Sherritt International Corporation · TSX:S
Sherritt International — Investor Day (September 2013)
67 slides from Sherritt International's investor day presentation, September 2013
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Slide 2: Sherritt Investor Day 2013
SHERRITT INVESTOR DAY 2013 Welcome and Opening Remarks David Pathe, President and CEO Approach and Agenda Paula Myson, Managing Director, IR and External Communications 2
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Slide 4: Forward-Looking Statements and Adjusted EBITDA
Forward-Looking Statements and Adjusted EBITDA This presentation contains certain forward-looking statements. Forward-looking statements can generally be identified by the use of statements that include such words as “believe”, “expect”, “anticipate”, “intend”, “plan”, “forecast”, “likely”, “may”, “
Slide 5: Perception Study (July 2013): Why and What Now
PERCEPTION STUDY (July 2013) Why and What Now Purpose To gather feedback to identify important topics to address at the Investor Day in September, as well as gauge the investment community’s opinions on Sherritt’s strategy, performance milestones, and communications efforts. Population Through an in
Slide 6: The Perception Study: Communication of Strategy
THE PERCEPTION STUDY Communication of Strategy • Majority of participants asserted that there has been a lack of long-term strategic discussions, apparently due to Has management clearly communicated a strategy management’s focus on Ambatovy. for growth and shareholder value creation? • The subset o
Slide 7: Perception Study Key Concerns
PERCEPTION STUDY Key Concerns • Nearly half of the study population highlighted risks Key Concerns associated with Ambatovy as their key concern. Ambatovy Risks 48% • Most participants cited the timeliness of commercial Nickel Market Outlook 43% production as their concern. Others voiced operational
Slide 8: Perception Study: Misperceptions in the Marketplace
PERCEPTION STUDY Misperceptions in the Marketplace • Study participants reiterated previously-mentioned Misperceptions in the Marketplace* concerns and Investor Day topic suggestions when Strategic Vision 29% discussing misperceptions in the marketplace. Ambatovy Progress 24% • A portion of responde
Slide 9: Agenda
AGENDA SEGMENT 1 – Answering Your Questions Addressing Your Main Concerns • Ambatovy – Mark Plamondon • Cash and liquidity – Dean Chambers • Leverage and risk – Dean Chambers • Corporate strategy and structure – David Pathe • Capital allocation – David Pathe • Dispelling myths – David Pathe SEGMENT
Slide 10: Segment 1: Answering Your Questions
SEGMENT 1 Answering Your Questions Addressing Your Main Concerns 10
Slide 11: Ambatovy Performance
AMBATOVY Performance Saleable Nickel Production • All ramp-ups tend to be “saw-tooth” in 60 profile, as opposed to a straight line, as mechanical equipment and operating % of Plant Design Capacity 50 issues are addressed. 40 • We have been opportunistic in 30 accelerating maintenance and making 20 e
Slide 12: Ambatovy Outlook – Operating Costs
AMBATOVY Outlook – Operating Costs Range of Estimated NDCC at Various Capacities • At capacity, Ambatovy is expected to (holding current commodity prices constant) achieve an NDCC that is at least similar to $12 that of the Moa Joint Venture. $10 $9 - $11 • The greatest benefits to the unit cost $8
Slide 13: Ambatovy Outlook - Capital
AMBATOVY Outlook - Capital • Sustaining capital expenditures for Ambatovy, when stabilized at full production, are expected to be comparable to Moa and other similar facilities, adjusted for size and age. • That would place the Ambatovy sustaining capital at approximately US$75 - 90 million (100% ba
Slide 14: Ambatovy Project Cash Flow and Cash Return
AMBATOVY Project Cash Flow and Cash Return Revenue Generated by Ambatovy (100%) subtract Payment of Operating Expenses (100%) subtract 1. Interest @ LIBOR + 140 bps Payment of Debt Service (2 parts) (100%) 2. Principal repayment is made semi-annually (June, Dec) and will range from $60 to $90 subtra
Slide 15: Ambatovy: Calculating Sherritt's Investment
AMBATOVY Calculating Sherritt’s Investment As at June 30, 2013 Assuming US$ = C$ 15
Slide 16: Cash and Liquidity
