18 shows the change in net loss per share from Q1 to Q2. You can see that generally lower earnings at Ambatovy and Moa due primarily to lower nickel prices accounts for CAD0.08 per share. There are two unusual adjustments to earnings this quarter. One is that we recognized a CAD19 million gain on the sale of our corporate office. In addition, we also recognized a tax recovery in Q2 resulting from the timing of clarification received from the Cuban tax authority. When Cuba introduced their new foreign investment laws and changes to taxation in 2014, it was unclear initially which tax rate would apply to our oil and gas operations. Q1 of 2015, we received clarification from the Cuban tax authorities that the applicable tax rate for 2015 and onwards will be 22.5%. We have received further clarification that the tax applicable for 2014 was in fact 15%. As a result of this further clarification regarding the 2014 taxation year, we have booked a one-time current tax recovery in the quarter of CAD13.2 million. I'm ending my remarks with a slide on Ambatovy that some of you have seen before, for example, in our Investor Day presentation. This is slide 19. I wanted to raise the topic of Ambatovy distributable cash flow as it had a few questions from analysts and shareholders concerning the Ambatovy Joint Venture additional partner loans, which has a balance of CAD1.1 billion at June 30, and the Ambatovy Joint Venture partner loans, which has a balance of CAD120 million at June 30, both including compound interest. This slide, of course, shows a 70% of our share of cash distributed by the project goes to repaying these loans. These loans are often described together but do have an important difference in that the smaller partner loan has a maturity date in 2023. As sufficient cash flows do not exist to repay that loan prior to maturity, it is recourse to Sherritt and must be repaid. We have the option to repay in cash or in Sherritt shares. The additional partner loans on the other hand have no fixed maturity. If the additional partner loans have an outstanding balance at the end of the mine life, then cash flow is never sufficient to pay them off due to low nickel prices. The only recourse is to our residual interest in the project. In that scenario, Sherritt would receive 12% of the distributable cash, 30% of our 40% interest for life of the project but would have no obligation to repay any outstanding balance on these loans. I have one last comment regarding the future outlook. Given the decline in commodity prices, in particular, nickel and oil, we are regularly evaluating whether these changes are long term in nature which could affect our carrying values going forward. That concludes my remarks. I will now ask the operator to open up the call to take your questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Thank you. (Operator Instructions) Greg Barnes, TD Securities. -------------------------------------------------------------------------------- Greg Barnes, TD Securities Inc. - Analyst [2] -------------------------------------------------------------------------------- Dean, can you talk about what your additional liquidity options are into 2016 if nickel prices stay where they are? -------------------------------------------------------------------------------- David Pathe, Sherritt International Corporation - President & CEO [3] -------------------------------------------------------------------------------- Greg, its Dave. Let me mention a couple of things and I'll let Dean add whatever he wants to add to it as well. From our Investor Day, you saw the forecast anticipating spending a lot of capital in the oil and gas business in 2016. Those forecasts were put together a year ago now or close to a year ago when we were doing our long range planning and budgeting for 2015 and beyond, and that was done in a different oil price environment than where we are now and so those numbers are being revised and where we are now compared to then, capital will be lower in that business than what we were previously been talking about. And the Ambatovy financing is the other place where we're spending a lot of money. What I can tell you there today, Greg, is that we're very focused on financial completion and getting through that and then talking to our partners about that, but those are the numbers that at least are forecasted there for the rest of the year in terms of making the December principal repayment and ongoing operating costs, and looking at ways that we can minimize the capital spending in Ambatovy. Those are the main things that we're looking at. We're still obviously focused on costs in other places. I don't know if that gives you some sense, Greg, or we can carry on. Dean, those are the principle things but are there anything you would add to that. -------------------------------------------------------------------------------- Dean Chambers, Sherritt International Corporation - EVP & CFO [4] -------------------------------------------------------------------------------- No, I think that's right, Dave. Obviously, the biggest levers for us is capital spending and I think as I mentioned, it would be restricted to any cash available generated in the business and Ambatovy funding and I think those are the biggest things that we're looking at. -------------------------------------------------------------------------------- Greg Barnes, TD Securities Inc. - Analyst [5] -------------------------------------------------------------------------------- So, are you implying that once you've got financial completion in September, that you may go back to the lenders and talk about the repayment schedule again? -------------------------------------------------------------------------------- Dean Chambers, Sherritt International Corporation - EVP & CFO [6] -------------------------------------------------------------------------------- At this point, Greg, we're just focused on getting through financial completion. -------------------------------------------------------------------------------- Greg Barnes, TD Securities Inc. - Analyst [7] -------------------------------------------------------------------------------- In 2016, at [$5.50] nickel, let's say, what would be the cash burn at Ambatovy? -------------------------------------------------------------------------------- Dean Chambers, Sherritt International Corporation - EVP & CFO [8] -------------------------------------------------------------------------------- Yes, I think, I generally would expect Ambatovy to be able to cover its operating costs or sustaining capital. The big cash burn or a drain to our partners would be senior debt service. -------------------------------------------------------------------------------- Greg Barnes, TD Securities Inc. - Analyst [9] -------------------------------------------------------------------------------- Which is what, [next to $80 million]? -------------------------------------------------------------------------------- Dean Chambers, Sherritt International Corporation - EVP & CFO [10] -------------------------------------------------------------------------------- It's roughly, on a 100% basis, $200 million. -------------------------------------------------------------------------------- Operator [11] -------------------------------------------------------------------------------- Sasha Bukacheva, BMO Capital Markets. -------------------------------------------------------------------------------- Sasha Bukacheva, BMO Capital Markets - Analsyt [12] -------------------------------------------------------------------------------- I think I'm going to stay within Dean here. I had a question regarding whether or not SNC-Lavalin had exercised their right to the 5% share put that they have. So, yes, I was wondering if that has happened and if so, like how do you think about the value and then when that payment might be required? -------------------------------------------------------------------------------- David Pathe, Sherritt International Corporation - President & CEO [13] -------------------------------------------------------------------------------- Dean, do you want to talk mechanics of the SNC put? -------------------------------------------------------------------------------- Dean Chambers, Sherritt International Corporation - EVP & CFO [14] -------------------------------------------------------------------------------- Sure, so SNC-Lavalin has a right to put their 5% following financial completion. So, since that has not yet occurred, that right has not yet kicked in. Then we would expect -- and under the terms of their put basically Sumitomo would be required to acquire their 5%. -------------------------------------------------------------------------------- Sasha Bukacheva, BMO Capital Markets - Analsyt [15] -------------------------------------------------------------------------------- And so you would have -- I guess, you also had a call option on that stake. So, are you currently planning to let is lapse or how do you think about that? -------------------------------------------------------------------------------- Dean Chambers, Sherritt International Corporation - EVP & CFO [16] -------------------------------------------------------------------------------- Yes, we have no intention to exercise our call at this time. -------------------------------------------------------------------------------- Operator [17] -------------------------------------------------------------------------------- (Operator Instructions) Cliff Hale-Sanders, Cormark Securities. -------------------------------------------------------------------------------- Cliff Hale-Sanders, Cormark Securities Inc. - Analyst [18] -------------------------------------------------------------------------------- Really just kind of looking at the potential cash drain next year from a different point of view, given the I would say relatively solid performance at Ambatovy despite the operating issues, can you kind of guesstimate or update your target cost levels if we hit full production rates in the latter part of this year? Is the, I guess, CAD3 to CAD4 range more appropriate level now given where you already are and the lower input costs? -------------------------------------------------------------------------------- David Pathe, Sherritt International Corporation - President & CEO [19] -------------------------------------------------------------------------------- Yes, I'll start on that. Cliff, the guidance we've been giving there for the last year or so is that we should be in the CAD4 to CAD6 range at 90% capacity and then sort of CAD3 to CAD5 range as we get up closer to 100%. Certainly, in the last couple of quarters, we've been able to put up numbers that are at the good end of those ranges. The biggest driver of variability in our net direct cash cost is the suite of input commodity