Rumble Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
October 31, 2024

There are 7 speakers on the call.

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Sherritt International Corporation Q3 2024 Results Conference Call and Webcast. At this time, all participants are in a listen only mode. I would like to remind everyone that this conference call is being recorded today, Tuesday, October 31, 2024 at 10 am Eastern Time.

Operator

I will now turn the presentation over to Tom Halpin, Director, Investor Relations. Please go ahead.

Speaker 1

Thank you, operator, and welcome everyone to Sherritt's Q3 2024 conference call. We released our Q3 results last night. Our press release, MD and A and financial statements are available on our website and on SEDAR Plus. During today's call, we will be referring to our presentation that is available on our website and on today's webcast. As we will be making forward looking statements and references to certain non GAAP financial measures, please refer to the cautionary notes on Slide 3 of our presentation as well as the material assumptions and risks associated with certain forward looking statements and reconciliations of non GAAP measures to the most directly comparable IFRS measures included in the appendix of the presentation.

Speaker 1

On the call today is Leon Binadel, President and Chief Executive Officer Yasmin Gabriel, Chief Financial Officer and Alvin Saruk, Chief Operating Officer. Following the review of our results, we will open the call to questions. It's now my pleasure to pass the call over to Leon.

Speaker 2

Thank you, Tom, and good morning, everyone, and thank you for joining us. I'll begin today with an overview of the market conditions we observed during the quarter on Slide 4. The current market conditions remain challenging. During the Q3, the average reference price of nickel decreased by 12% with prices reaching the low of the year on July 25. The average reference price of nickel during the Q3 was the lowest since the Q4 of 2020.

Speaker 2

And for cobalt, it was the lowest since the Q2 of 2016. Several developments occurred that were supportive for prices and without them, prices could have declined even further. During the Q3, BHP announced plans to suspend its Nickel West operations in Australia. Russia made headlines with of restricting certain exports including nickel and in the U. S, the Fed lowered interest rates and new tariffs against Chinese suppliers took effect.

Speaker 2

Longer term fundamentals remain positive for nickel and cobalt as the energy transition advances. However, near term forecasts remain oversupplied primarily from the unprecedented increase in Chinese influence supply and this is the environment that we must plan and navigate. We made a number of changes over the last year to improve revenue, reduce costs and restructure our business to align to these market conditions and position the company for long term success. While these changes take time to implement and fully realize the benefits, in our Q3 results released last night, you can see the significant progress we have made while we continually seek opportunities for improvement in all aspects of our business. Turning to Slide 5 for our Q3 highlights.

Speaker 2

Despite the challenging market conditions, we had an excellent quarter operationally. We delivered strong quarterly production of mixed sulfides, finished nickel and cobalt and fertilizers. Our NDCC declined to US5.16 dollars per pound, positioning us well to navigate the challenging pricing environment and in line with our guidance for the year. At Power, electricity production reached a 9 year high. Our unit operating costs were higher this quarter as we expected due to planned maintenance to support the increasing production we are delivering.

Speaker 2

We anticipate these costs to decrease going forward with this work now completed and our guidance for the year remains unchanged. A new gas well was also completed during the quarter and began providing additional gas earlier this month, which will support further increases to electricity production. Lastly, available liquidity in Canada increased 28% during the quarter, driven by the strong operating performance, particularly at the Ford side. Slide 6 illustrates our continued journey to improving our business and highlights the success we achieved during the quarter. On the left two charts, both MSP and finished nickel production were higher year over year in each quarter of 2024.

Speaker 2

In the middle chart, our NDCC of US5.16 dollars per pound is the best quarterly results in 2 years despite the lowest cobalt byproduct price in almost a decade. As mentioned, electricity production at our powder division was the highest it's been in 9 years. Although we faced another quarter of oversupplied market conditions with further decreasing nickel and cobalt prices, our available liquidity in Canada was the highest it's been in the last year. Overall, it remains a very challenging market environment, but we are finding ways to improve or maintain positive margins and cash flows. With that, I'd like to congratulate Elvin and the team on a

Operator

strong quarter and will now hand it over to Elvin to provide more details on our operations.

Speaker 3

Thank you, Leon. Turning to Slide 8 for our metals results. Mixed sulfide production was strong during the quarter as we continue to see benefits from the additional processing capacity and efficiencies from the slurry preparation plant commissioned earlier this year. Finished nickel and cobalt production increased year over year mainly because of the higher mix sulfides availability at the refinery. Fertilizer production was also higher consistent with the higher nickel production and further operating improvements that we have made.