CASH and LIQUIDITY • Capital allocation priorities will be assessed in the context of, among other things, their effect on liquidity. • Sherritt currently has $0.4 billion of cash and cash equivalents. • In addition, the Company has access to approximately $0.6 billion of credit under existing, revo
Slide 17: Leverage and Risk
LEVERAGE and RISK June 30, 2013 Total Recourse • Revolving credit facilities: ($ millions) • currently only have minimal draws; and Coal revolving credit facility $ 15 $ 15 • contain financial covenants that could be Senior credit facility - - Events of Default. • Senior unsecured notes (three serie
Slide 18: Corporate Strategy & Structure: Valuation Ranges
CORPORATE STRATEGY & STRUCTURE Valuation Ranges Sum of the Parts • Basic sum-of-the-parts analyses published (Select Analyst NPVs) by analysts illustrate the disparate views 3,500 3,391 people hold on industries, market prices 3,000 and specific assets. 2,500 2,426 2,238 2,032 • From a selection of
Slide 19: Corporate Strategy & Structure: Looking Forward
CORPORATE STRATEGY & STRUCTURE Looking Forward • Build on strengths of our current businesses and High expertise (base metals, Cuban oil) and refocus Acquisition the portfolio of assets. of low-cost, Greenfield long-life, Ability to Enhance Asset Base • Refocusing the portfolio through divestiture o
Slide 20: Capital Allocation: Strategically-Driven Priorities
CAPITAL ALLOCATION Strategically-Driven Priorities • Since 2010, the allocation of cash/capital has been: 1) funding Sherritt’s 40% of the Ambatovy Joint Venture; and 2) providing a cash return to shareholders in the form of a dividend. • Going forward, assuming no major disruptions in the macro-eco
Slide 21: Dispelling Myths
DISPELLING MYTHS Myth 1: U.S. Investors Don’t Own Sherritt Institutional Investor Base by Country 1 • Sherritt has a significant institutional shareholder base in the United States. Myth 2: Sherritt has Disproportionate Cuba Risk • The jurisdiction of concentration for Sherritt, both on an asset and
Slide 22: Segment 2: Operations Review, Reporting & Accounting
SEGMENT 2 Operations Review Reporting & Accounting 1
Slide 23: Operations Review Introduction
OPERATIONS REVIEW Introduction The Perception Study Direction • Perception Study participants requested updates directly from Operational executives. The specific requests of the Operational Team were for discussions pertaining to: • operating costs and capital in each division; and • Sherritt’s vie
Slide 24: Metals Operations – Focus and Challenges
METALS Operations – Focus and Challenges Focus of operations in the next 12 - 18 months • Margin protection and productivity improvements. • Bringing new mine concessions granted to the Moa Joint Venture into production, enabling operation to continue at current production rates for 20+ years. Risks
Slide 25: Metals Operating Costs
METALS Operating Costs • The published C1 cash costs of all producers are not comparable. • When we make our comparisons, we make adjustments for comparability. • All things being equal, we are consistently among the 40% of lowest cost producers. Throughout its history, the Moa Joint Venture has bee
Slide 26: Metals Capital
METALS Capital • Capital spending in recent years, in both Cuba and Canada, has been lower than what would be considered “normal sustaining” levels due to downward pressure on base metals prices. • When prices recover, an additional $10 - $15 million (100% basis) per year in capital would be expecte
Slide 27: Nickel Market Segmentation – Form and Use
METALS Nickel Market Segmentation – Form and Use Form • “Primary Nickel” is nickel contained in products of smelters and refineries that is ready-to-use by consumers. • There are three types: refined (Class I), charge (Class II), and chemicals. • Sherritt operations produce Class I nickel. • Class I
Slide 28: Nickel Market – Consumption and Inventory
METALS Nickel Market – Consumption and Inventory Consumption • The consumption of primary nickel generally follows a cyclical pattern, but has averaged a four percent CAGR between 1960 and 2010. • A three percent annual growth in nickel consumption requires 50,000 to 60,000 tonnes of new nickel unit
Slide 29: The Nickel Market – What is NPI?
