Sherritt International (TSX:S) Q4 2022 Earnings Call

0:00 Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Shared International 4th Quarter 2022 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 9th, at 10 o'clock Eastern Standard Time. I'll now turn the presentation over to Lucy Chatillion, Director and Best Relations. Please go ahead.

0:26 Thank you, Joanna. Good morning. Thank you, operator, and everyone for joining us today. Before we begin, I just want to make mention of a couple items. As you know, we released our Q4 results last night, and all our disclosure materials, including the press release, MD&A, and financial statements, are available on our website as well as on CDAR. As is customary, during today's call and webcast, we will be using a presentation that is available on our website in the Investor Relations section. In addition, we will be making forward-looking statements and references to certain non-GAAP financial measures. Forward-looking statements can be found on slide three, and non-GAAP measures discussions and reconciliations to the most directly comparable IFRS measures are included in the appendix to this presentation.

1:14 With me today are Sherrod's Chief Executive Officer, Leon Binadel, and Chief Financial Officer, Yasmin Gabriel. who will be reviewing our results in detail. Following this discussion, we will open the call up to questions. It is my pleasure to now pass the call along to Leon.

1:32 Thank you, Lucy, and good morning, everyone, and thank you for joining us today. 2022 was a very exciting year for us at Sherratt. On the strength of high in nickel and fertilizer prices, we achieved strong operating and financial results while at the same time delivering on each of our 2022 strategic priorities as outlined on slide four. We are happy with our strong operating results, including significantly higher adjusted EBITDA net earnings, and are equally encouraged by the progress we were able to make on our strategic priorities, providing the building blocks for continued long-term success for Sherrod. Some of the key highlights that we'll be touching on in more detail during this presentation include the advancement on our expansion program that will see approximately 6,500 tons of new nickel and cobalt-contained metals annually by 2024.

2:21 a program that remains on time and budget. Advancing our new life of mine, which will conclude in a 43-101 technical report by the end of Q1, that we expect will confirm the extension of the life of mine at Moher to beyond 2040. Our buyback of almost $150 million in second lien secured and junior notes, all at a discount, which strengthens our balance sheet and reduces our annual interest expense by about $13 million. Our transformative cobalt swap agreement with our Cuban partners to recover $368 million of legacy receivables. And in January, we received our first distribution under this agreement, which Yasmin will touch on later. In our power business, the extension of our MOA swap, as we call it, facilitates access to foreign currency to provide certainty to the business, enable to fund its foreign currency denominator operating, maintenance, and capital expenses, but equally important, pay the way for future dividends to be repatriated to Sherrod.

3:20 Also in our power business, the extension of the Energas joint venture contract by 20 years to March 2043. And we entered an agreement with Open Mineral, our first collaboration agreement towards the application of one of our promising proprietary technologies in the precious metal sector. And we obviously continued advancement on our very important sustainability initiatives. I'll provide an overview of operations and the status of our expansion program and ESG scores, and Yasmin will provide commentary on our financial highlights. I'll then conclude with an update on our 23 outlook, looking at our guidance before we address any questions. Starting with the Mojo and Venture Q4 operating results outlined on slide six, Sherrod's share of finished nickel and cobalt production was 4,112 tons, and 423 tons of cobalt, 4 and 11 percent lower respectively than Q4 2021.

4:18 Lower finished nickel and cobalt production during the quarter was the result of lower mixed sulfide availability at the refinery. The refinery utilized some of its available mixed sulfide feed inventory. However, this was tempered by lower than planned mixed sulfide production at the mine due to lower ore grades as a result of heavier than expected rainfall limiting access to some mining areas. coupled with some unplanned maintenance at the leach plant, as well as lower availability of third-party feeds for the refinery. Cobalt production was lower alongside nickel production and higher nickel-to-cobalt ratios in the mixed sulfide feed from MOA and a lack of historically profitable high-cobalt-bearing third-party feeds. Regarding NDCC or our net direct cash cost, as with much of 2022, when compared to 2021, the driving cost disruptor for our industry was input commodity prices. This quarter, again, we saw sulfur, diesel, and fuel oil significantly higher than the prior year quarter. Details are included in the footnote.