Speaker 3

Moving on to sales. Finished nickel and cobalt sales were below production for the first time this year. This was mostly due to seasonal factors typically observed in the Q3, including summer shutdowns of steel mills, reducing demand and certain customers postponing sales to the Q4. Apart from the seasonal factors, the Canadian rail lockout caused only a brief logistical disruption, but nevertheless pushed some of our sales into the Q4. Sales of finished nickel were 24% higher year over year, and we expect stronger demand from customers in the Q4.

Speaker 3

Finally, fertilizer sales increased 46% year over year mainly because of higher production available for sale. Now turning over to Slide 9 to talk about our net direct cash costs or NDCC. NDCC during the Q3 was US5.16 dollars per pound, decreasing almost 30% year over year. This was largely due to 19% lower mining, processing and refining costs per pound of nickel sold, more commonly called MPR. The lower MPR per pound was largely due to operational improvements, lower maintenance costs, lower input commodity prices and the impact of higher nickel sales volume.

Speaker 3

Lower NVCC was achieved despite lower cobalt byproduct credits from lower average realized pricing and lower sales volumes. Looking ahead, we continue to expect NDCC to be in line with our guidance range for the year. Now turning to our low intensity Molla expansion on Slide 10. Phase 2 of the Molla joint venture expansion, which is the processing plant, continued to advance. During the quarter, IP installation continued and brick lining of vessels started.

Speaker 3

Timoa joint venture finalized and began utilizing its US12 $1,000,000 of foreign currency financing from a Cuban bank to support international payments related to the construction of the 6 Leach train. We continue to expect commissioning of Phase 2 of the expansion in 2025 with the ramp up in the first half of the year. Finally, on Slide 11, talk about our Power Division results. Power generation and sales volumes was 21% higher year over year. Last year, you will recall we had 2 additional gas wells going to production and this quarter we completed another gas well which began production in early October.

Speaker 3

This will result in even higher levels of power generation going forward. To support the higher levels of production, we completed the annual planned maintenance program this quarter, which included bringing additional gas turbine back online. Planned maintenance work contributed to higher unit operating costs in the quarter, but will improve efficiencies in equipment utilization. We expect maintenance costs to decrease for the remainder of the year. The planned maintenance cost was factored into our unit cost guidance range for the year, which remains unchanged.

Speaker 3

This time, I'll turn the call over to Yasmin to present the financial results.

Speaker 4

Thanks, Alvin. I'll begin with our financial performance on Slide 13. While the metals pricing environment continues to be challenging, as Leon mentioned, we had considerable operational success, which drove our improved financial performance. Average realized prices for nickel and cobalt were lower year over year by 19% 30%, respectively, partially mitigated by our nickel put options with $5,000,000 received to date. Conversely, nickel sales volumes were 24% higher and mining, processing and refining costs per pound of nickel sold were 19% lower.

Speaker 4

Combined revenue, which includes revenue from the Moa joint venture on a 50% basis in which more holistically reflects our performance, was relatively unchanged at $126,400,000

Operator

compared

Speaker 4

to $128,000,000 in Q3 2023. The impact of lower average realized prices for nickel was offset by higher nickel sales volumes and lower cobalt revenue was mostly offset by higher fertilizer and power revenue. Q3 adjusted EBITDA of $10,500,000 was significantly higher year over year, primarily driven by the reduction in mining, processing and refining costs and a stronger contribution from our fertilizer business with higher average realized prices, higher sales volumes and lower maintenance costs. Net earnings from continuing operations improved to 1,800,000 dollars Adjusted net loss from continuing operations was $11,500,000 and excludes a non cash gain of $11,500,000 driven by updated valuation assumptions related to the Cobalt swap. Turning now to Slide 14.

Speaker 4

We ended the quarter with $71,000,000 of available liquidity in Canada, increasing 28% during the quarter. Key changes in liquidity during the quarter included CAD 35,900,000 of cash provided by operating activities at Foresight, reflecting strong receipts from fertilizer sales and presales CAD 3,400,000 of cash received from in the money nickel put options dollars 900,000 of dividends from Energas, dollars 10,800,000 used in power to support plant maintenance activities and dollars 5,400,000 in payments and contractually obligated rehabilitation and closure costs related to legacy oil and gas assets in Spain. I'll now turn to Slide 15. Looking ahead, we still expect to receive distributions under the Cobalt swap agreement in the Q4 of this year. These distributions are predicated on Moa JV's current and expected available liquidity.

Speaker 4

Following the Q2, we indicated that assuming the midpoints of our guidance ranges and the average reference price of nickel and cobalt from the first half of the year, we would expect to receive approximately $50,000,000 in distributions. This would include Jared share as well as GNC's redirected share. With average prices of nickel and cobalt decreasing further and below the levels we assumed, we remain focused on efforts to maximize cash flows from sales of available inventories and thereby maximize the amount to be received under the cobalt swap, potentially up to the CAD50 1,000,000 previously indicated. As defined by the agreement, any shortfall in the annual minimum payment amount is carried forward to the following year. We are also expecting to receive additional dividends in Canada from Energas in the Q4.