METALS The Nickel Market – What is NPI? • Nickel Pig Iron (NPI) is a form of Class II nickel. The ore used in NPI production is lateritic ore that is considered uneconomic for standard FeNi production. • NPI was developed in China in 2004/2005 in response to higher nickel prices and a shortage of st
Slide 30: Oil & Gas Operations – Focus and Challenges
OIL & GAS Operations – Focus and Challenges Focus of operations in the next 12 - 18 months • Optimization of production from existing wells. • Prepare second drilling rig in anticipation of work in potential new exploration blocks and potential extension of existing block. • Shoot seismic and determ
Slide 31: Oil & Gas Reserves
OIL & GAS Reserves GWI Production and Reserve Life Index • Sherritt has maintained an (Cuba) average Reserve Life Index 50,000 6.0 (RLI) of approximately three 5.0 years for the last 20 years of 40,000 GWI Production (bopd) operation in Cuba. Reserve Life Index 4.0 30,000 • Average RLI is three year
Slide 32: Oil & Gas: Cuba – Current & Future Blocks
OIL & GAS Cuba – Current & Future Blocks • Sherritt intends to maintain its principal oil Puerto Yumuri Varadero production in Cuba. Escondido West • Applications for the extension of the existing development block and the four new exploration Working interest 100% 100% 100% Block expiry Mar 2018 Ma
Slide 33: Oil & Gas Operating Costs
OIL & GAS Operating Costs • Sherritt operates an integrated oil and gas business in Cuba – in terms of capital, equipment and expertise. As a result, the majority of total costs are fixed and relatively stable. • The increase in total operating costs and unit costs in 2011 was due to a re-categoriza
Slide 34: Oil & Gas Capital
OIL & GAS Capital • Capital spending on the two current blocks is approximately Oil Capital Spending $50 – 60 million per year. 25 • This will continue until the expiry 20 of these PSCs (2017 and 2018). • At that level, the current 15 Quarterly $ millions production rate can be Average ~$14 million
Slide 35: Coal Operations – Focus and Challenges
COAL Operations – Focus and Challenges Focus of operations in the next 12 - 18 months • Cost-control initiatives across the division aimed at margin protection. • Renew long-term coal supply agreements. Risks to achieving operational goals • Continued pressure on seaborne reference pricing. • Disrup
Slide 36: Coal Operating Costs
COAL Operating Costs Prairie Operations Prairie Operations – Unit Operating Cost 20 • Operating cost profile over time is primarily influenced by mining conditions (geological 15 complexity, strip ratios and haul distances) and maintenance practices. 10 $ per tonne • Cost control is achieved by real
Slide 37: Coal Capital
COAL Capital Prairie Operations • Capital comprised of investment in Coal Capital Spending draglines, replacement of mobile 50 equipment and mine infrastructure investments. 40 • Changes in capital levels can occur due to 30 $ millions strip ratio changes and major dragline investments. 20 • Coal ha
Slide 38: Power Operations – Focus and Challenges
POWER Operations – Focus and Challenges Focus of operations in the next 12 - 18 months • Successful commissioning of additional 150 MW from the Boca de Jaruco Combined Cycle operation. • Drilling to determine additional gas potential. Risks to achieving operational goals • Insufficient gas supply to
Slide 39: Power Operating Costs
POWER Operating Costs • The main operating cost in similar facilities is the gas input. For Energas, the gas is a zero-cost input, as it is supplied by CUPET (1/3 owner) as part of the Joint Venture arrangements. • The majority of the remaining operating costs in the Power business are fixed. • Ther
Slide 40: Power Capital
POWER Capital • The majority of maintenance Power Capital Spending incurred for the facilities is expensed. 10.0 Full Consolidation Therefore, the capital profile for the business is minimal. 8.0 Proportionate Consolidation (33 1/3%) • An annual capital expenditure budget of approximately $8 to $10