prices and obviously cheaper fuel oil at Ambatovy for power generation, cheaper coal is helping us a bit, we are seeing sulphur come down a little bit as well now which has a benefit on our variable costs and we've been making progress -- perhaps better progress than we were anticipating a year ago on getting more fixed costs out of the system as we demobilize contractors and get the workforce appropriately sized there. So, we have always said, and I continue to believe that we can -- whatever we're doing at Moa, ultimately, we should be able to do that or better it at Ambatovy and that focus on those initiatives to get costs down to their primarily to ramping up production and simplifying the organization there will continue as fast as we can. -------------------------------------------------------------------------------- Cliff Hale-Sanders, Cormark Securities Inc. - Analyst [20] -------------------------------------------------------------------------------- Just on a slightly different comment, given the apparent move towards normalizations with Cuba, with the US and how that evolves over the next year depending on the rate of change (inaudible), does that kind of open up new opportunities for you to look at divesting either the oil and gas or power division if the market was to improve in those areas and obviously provide a new source of liquidity, perhaps streamline the Company a little bit more? Is that something you could consider at that point? -------------------------------------------------------------------------------- David Pathe, Sherritt International Corporation - President & CEO [21] -------------------------------------------------------------------------------- Certainly we would look at anything that would better demonstrate the value of our assets and maintain a strong liquidity position. We've seen things open up somewhat in Cuba. I was down there last week when the embassies opened up and there was certainly much excitement around that. Progress is still slow on the bigger issues in the relationship in terms of actually ending the embargo and repealing Helms-Burton, both of which should be a big benefit to us. But I think they were probably on course in a process here now that is irreversible but politics being what they are, that's still going to take some time. I think one of the greatest advantages of it to us, if the embargo were to be lifted and there'll be some incremental cost savings in terms of accessing US suppliers and being able to run Caterpillar equipment in the mine and get access to the US Gulf Coast for our business would be some incremental savings there. But I think it would also change the way our assets are viewed and remove some of the stigma around those assets that from our experience has always been somewhat overblown and certainly has potential to create new opportunity for us. -------------------------------------------------------------------------------- Operator [22] -------------------------------------------------------------------------------- Steve Parsons, National Bank Financial. -------------------------------------------------------------------------------- Steve Parsons, National Bank Financial - Analyst [23] -------------------------------------------------------------------------------- Question for you on the potential to cut capital programs and those mentioned as potential ways to manage liquidity, seems the bulk of the opportunity here would be to cut CapEx in the oil business. I just wonder if you could speak to -- as you make cuts to the CapEx here, what sort of decline rate you would expect for oil production and even with respect to the 2015 budget there, what sort of decline rates should we expect in terms of production? -------------------------------------------------------------------------------- Dean Chambers, Sherritt International Corporation - EVP & CFO [24] -------------------------------------------------------------------------------- Yes, we've made some reductions in each quarter so far this year on our oil and gas spending. We're not expecting that to have any immediate impact. We've got about three wells to get evaluated in the next three or four months here, which will really tell the tale of how the rest of this year will play out with some of the workover activity we've been able to do that has now made sense. Given the longer run life on the area, we've been able to add some incremental production that way. But some of the drilling results have not been what we've expected them to be and in these prices, some of the drilling contemplated is not as economic as it was previously and so we've scaled back our drilling plans a bit for this year and that's where the capital savings are primarily coming from. But at the moment, we still think we're shooting for that, 19,000 tonnes a year is our guidance at the beginning of the year. For next year, we'll see. There are obviously long term trade-offs between capital spending and longer term production and some of the work that's being done now in the context of budgeting for next year is understanding where some of those tipping points are at varying levels of capital spending in terms of what amounts of production we could expect to see at different capital spending levels, and we'll work through that as we plan our spending for next year. And so I don't have any specifics for you in terms of any particular level of capital spending and what results and