Speaker 4

We've received approximately $6,000,000 so far this year and are estimating another $4,000,000 dollars In addition, we have received $1,600,000 in October from the in the money nickel put options, bringing the total cash received this year to $5,000,000 As a reminder, with a brief spike in nickel prices in May, we purchased put options equivalent to approximately 25 percent of our expected nickel production from the Moa joint venture and an exercise price of US8.16 dollars per pound for 6 month period starting June 1, providing downside protection while maintaining full exposure to the upside. We continue to evaluate and pursue hedging opportunities where it may make sense based on a number of factors, including market conditions. Finally, we continue to look for additional savings at all levels of our operations. And during the quarter, we made further workforce reductions that are expected to result in $2,200,000 in annualized savings. This will bring our total annualized savings from cost optimizations this year to approximately $17,000,000 That concludes my comments.

Speaker 4

I will now turn the call back over to Leon.

Speaker 2

Thank you, Yasmeen. Before we conclude, I'd like to take a moment to thank our teams for their hard work and dedication in restoring our operations in Cuba to full capacity after a particularly challenging set of circumstances with the nationwide power outage in Cuba coinciding with the impact of a hurricane turned tropical storm. You would have seen our press release on Monday that our operations have returned to full capacity and that we have maintained our guidance for the year. The efforts of our team in working around the clock to achieve this has been nothing short of extraordinary and I've shown what we can accomplish. Now turning to Slide 7 to conclude.

Speaker 2

Although near term market conditions remain unfavorable, our operations delivered a strong quarter. Our growth projects remain on track with our low cost Phase 2 of the Moa JV expansion still expected to ramp up in the first half of next year. We remain focused on our efforts to maximize cash flows from the sale of available inventories and other options in order to maximize the amount of that we receive under the cobalt swap this year. And now operator, I'd like to open the call to questions.

Operator

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Your first question comes from Tony Robson from Global Mining Research. Please go ahead.

Speaker 5

Good morning all and thank you for the presentation and thank you for taking my questions. I'll limit myself to 2 initially. You noted obviously great cost control in Mow Bay in Port Saskatchewan in the quarter, which you noted partially or mostly on low sulfur prices, net gas and diesel. So the first question is how are those input costs looking as we go into quarter 4, given that we're already a month in? I'll come back to my second question.

Speaker 5

Thanks.

Speaker 2

So we do provide our assumptions over the year over year key input pricing, and we expect similar levels of pricing going into quarter 4 as what we've achieved year to date. There's slight movements up or down depending on which one you're looking at, but on a basket of goods, we're expecting similar levels of input pricing.

Speaker 5

Okay. Thank you. Howard, despite that you're still not adjusting your year guidance, at least in U. S. Dollars, are you being a touch conservative there, do you think?

Speaker 2

In terms of full year production and cost guidance? Yes. Or cost specifically?

Speaker 5

The cost.

Speaker 2

There's clearly been a number of factors that come into play when we consider cost and most negative for us has been the cobalt byproduct credit. As Alvin mentioned, in the quarter, it was a significant impact year over year negative impact that is that we've been able to offset with input commodity prices, improved operating results and generally overall improved operations and lower maintenance cost. So we still expect our guidance to be relevant given all circumstances to date.

Speaker 5

Okay. Thank you. The second question was third is it now? You noted that the CAD50 1,000,000 due in the Q4 on the cobalt swap was subject obviously to variety of inputs including nickel and cobalt prices. Now I understand, but you haven't guided interestingly to a range where you think the seats will be in this Q4.

Speaker 5

Principally, this is due to the cobalt price, at least that's a large input. If I simply pro rata today's spot price of $11.20 divided by £13.50 £13.50 £50,000,000 I get CAD41 1,000,000 Again, I'll note that's clearly more complex than that. But would $40,000,000 Canadian be a reasonable starting point for investors and the analysts looking for the numbers in the Q4? Thank you.

Speaker 2

Thanks for that question. Tony, it's obviously a lot more complicated than purely what happens in the volume of sales, particularly in the quarter. What transpires into the Cobalt swap ultimately is driven by the overall liquidity position and need for liquidity within the Moa joint venture. And so financing does play a role in that as well. As Yasmin mentioned, we are looking to maximize leveraging our existing inventories to sell that down or to do presales from that in order to maximize the available liquidity within the joint venture.

