DexCom Q4 2023 Earnings Call Transcript

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Provided by Quartr
February 8, 2024

There are 5 speakers on the call.

Operator

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Sherritt International Fourth Quarter 2023 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, Thursday, February 8, 2024, at 10 am Eastern Time. Will now turn the presentation over to Tom Houghton, Director, Investor Relations.

Operator

Please go ahead.

Speaker 1

Thank you, operator, and welcome everyone to Sherritt's 4th quarter 2023 conference call. We released our 4th quarter 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.

Speaker 1

As well, Reconciliations of non GAAP measures to the most directly comparable IFRS measures are included in the appendix of the presentation. On the call today is Leon Binadel, President and Chief Executive Officer and Yasmin Gabriel, Chief Financial Officer. Going forward, on our conference calls for our 2024 results, we will have Alvin Saroo, our Chief Operating Officer, join us as well. Following a review of our results on today's call, we will open up the line for questions. It is now my pleasure

Speaker 2

to pass the call over to Leo. Thank you, Tom, and good morning, everyone, and thank you for joining us today. I want to begin with a few comments about the past year and the actions we've taken to mitigate the impacts of low nickel prices from a market that we expect will remain in a Novus Lock Clyde position in the near term. I'll review our 2024 outlook shortly that details an expected stronger operating performance with meaningfully lower cost as a result of the actions we've taken. As you all know, 2023 was a challenging year.

Speaker 2

We encountered a number of unanticipated operational setbacks in the metals that hindered our performance. Working together with our partner, we successfully resolved each of the operational hurdles during the year, and we are continuing to work together to materially improve operational performance at both facilities. We suffered a significant outage in our ammonia plant. Despite our established multiyear capital refurbishment program, which was implemented post a prolonged deferral of capital spend During the austerity years, the ammonia plant repair required the advancement of significant maintenance spend, which would otherwise be covered under a plant capital program and also led to reduced fertilizer sales, ultimately negatively impacting cash flow and our byproduct credits in 2023. We do not anticipate this to recur in future.

Speaker 2

Despite the challenges, we were successful in accomplishing a number of objectives during the year. We successfully completed the 1st year of the cobalt swap agreement, a major milestone in a long standing challenge in recovering given receivables. We achieved significant growth in the power business through increased electricity production, exceeding our guidance, which we had already increased during the year. We delivered our technical report for the Moa joint venture, doubling the mine life and extending it beyond 2,040. And we completed Phase 1 of the Moa joint venture expansion under budget and on schedule.

Speaker 2

These accomplishments better position us for future success. As the nickel market turned quickly during the Q3 of 2023, our established process of forecasting long term cash flows enabled us to swiftly act And I will walk through this on the next slide. Turning to Slide 5. At the start of 2023 And even around the mid year point, the expectations were for a continued strong nickel price with consistent price above $10 per pound for the full year average of 2023. In the second half of the year, the nickel price declined rapidly as a result of significant oversupplied market Due to the conversion of Class 2 nickel into intermediates suitable for electric vehicle market and even into Class 1 LME inventories as Chinese brands received fast track registration approvals, putting further down the pressure on pricing.

Speaker 2

Latter was an unexpected change to the market. In September, we challenged our teams to cut costs and by the start of November, We established cost containment and spending reduction measures across the company, while continuing to work towards further opportunities to reduce cost and capital. You'll recall in the 3rd quarter results, as part of our efforts, we updated our guidance, deferring spending, lowering our CapEx guidance, And despite lowering our nickel and cobalt production guidance, we maintained our cost guidance at the time. Nickel prices continue to fall, however, and in January of this year, we announced further cost cutting measures and headcount reductions in response. Since our announcement, we continue to see others in the market announcing cost cutting, strategic reviews and operations moving into care and maintenance, reflecting the near term challenges facing the nickel market.