5:21 On a positive note for Shara, higher fertilizer prices resulted in significantly higher byproduct credits to offset some of the high input commodity costs. However, due to lower cobalt sales in the quarter, our NDCC was elevated above expected levels. On an annual basis, as outlined on slide seven, Sherrod's share of finished nickel production at the Mower JV was 16,134 tons, 3% higher than the 15,592 tons produced in 2021. This is primarily due to improved equipment reliability during the year and the drawdown of some feedstock inventory at the refinery. Coal production, however, was down 4% to 1,684 tons from 1,763 tons in 2021, primarily due to lower availability of historically profitable cobalt-rich third-party feeds.

6:17 2022 finished nickel production was in line with guidance, while finished cobalt production was materially within guidance. On NDCC, it was similarly impacted on a full-year basis by high input commodity prices, partly offset by higher net fertilizer byproduct credits. We were not able to fully benefit from our cobalt byproduct credits in 2022 due to slower than anticipated cobalt sales in the back half of 2022 due to significant market softening for cobalt. The Mojo Inventure built inventory over 2022, which will benefit this year as the situation unwinds. In the near term, market softness is likely to remain a challenge for cobalt. However, we see this stabilize over the course of 2023.

7:03 Had we sold normalized volumes of cobalt in the second half of the year, we would have been well within our cost guidance for the full year. On slide eight, we summarized some of the key points of our MOA JV expansion. As was mentioned in our last call, Sherrod approved an additional $50 million on a 100% basis for the second phase of our joint venture expansion plan, bringing the total expansion program to $77 million on a 100% basis. The expansion program has been developed to achieve a 20% increase in metal production at a low capital intensity of only $13,200 per annual ton of nickel added. With a market focus on EV batteries, we do see an opportunity to focus our strategy on increasing production of intermediary products that will enable us to fully utilize existing capacity at the refinery, but also consider direct sales of intermediate products into the EV battery supply chain.

8:03 We estimate that two-thirds of the increased MOA feed will be processed into finished nickel and cobalt using the refinery capacity, and the remaining component will be sold into the EV battery supply chain. We always retain the option to make improvements to the refinery to process all of the MSP from MOA. However, we do not believe at this time that any expansionary capital may be required at the refinery. The program will be completed in two phases as outlined the slurry preparation plant and the MOA processing plant improvements. In phase one of the program, the slurry preparation plant, or SPP, is expected to be completed in early 2024 and is anticipated to deliver several benefits, including reduced ore haulage distances and lower carbon intensity for mining. Upon completion, it will increase MSP production from MOA by approximately 1,700 tons of contained nickel and cobalt annually.

9:03 Completion of the second phase of the program, the MOA Processing Plant Improvements, planned for the end of 2024, is expected to increase annual MSD production by approximately additional 4,800 tons of contained metals annually, and will also reduce our NDC by approximately 20 cents U.S. per pound. As a reminder, the expansion costs are expected to be funded by the joint venture itself, not directly by Sherrod. We anticipate spending on growth capital to spread evenly over the remaining period. The joint venture is expected to fund the capital primarily from operating cash flows, but may also seek to fund select components for the expansion program.

9:49 Just to give everyone an idea of the progress to date, with regards to the SPP, 100% of the civil construction has been completed, 100% of materials and service contracts have been awarded, and 65% of the steel prefabrication has been erected. For the mower processing plant, the final feasibility study encompassing the full project scope has been submitted for approval to Cuban authorities, and we expect that approval in Q1. Bids for long-lead items for the six-lead train has been evaluated and will be expected to be awarded in Q1. Both of these phases remain on budget and on schedule. Turning to our power division on slide nine, power production in Q4 was 159 gigawatt hours of electricity, up 22% from Q4 2021. And on an annual basis, power production was 568 gigawatt hours, or 26% higher than the prior year.

10:50 Year over year, we have seen increased production as a result of better equipment reliability as much of the maintenance work was completed in 2021. and had a positive impact in 2022. In addition, the Power Division has been working on increasing additional gas to drive increased electricity production, and this was certainly a factor in Q4 in enabling us to beat our updated guidance for the year. As mentioned in our Q3 call, during the quarter we signed an extension to our MOA swap agreement alongside the Cobalt swap, which provides power operations certainty on access to foreign currency through the MOA joint venture. thereby funding the foreign currency denominated operating, maintenance, and capital costs of Energas, as well as covering future payments that would be owed to Sherrod, including dividends.