Slide 41: Sherritt Consolidated: Financial Reporting Evolution
SHERRITT CONSOLIDATED Financial Reporting Evolution • IFRS has had a significant impact on our disclosures. • The balance sheet has been significantly affected by the changes in financial reporting standards. The variance in the total assets, below, illustrates this. • Using Q2 YTD results for the i
Slide 42: Metals Reporting & Accounting
METALS Reporting & Accounting 1. Moa Joint Venture • Reconciling disclosure in the MD&A and financial statements 2. Ambatovy Joint Venture • The impact of commercial production on our disclosure 21
Slide 43: Metals Segment Reconciliation
METALS Segment Reconciliation Getting to Sherritt Metals Revenue… Six Months Ended Moa Joint Fort Site Moa JV + Metals Equity Consolidated June 30, 2013 Venture Fort Site Marketing Accounting Metals Segment ($ millions) Adjustment Revenue A B A+B C D A +B + C + D Nickel $ 126.7 - 126.7 - - $ 126.7 C
Slide 44: Metals Moa Joint Venture - Balance Sheet / Income Statement
METALS Moa Joint Venture - Balance Sheet / Income Statement Sherritt’s Balance Sheet (shows 50% of Moa JV) Sherritt’s Income Statement (shows 50% of Moa JV) $ millions Note 2013 Results of Operations June 30 $ millions Six Months Ended ASSETS June 30, 2013 Revenue $ 625.0 Non-Current Assets
Slide 45: Metals Ambatovy – Commercial Production
METALS Ambatovy – Commercial Production • Commercial production is an accounting term. The definition is subjective. Its significance relates to the transition from capitalizing all net costs of Ambatovy to Sherritt reporting its 40% share of operating earnings through its income statement on a sing
Slide 46: Oil & Gas Reporting & Accounting - Cost Recovery
OIL & GAS Reporting & Accounting - Cost Recovery • For each production-sharing contract, after a declaration of commerciality, Sherritt is allocated cost recovery oil as reimbursement for approved capital and operating costs, including any costs in the cost recovery pools since the inception of the
Slide 47: Coal Reporting & Accounting
COAL Reporting & Accounting 1. Lease Accounting • MD&A disclosure • Cash flow treatment 2. Goodwill • Current balance • Impairment testing • Key sensitivities 26
Slide 48: Coal Lease Accounting – PP&E
COAL Lease Accounting – PP&E Capital + Lease Purchases = Capital Required for the Business • Coal purchases a significant portion of their capital through leases (54% of 2013 YTD capital). • The majority are shown as PP&E on the balance sheet, but are not reflected as a capital purchase on the cash
Slide 49: Coal Lease Accounting – IFRIC 4
COAL Lease Accounting – IFRIC 4 But , because of IFRIC 4, Not All Assets are Recorded as PP&E • Certain coal assets are categorized as “Finance Lease Receivables”. • These assets primarily relate to draglines at certain mines and capital assets at the Genesee mine. Impact of IFRIC 4 CGAAP IFRS ($ mi
Slide 50: Coal Goodwill
COAL Goodwill • The $307.9 million Goodwill balance on Sherritt’s statements relates to the 2008 purchase of the Royal Utilities Income Fund (now Prairie Operations) that Sherritt did not already own. • Annual impairment testing is performed (as at October 1). • Impairment indicators are reviewed qu
Slide 51: Power Reporting & Accounting
POWER Reporting & Accounting 1. Revenue breakdown (Cuba, Madagascar) • Sources of revenue 2. Service Concession Arrangements (Cuba) 30
Slide 52: Power Reporting & Accounting
POWER Reporting & Accounting • The two core revenue streams in Power $ millions Six months ended are from electricity and by-product 2013 sales by Energas S.A. in Cuba. June 30 • Sherritt has a 33 1/3% interest in Electricity sales (Cuba, 33 1/3%) $ 13.2 Energas S.A. and proportionately By-products
Slide 53: Reporting & Accounting - Ambatovy Call Option