Speaker 2

As noted earlier, we have also announced our 2024 guidance last night, which factors in the results of our efforts in response to these market developments. Looking ahead to our market outlook on Slide 6. Despite strong demand growth, both nickel and cobalt markets moved into an oversupply situation and our forecast remains so in the near term until demand catches up with increased supply. This is mainly due to actions from Chinese influence supply continuing to grow substantially to increase their dominant market share, particularly around the EV value chain. Despite these dark clouds over the nickel and cobalt markets, Some notable events took place in 2023, which might lead to stronger regionalization of markets or bifurcating of markets between U.

Speaker 2

S. Inflation Reduction Act or IRA compliant materials destined for the EV supply chain or similar regulations in the EU and UK Regarding Chinese controlled materials. These include the deferral of the U. S. To enter into free trade talks with Indonesia, Effectively rendering all Indonesian nickel supply outside of IRA compliance.

Speaker 2

And this on the basis that Indonesia does not comply with acceptable environmental and labor and is under Chinese influence. Secondly, the U. S. Issuing foreign entity of concern regulations for IRA compliance to exclude China, Russia, North Korea and Iran from owning or controlling more than 25% of entities involved in the EV value supply chain. Lastly, the EU issuing increased reporting obligations for suppliers to the EU EV supply chain and setting up cross border carbon taxes and consideration of duties to mitigate Chinese so called subsidized EVs and decarbonization products flooding their market.

Speaker 2

These are recent developments and are well received by market participants outside of the Chinese supply chains for nickel and cobalt and may have a positive impact on pricing into certain market segments. We are following these and other developments closely to inform our strategic and marketing plans and seek to take advantage of market opportunities as they develop in a proactive fashion. More short term focused, broadly given the cost associated with the conversion of Class 2 nickel into the EV value chain According to Alameda deliverable metals, market observers suggest that at current spot pricing, we may have found stability, especially given the pullback in projects at these prices and various higher cost operations moving into care and maintenance. Early indicators suggest uptake of new sales are likely around these prices. The price gap between various forms of nickel have now narrowed, Further suggesting pricing support can be found at these levels.

Speaker 2

Transitioning to our operating outlook on Slide 7, outlining our guidance for 2024. In our metals division, we expect finished nickel production to be within 30,000 to 32,000 tons. For cobalt, we expect production to be between 3,103,400 tons. Production is expected to recover on the back of increased feed of mixed sulfides from the Moa mine site to the refinery because of access to additional ore sources to improve the blend of feed as well as increased quality and feed rates following the ramp up of the new SPP and reduce downtime for maintenance. We expect nickel sales to exceed production over the year as we see opportunities to lower our finished nickel inventory levels over the course of 2024 with some early successes already identified.

Speaker 2

We see our costs decreasing The NDCC expected to come in between $5.50 to $6 per pound of nickel sold with the midpoint of that range implying a 20% decrease from our 2023 results. Our forecast for lower NDCC is attributable to lower expected maintenance activities, lower input commodity prices, our cost optimization activities, which include ongoing efforts and higher expected production and sales, including higher fertilizer byproduct sales. We forecast INDCC to be above the annual guidance range in Q1, but below or within the range in subsequent quarters, the fertilizer byproduct grid is expected to be highest in Q2 and in Q4. For spending on capital, we see $40,000,000 for sustaining capital for shared share, The majority focused on constructing a new long term tailings facility at Moa and $15,000,000 for growth, with gross spending primarily for the construction of Phase 2 of the expansion program at the Mojo Inventure. We continue to seek opportunities to defer, reduce or finance capital spend.

Speaker 2

At our power division, we expect electricity production of 775 to 8 25 gigawatt hours with higher production from a full year of additional gas from the 2 wells that went into production during the Q2 of last year. Unit operating costs for 2024 reflects higher plant maintenance activities related to our gas turbines, partly offset by the impact of higher electricity production sales. Sustaining spending on capital is expected to be 5,500,000 With increased electricity production and sales and completion of our capital refurbishment program, we expect evidence from Energas substantially increase over 2023. We expect to provide more guidance on the go forward dividend expectations from Energas in the second half of this year. Moving on to review our 4th quarter results starting on Slide 9.