11:41 With this agreement in place, we are excited that we also received approval for the extension of the Energas joint venture contract through to 2043. The extension is economically beneficial, as it is and always has been a consistent operating earnings generator for us and supports Sherrod's ongoing investment in Cuba. For 2023, we continue to work with our Cuban partners to access additional gas supply for the BOCA facility from two new gas wells to be drilled in Puerto Escondido that are scheduled to both be in production by Q4 of 2023. In Q4, Sherrod issued its 2021 sustainability, climate, and tailings management reports, as well as its sustainability scorecard outlining our performance on ESG matters.

12:29 The successes seen in 2021 carried out in 2022 as applied on slide 10. We further improved our safety performance with the total recordable incident frequency rate and the lost time incident frequency rates decreasing 59 and 50% respectively between 21 and 22. We continue to meet safety and production targets at all our sites, prioritizing the health and safety of our employees, contractors, and the communities in which we operate. Once again, in 2022, across all of our sites, we had zero work-related fatalities, zero significant environmental incidents, zero security incidents involving any allegation of human rights abuses, and no tailings-related incidents.

13:15 Additionally, in Q4, we received confirmation of conformity with the London Metals Exchange Track B responsible sourcing requirements. Sherrod received independent verification that its minerals are not associated with conflict risks such as human rights abuses, forced labor, or corruption. We continue to progress our commitments to achieving net zero greenhouse gas emissions by 2050, with near-term objectives of obtaining 15% of overall energy from renewable sources by 2030 and reducing nitrogen oxide emissions intensity by 10% next year. Further, we have initiated a greenhouse gas emissions baseline study in the inner gas business and are advancing project planning for carbon capture opportunities at the Ford site and solar power at MOA. And with that, I will hand to Yasmin to summarize our financial results.

14:09 Thanks, Leon. I'll start today with our key financial metrics on slide 12, adjusted EBITDA and net earnings. As you can see on this slide, our adjusted EBITDA in 2022 was almost $218 million, or 94% higher than the previous year, while net earnings from continuing operations with almost $64 million compared to a loss in the previous year of $13 million. These results were driven primarily by higher nickel and fertilizer sales volume and realized prices, partly offset by higher input commodity prices, and a $17.5 million share-based compensation expense, resulting from a full year of additional unit vesting and the appreciation in our share price. also impacting EBITDA with a 15 million non-cash ERO loss relating to legacy oil and gas Spanish assets. 2022 net earnings from continuing operations was also impacted by the recognition of a 49 million non-cash loss on the revaluation of allowances for expected credit losses on the Energas receivable related to the implementation of the Cobalt swap agreement and an almost 21 million gain on the repurchase notes.

15:18 On an adjusted basis, Removing the impact of these non-cash items, we had adjusted net earnings from continuing operations of $88 million compared to an adjusted net loss of $14 million in 2021. These strong market fundamentals drove our 2022 earnings and allowed us to take advantage of opportunities to strengthen our balance sheet, which I'll cover next. Moving on to slide 13. At the beginning of December, with oversubscribed offers, we maximized our debt repurchase with an aggregate repurchase of almost $90 million in principal of our second lien secured in junior notes at a discounted value of $80 million. Including the repurchase in Q2, we repurchased an aggregate of almost $150 million in principal of these notes in 2022 at a 16% discount, reducing our principal debt by 35% from the beginning of the year and reducing our annual interest expense by approximately $13 million.

16:16 These note repurchases reinforce our positive outlook on our operations, and together with our cobalt swap, which I'll speak to next, strengthen our balance sheet and will generate value for our stakeholders. Turning now to slide 14, as we disclosed on our last call, in Q4 we finalized a transformative agreement with our Cuban partners to recover 368 million of total outstanding Cuban receivables over five years, putting an end to the long-standing uncertainty related to these receivables. Under this agreement, which became effective on January 1st of this year, the Mojoin Venture prioritizes distribution in the form of finished cobalt to each partner up to an annual maximum volume of cobalt, with any additional distributions in a given year to be paid in cash.

17:03 All of our Cuban partners' share of these cobalt distributions will be redirected to share it as payment against these receivables. If the total value of cobalt distributed by the Mojoin Venture is lower than the US$114 million minimum, all cash distributions will be redirected to share it until this dollar threshold is met. And as you can see here on slide 13, under the agreement, we expect to receive over 700 million in cobalt in cash distributions over the next five years, and this amount excludes any potential distributions over and above the cobalt swap agreement. Further, we expect to receive the majority of these payments prior to the maturity of the second lien notes in November 2026. In January, the first month in which the agreement was effective, we received our first distribution of 760 tons of cobalt, representing 37% of the annual cobalt volume under the agreement.