level of production that would lead to by the end of 2016. But, as a general principle, we are going to expect our oil and gas business to live within its means and to the extent there is cash flow in the oil and gas business that can fund development drilling in (inaudible) next year and we may be in a position where we are having to make some decisions in terms of preserving short-term liquidity at the expense of longer term production but we'll update you on that quarter-by-quarter as we go. The advantage of the capital spending in the oil and gas business is that it can be done on the drill hole by drill hole basis. We can evaluate spending as we go based on what we learn with each successive drill hole result and what we're seeing in terms of production out of incremental new wells and the pricing environment that we're in at the time. -------------------------------------------------------------------------------- Operator [25] -------------------------------------------------------------------------------- (Operator Instructions) Greg Barnes, TD Securities. -------------------------------------------------------------------------------- Greg Barnes, TD Securities Inc. - Analyst [26] -------------------------------------------------------------------------------- Dave, you mentioned that the flow rates or the production rates on the wells you drilled on the new extensions weren't what you expecting? How far below what you expecting were they? -------------------------------------------------------------------------------- David Pathe, Sherritt International Corporation - President & CEO [27] -------------------------------------------------------------------------------- Well, we had one hole that Steve mentioned that didn't pan out as we were expecting and we talked a bit about that in the first quarter as well. So, on the two sides of the block, Puerto Escondido and Yumuri and on one side, we were getting as expected, on the other side though, we had one that was a bit of a bust compared to what we are expecting and that was why we had slowed down our drilling a bit after the first quarter. So, in rough numbers, probably a few hundred barrels, but with capital being at a premium at the moment it is, we're taking our time in what we do before we move forward there. -------------------------------------------------------------------------------- Greg Barnes, TD Securities Inc. - Analyst [28] -------------------------------------------------------------------------------- Dean, you mentioned if current commodity prices hang around a while, you might have to look at impairments. What are the carrying values for Ambatovy and Moa and what do you base those on? -------------------------------------------------------------------------------- Dean Chambers, Sherritt International Corporation - EVP & CFO [29] -------------------------------------------------------------------------------- So, if you look at our financial statements, you can see the carrying values are -- you can look at the individual balance sheet from Ambatovy. So, that's our carrying value in that business. I don't know that I have the oil and gas carrying value off the top of my head but -- -------------------------------------------------------------------------------- Greg Barnes, TD Securities Inc. - Analyst [30] -------------------------------------------------------------------------------- What long term nickel price do you use in your -- -------------------------------------------------------------------------------- Dean Chambers, Sherritt International Corporation - EVP & CFO [31] -------------------------------------------------------------------------------- Well, in fact, that is the important feature. Right now, we're using analysts' forecasts of long-term nickel prices, and if those forecasts start to drop, then, in nickel, we'll have to look at that. -------------------------------------------------------------------------------- Greg Barnes, TD Securities Inc. - Analyst [32] -------------------------------------------------------------------------------- Are you probably using something in [CAD9 to CAD10] range long-term? -------------------------------------------------------------------------------- Dean Chambers, Sherritt International Corporation - EVP & CFO [33] -------------------------------------------------------------------------------- Yes, in that range. -------------------------------------------------------------------------------- Operator [34] -------------------------------------------------------------------------------- There are no further questions at this time. I will now turn the call over to Ms. Wood for any closing remarks. -------------------------------------------------------------------------------- Flora Wood, Sherritt International Corporation - Director, IR [35] -------------------------------------------------------------------------------- Thank you, Ron. I think that's all we have and any of you have any additional questions, we're always happy to hear from you after the call and we'll speak next quarter. -------------------------------------------------------------------------------- Operator [36] -------------------------------------------------------------------------------- Ladies and gentlemen, this does conclude the conference call for today. Thank you for your participation. You may now disconnect your lines.
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