Speaker 2

Melanomix Sulfide production during the quarter was impacted by heavy rainfall. Low grade and lower quality stockpiled materials were processed as a result and led to production coming in below expectation. Gaining access to more mining areas in 2024 will give us greater flexibility to blend and stockpile materials to feed into the new SVP and mitigate impacts of high rainfall seasons. Our 50% share of production of finished nickel and finished cobalt was also slightly below our expectations, having been impacted by the lower feed available from Moa, partly offset by higher third party feeds processed. Fertilizer production during the quarter returned to expected levels as we completed the ammonia farm maintenance following the shutdown in the 3rd quarter.

Speaker 2

However, came too late and late to reduce fertilizer sales during the fall sales season. Turning to slide 10. Our costs are clearly a key focus given the challenges we faced last year. Our NDCC during the quarter was higher largely due to higher third party feed cost and lower fertilizer and cobalt byproduct credits, despite benefiting from lower input costs and cost avoidance actions taken in Q4. You can see on the graph the impact of materially higher maintenance costs during the quarter in the net fertilizer byproduct credit, which includes the impact of lost sales during the fall season and amounted to almost $1.50 per pound negative impact.

Speaker 2

We do not expect to see this again in future quarters. As mentioned earlier, we expect NDCC for 2024 to meaningfully improve from lower input commodity prices and our continuing efforts to cut costs and optimize operations. In 2023, we did not see the benefits of our costs due to the maintenance and lost byproduct fertilizer sales we incurred during the quarters, But we expect to see the benefit of lower NDCC progressively throughout 2024. Moving to Slide 11. An update on our low cost and low capital intensity Moa JV expansion project.

Speaker 2

During the Q4, we completed Phase 1 of the expansion, the Slider Preparation Plant or SPP on time and under budget. As a reminder, Phase 1 will reduce ore haulage distances, lower carbon intensity from mining and increased annual MSP production of contained nickel and cobalt through higher plant throughput and improved quality of ore feed. Commissioning and capacity testing is continuing and last month the SPP began processing ore at design capacity. The completion of the 2nd phase of the project, the processing plant expansion, we expect MSP production will increase by a cumulative 6,500 tons of contained nickel and cobalt on 100% basis. Phase 2 will fill the refinery to nameplate capacity from the joint venture's own mine feed displacing lower margin third party feeds and decreasing costs and maximize profitability.

Speaker 2

In the current low price environment, we continued our prudent approach to capital spending and found opportunities to defer of the spending for Phase 2 beyond 2024, which is not expected to impact the timing of the ramp up of MSP production from the expansion. Overall, Phase 2 remains on schedule for an expected end of 2024 completion with commissioning and ramp up in 2025. Turning to Slide 12 to review our Power division. Electricity production increased throughout 2023, exceeding our annual guidance, which we increased in the 2nd quarter results. As mentioned, next year we are looking forward to full year of contribution from the 2 gas wells that went into production in the Q2 of 2023 and the increase in utilization of our facilities.

Speaker 2

We're also pursuing further opportunities to increase gas supply and enable additional power production. Importantly, With power turning a corner in 2023, Sherritt received $1,400,000 in dividends from Energas during the year and with the operational strength expected to continue, We should see these dividends increase in 2024 as mentioned. On Slide 13, summarize a few of our ESG highlights for the year. Starting with safety, which remains a key focus for us. During 2023, we implemented safety strategy refocus sessions with each of our operations to improve safety protocols.