Speaker 2

And that ultimately will determine the quantum of what we can distribute. It's not particularly relevant whether it's in cobalt or in cash. Any distributions in cobalt late in the year would have a follow on impact of cash early in the New Year given the sales cycle and recovery from receivables. And so we're more likely focused on cash than Cobalt distributions in the 4th quarter to ensure that cash gets accelerated to Sherritt.

Speaker 5

Thank you. It looks like I failed to tease out our guidance from you or you're unwilling to give one at this stage. I'll ask a subsequent question if you don't mind then. As you note, reduced third party input costs as you debottleneck Moabay into from mid next year. What roughly would that say in terms of cents per pound in cash cost looking for the second half of twenty twenty five and into 2026?

Speaker 5

Thank you.

Speaker 2

Tony, we'll defer to our guidance in January next year when we provide our 2025 guidance for production and cost. Obviously, we're going through that cycle right now where we're finalizing what we expect for next year from a budgeting perspective and operating outcomes and finalizing our commissioning plans. And there's a number of factors that go into that with various shutdowns of plant components to tie in to ensure the commissioning ties in with those. So quite a complex set of factors that go into that. So we would defer, but we did indicate that we do expect to see benefit from increased volumes.

Speaker 2

Obviously, it has a fixed cost dilution impact. So we expect those to come to fruition once we get to January and we'll be able to share that with you.

Speaker 5

I look forward to it. Thank you. No further questions.

Operator

Thank you. The next question comes from Shane Nagel from National Bank Financial. Please go ahead.

Speaker 6

Thanks operator. Just to follow on the cobalt swap. So I guess you won't receive the full $57,000,000 that was agreed upon initially with the annual top ups. So the assumption would be, I guess, any cobalt that you're delivering, you try and sell as much as possible. So you may not actually fully receive the up to $50,000,000 I guess in hard cash as of Q4.

Speaker 6

And then the top up payment and additional sales would kind of follow through in early next year. Is there any concern I guess on the deliveries next year being again kind of more back half weighted just given that's kind of a lot of liquidity from your partners to kind of come out at the end of this year and into early next?

Speaker 2

Thanks for the question, Shane. As I mentioned, it is all driven by the liquidity within the joint venture, which is very much coupled to both nickel and cobalt pricing. The cobalt swap mechanism is quite tied to the cobalt price. But overall, in terms of receiving the $57,000,000 it's somewhat irrelevant whether it comes in cobalt or in cash. We want to make sure we get to that $57,000,000 target each year to keep the velocity of repayments happening as planned.

Speaker 2

If one of those commodities are higher, it drives the higher liquidity in the joint venture and it's not really relevant which one whether it's nickel or cobalt. It does facilitate the ability to pay dividends and the preference is cobalt, but if there's no cobalt available because of ordinary sales through the JV then it will revert to cash. So I think from an overall picture it is really driven around the overall liquidity and the overall profitability of the Moa joint venture on a combined nickel and cobalt basis that will drive that. In these very low pricing environments, it is our focus to drive down our unit cost and manage our liquidity in an appropriate manner to try and maximize how much can get delivered in 2025. But we're still anticipating over the life of this instrument to have recovered the full quantum.

Speaker 6

Okay. Yes. So you may see a bit of a delay in that some of that, I guess, U. S. 57 guarantee may spill over into future years and if we get a price recovery, you'd suspect we're going to receive more at that point of time?

Speaker 2

Exactly. If there's a price spike in early part of the year, it accelerates some liquidity early in the year, but on a sort of flat basis, it's probably more back end weighted. Okay. And then just

Speaker 6

a quick follow-up, if I may, on how this ties into the 2nd lien notes and any kind of potential mandatory redemptions there. The increased liquidity coming in the first half of the year, would you see some potential redemptions based on your calculations to those notes before they come current sometime mid next year?

Speaker 2

So what we have said in our materials that came out at the end of the Q3 is that there were no mandatory redemptions this time around and it will be fully dependent on the cash generated by the business and the available liquidity within the business, meaning the minimum thresholds at the time when it needs to be paid. It is a tough market out there and it is entirely going to be driven by commodity price environment, whether there will be sufficient cash generated and within that particular 6 month window in order to be able to see any of that mandatory redemptions take place. We haven't seen it this year in this price environment, and it would be difficult to see much of that happen based on the current pricing environment in the current 6 months as well.

Speaker 6

That's all from me. Thanks guys.

Operator

Thank you. I'll hand the call over back to Tom Halpin for closing remarks.

Speaker 1

Thank you, operator. We look forward to updating everyone again in the New Year with our Q4 results. Feel free to reach out if you have any further questions in the meantime. Thank you for joining us today and for your continued support.

Operator

Ladies and gentlemen, today's conference call has concluded. Thank you for your participation. You may now disconnect.

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