SHERRITT CONSOLIDATED Reporting & Accounting - Ambatovy Call Option • The Ambatovy Call Option relates to Sherritt’s option to acquire one-half of SNC Lavalin’s 5% interest in Ambatovy. The option can only be excercised after Change in Fair Value of Ambatovy Call Option 4 Ambatovy’s US$ 2.1 billion
Slide 54: Reporting & Accounting - Non-GAAP Measures: Operating Cash Flow per Share
SHERRITT CONSOLIDATED Reporting & Accounting - Non-GAAP Measures Historical Operating Cash Flow Per Share $0.70 • With the changes to IFRS and an increasing $0.60 focus on liquidity in a challenging base metals $0.50 market, Sherritt also focuses on operating cash flow as a performance indicator. $0
Slide 55: Reporting & Accounting - Non-GAAP Measures: Adjusted EBITDA
SHERRITT CONSOLIDATED Reporting & Accounting - Non-GAAP Measures • The definition of Adjusted EBITDA was amended in 2013 as a result of the introduction of IFRS 11. • Under IFRS, beginning in 2013 the Adjusted EBITDA of the Moa Joint Venture would have otherwise been excluded. Not only does this sig
Slide 56: Appendix
APPENDIX 1
Slide 57: Metals Map – Ambatovy Joint Venture
METALS Map – Ambatovy Joint Venture 2
Slide 58: Metals Map – Moa Joint Venture
METALS Map – Moa Joint Venture Cuba Canada 3
Slide 59: Metals Historical Performance
METALS Historical Performance Nickel and Cobalt Production Nickel Reference Nickel Price vs Operating Cost (1) 80,000 70,000 12 tonnes, 100% basis 60,000 10 50,000 8 $6.79 US $/lb 40,000 6 30,000 $5.58 4 20,000 10,000 2 0 0 2008 2009 2010 2011 2012 2013e 2008 2009 2010 2011 2012 2013 Q2 Nickel Produ
Slide 60: Oil & Gas Map
OIL & GAS Map Cuba STRAITS OF FLORIDA ® Havana Matanzas @ © Cardenas OIL & GAS COMMERCIAL FIELDS COMMERCIAL BLOCKS PRODUCTION GAS-GATHERING 1 Puerto Escondido 100% interest FACILITIES SYSTEM 2 Yumuri A Puerto Escondido OIL PIPELINES 3 Varadero West B Yumuri C Varadero
Slide 61: Oil & Gas Historical Performance
OIL & GAS Historical Performance Oil Production Oil (Cuba) Realized Price vs Operating Cost (1) 18,000 80 16,000 (boepd, net production) 70 $67.64 14,000 60 12,000 50 10,000 $/bbl 40 8,000 6,000 30 4,000 20 $12.70 2,000 10 0 0 2008 2009 2010 2011 2012 2013e 2008 2009 2010 2011 2012 2013 Q2 Operating
Slide 62: Coal Map
COAL sherritt BRITISH COLUMBIA UUs SASKATCHEWAN | MANITOBA Prince Fort Saskatchewan | Rupert @Edmonton Saskatoon | ea ESN ike ® ° Calgahy Regina Winnipeg (0) 7 (O} | 5 Thunder Bay Vancouver 6 @ SHERRITT MINE COAL OPERATIONS DEPOSITS 1 Coal Valley 6 Poplar River l@ Bituminous 2 Paintearth 7 Bienfait
Slide 63: Coal Historical Performance
COAL Historical Performance Thermal Coal - Prairie (Domestic) Coal Production Realized Price vs Operating Cost (1) millions of tonnes, 100% basis 50 20 $18.19 40 15 $13.57 30 $/tonne 10 20 10 5 0 0 2008 2009 2010 2011 2012 2013e 2008 2009 2010 2011 2012 2013 Q2 Prairie Coal Production Mountain Coal
Slide 64: Power Map
Cuba ® Havana POWER GAS-FIRED PLANTS A Boca de Jaruco B Puerto Escondido C Varadero STRAITS OF FLORIDA Matanzas @ a. ® Cardenas GAS-GATHERING SYSTEM
Slide 65: Power Historical Performance
POWER Historical Performance Power Power Production Realized Price vs Operating Cost (1) 2,500 50 (GWh, 100% basis) 2,000 40 $42.28 1,500 30 $/MWh $28.92 1,000 20 500 10 0 0 2008 2009 2010 2011 2012 2013e 2008 2009 2010 2011 2012 2013 Q2 Operating Cost Realized Price Adjusted EBITDA vs. Capex (1)(2)
Slide 66: Combined Performance
COMBINED PERFORMANCE Revenue (1)(2) Adjusted EBITDA (1)(2) ($ millions) ($ millions) $2,000 $800 $1,500 $600 $1,000 $400 $500 $200 $0 $0 2007 2008 2009 2010 2011 2012 LTM 2007 2008 2009 2010 2011 2012 LTM (1) Segmented numbers do not include corporate revenue or Adjusted EBITDA. Metals Coal Oil and
Slide 67: Investor Relations
INVESTOR RELATIONS Telephone: 416-935-2451 Toll-Free: 1-800-704-6698 Sherritt International Corporation Fax: 416-935-2283 1133 Yonge Street Toronto, Ontario, Canada Email: investor@sherritt.com MAT 2Y7 Website: www.sherritt.com
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