Speaker 2

We also completed greenhouse gas emission baseline assessments at Energas and initiated assessments at the Moa mine and Fort Site expected to be completed by mid this year. We continue to identify potential de carbonization opportunities for consideration. Beyond this, our team continued to advance a number of ESG initiatives, including commencing TFCD aligned risk and opportunity assessments, maintaining our conformity to the LMEs, TRAC B responsible sourcing requirements and achieving ISO certifications, improving our TSM score at the Fort site. An enhanced ESG profile and continued progression towards our climate change goals is a key strategic priority for Sherritt. As current and evolving metal market customers prioritize responsible source inputs.

Speaker 2

I'll now hand over the call to Yasmin to summarize our financial highlights Before returning at the end for a few concluding remarks.

Speaker 3

Thanks, Leon. I'll begin today with our financial performance on Slide 15. Our financial performance this quarter was significantly impacted by lower average realized prices, unplanned maintenance Leon mentioned earlier and lower nickel and fertilizer sales volume. Consolidated revenue for the 4th quarter, which does not include ShareIt's share of Revenue from the Moa joint venture was $34,600,000 This represents a 28% decrease year over year, primarily due to lower average realized fertilizer prices and lower fertilizer sales volumes as unplanned maintenance earlier in the year reduced fertilizer availability during the fall shipping season. This was partly offset by higher electricity sales with increased production from our Power business.

Speaker 3

Combined revenue, which includes the corporation's consolidated revenue and revenue from the Moa joint venture on a 50% basis, was $140,500,000 and reflected lower average realized prices and lower nickel sales volume. Nickel sales in Q4 were in line with production and expected improvement from prior quarter but were lower year over year. Sales continued to be impacted by lower demand from steel mills after summer shutdowns and higher intermediate availability, leading to lower metal purchasing in Asia. As well, the trend of declining nickel prices resulted in some customers delaying purchases of further price reductions and to avoid the increasing financing and other costs associated with holding inventory. This resulted in us having inventory at the end of 2023, which we expect will reduce over the course of 2024.

Speaker 3

Adjusted EBITDA of negative $7,000,000 was impacted by the challenging market conditions that accelerated in Q4, contributing to lower demand in realized prices for nickel. Despite actions taken to reduce costs, lower production and unplanned maintenance increased costs negatively impacting operating margins. Also included in adjusted EBITDA is the impact of $2,300,000 in inventory write downs. Our adjusted net loss from continuing operations was $27,900,000 and excludes an increase in rehabilitation and closure costs related to legacy oil and gas assets. Looking ahead, we expect our operating margin and cash flow to improve significantly in 2024 based on our outlook with higher expected production and sales and lower operating costs.

Speaker 3

Turning now to our available liquidity on Slide 16. We ended the year with $63,000,000 available liquidity, a decrease from prior quarter as a result of an additional $15,000,000 advance the Moa joint venture for short term working capital purposes resulting from the challenging market conditions noted earlier that accelerated in Q4. $9,000,000 interest payment on our 2nd lien notes $5,000,000 for property, plant and equipment and $4,000,000 related to rehabilitation and closure costs related to legacy oil and gas assets. Looking ahead, we do not expect any further advances to the Moat joint venture and expect the $30,000,000 drawn in 2023 to be repaid during the first half of the year. This will be facilitated primarily through the sale of higher than normal opening inventory that I mentioned earlier.

Speaker 3

Current sales contracts and commitments support our expectation that sales will exceed production in 2024. Progress towards this has already been made with the Moa joint venture having received a $20,000,000 prepayment for nickel deliveries in 2024, improving its available liquidity. As you may have seen in our disclosure, the Moa joint venture will be eligible to commence dividends under the Cobalt swap agreement upon repayment of the short term advance from Sherritt. The amount of dividends to be distributed to each partner is decided by the Moa Joint Venture Board on a monthly basis, and there are a number of factors that go into that decision making process. At current spot nickel prices and given the prioritization of the JV to repay its outstanding advances from Sherritt.

Speaker 3

We expect dividends from the cobalt swap agreement to commence in the second half of the year and that they will fall below the annual maximum cobalt volume and a minimum payment for 2024. The cobalt swap agreement anticipated periods volatility in market conditions and pricing over its 5 year term and includes provisions for any shortfalls in the annual maximum volume and minimum payment amount to be added to the following year. Despite this potential short term reduction, we continue to remain confident in our ability to collect full balance over the remaining 4 years of the agreement. The expected improvements in production, sales and operating costs will help ensure improved profitability and sufficient liquidity in 2024, and we will continue to proactively pursue opportunities to increase our financial capacity. That concludes my remarks.

Speaker 3

I'll pass it back to Leon for some final comments.

Speaker 2

Thank you, Yasmin. Concluding on Slide 18. Although we find ourselves in a challenging marketing environment and one we are taking very seriously, we have plans in place to mitigate the impacts of lower nickel and cobalt prices. We've commenced action on these plans already by deferring capital, containing costs, reducing headcount and with the support of our partners are optimizing operating plans. We have made improvements to our business, streamlining our metals division and changing leadership to drive operational improvements.

Speaker 2

We have announced our 2024 guidance that reflects the impact of our actions and expected improvements with notable decreases in our costs as well as strong year ahead from our power business expected to generate increased dividends to Sherritt. Finally, our low capital intensity Modran venture expansion program remains on time and on budget. With Phase 1 now complete, we turn our attention to completing Phase and achieving higher levels of low cost production that maximizes profitability. I'd like to thank everyone for your time today. And operator, I'd like to open the call questions at this time.

Operator

Thank you. Ladies and gentlemen, we will now begin the question and answer Your first question comes from the line of Gordon Lawson from Paradigm Capital. Your line is now open.

Speaker 4

Hey, thanks for taking my question. You just answered a large part of it regarding the swap agreement. But In terms of the commencement in H2, is that a reflection of the current pricing environment in hopes of some recovery later this year or are there other factors behind

Speaker 3

Martin, it would largely be related to the current pricing environment. It's something that we're monitoring very closely, and it's also our expected sales recovery as well.

Speaker 4

Okay. And is that your question?

Speaker 3

In terms of sales?

Speaker 4

No, no. When you can collect, is that something that you can push for? Or is that more in the hands of your partner?

Speaker 3

So this is something that's decided by the Mogo joint venture board. We do have equal representation from the partners, and we do review that on a monthly basis. And it considers a lot of factors, available cash, for failing prices, including input commodity prices, working capital, capital spending, financing. So there's a lot that goes into that decision making, but It is something that both partners decide on.

Speaker 2

Gord, maybe just to add to that. Yasmin mentioned earlier that there's some short term accounts between the Moa joint venture and Sherritt that takes priority for repayment as those are interest bearing. So those will We repaid first before we commence with Carboxdol.

Speaker 4

Okay. And that kind of sets up well for My second question, I mean, the debt repayment program you guys have done so well on the past couple of years, is it safe to assume that, that will be on hold for now?

Speaker 2

We obviously consider what the liquidity forecast Look like when we make decisions around debt repurchases, when we did the last repurchase at the conclusion of 2022, We were very confident that the cobalt swap was going to replenish cash flows early in 2023 and therefore we're able to upsize that debt we purchase at the time. I'd say given current market volatility and uncertainty, we wouldn't expect something in the very near term. But as the market stabilizes and our view firms up on expectations for cash flows going forward, we will certainly be looking at opportunities as managing our debt balance remains a key concern and a priority for us.

Speaker 4

Okay. Yeah. Makes sense. Thanks very much.

Operator

There are no further questions at this time. I will now hand over to Tom Houghton. Please continue.

Speaker 1

Thank you, operator, and thank you everyone for joining us. Please feel free to reach out if there are any further questions. We look forward to speaking with you again next quarter.

Operator

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

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Earnings Conference Call
DexCom Q4 2023
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