17:59 That had an in-kind value of $36 million. Half of this amount was received as a distribution to share it from the Mojoin Venture, and the other half, which represents our Cuban partner share, has been used for the settlement of the outstanding receivable. All of this cobalt is in shares' possession and is being sold into existing customer contracts and on the open market. Finally, in exchange for these benefits, we agreed to forego interest over the repayment period on the condition that the full amount is received within the five-year timeframe as an incentive. This adjustment resulted in the non-cash loss we recorded this year that I noted earlier. Further detail on the mechanics of the Cobalt Swap Agreement can be found in both our press release and MD&A. Finally, turning to our liquidity position on slide 15, at the end of Q4, our total liquidity was $178 million, down from $228 million at the start of the year. The decrease in our available liquidity reflects the almost $150 million repurchase of our second liens and junior notes for $125 million in cash, as well as the $29 million in cash interest paid on the second lien notes and $28 million of capital spending.

19:07 This is offset by strong distributions to the mode trade venture of approximately $100 million and $31 million of net fertilizer receipts. In addition, I'll note that with the cobalt swap distribution in January, Share It Now has available finished cobalt inventory with an in-kind value of $36 million, which is expected to be converted into cash in the coming months. That concludes my remarks. I'll hand it back to Leon.

19:32 Thank you, Yasmin. Looking ahead at 2023, outlined on slide 17, we view this as a transitionary year for the Mojo and venture as we continue to deliver our plant capacity expansion and implement our updated life of mine plan utilizing an economic cut-off grade methodology. The updated life of mine plan will be reflected in the revised 43-101 report expected in the first quarter and is expected to extend the current operation to beyond 2040. The MOA joint venture production guidance is slightly lower for 2023 compared to guidance figures provided in previous years as we prepare to execute on our expansion plan for 2024 and transition to the new life of mine plan.

20:17 We also anticipate reduced reliance on low margin third party feeds. Transitioning to the new optimized mine plan will see the joint venture access new mining areas and build blending stockpiles, both impacting MOA production capacity in 2023. This will set us up for growth in 2024. As a result, finished nickel production is forecast to be in the range of 30,000 to 32,000 tons on a 100% basis, while finished coal production is forecast to be between 3,100 and 3,400 tons on a 100% basis. NDCC at the Mojo Inventor is forecast to be in the range of 5 to 550 US dollars per pound of finished nickel sold primarily as a result of lower forecast cobalt and net fertilizer byproduct credits offset by moderated input prices.

21:11 At our power business, production is expected to be higher than in 2022 as we continue to work with our Cuban partners to increase access to additional gas supply, particularly from developing two new gas wells on an existing field in 2023. Unit operating costs are expected to be higher in 2022 due to the planned gas and steam turbine maintenance in preparation for the additional gas supply later this year. Finally, I just want to spend a minute on our strategic priorities for 2023 as outlined on slide 18. As I said at the beginning, the success we had in meeting our priorities in 2022 built the foundation for future successes. We will continue to execute our expansion program, and we expect to adopt and implement the new optimized life of mine plan We'll leverage collections on our cobalt swap, and we'll look to further opportunities to strengthen the balance sheet this year.

22:08 We'll continue to advance our technologies and anticipate further collaboration agreements to advance the commercialization of our proprietary technologies. And as I said earlier, we continue to work with our Cuban partners to access additional gas to provide much-needed electricity to the Cuban power grid. On the ESG front, we remain focused on keeping our employees and communities safe each day as we make progress on our long-term ESG targets. Just to sum up 2022 on slide 19, it was a pivotal year for Sherrod in that we put in place a number of key elements that deal with legacy challenges and position the business going forward. In a market driven by high nickel prices, we began a low capital intensity expansion program and reduced our long-term debt substantially.

22:56 We also strengthened cash flows with the implementation of a cobalt and mower swaps. I'd like to thank everyone for their time today, and operator, I'd like to now turn the call over for questions. Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star, followed by the one on your touchtone phone. If you would like to withdraw your request, please press star, followed by two. If you are using a speakerphone, please lift the handset before pressing any keys. First question comes from Gordon Lawson at Paradigm. Please go ahead.

23:32 Hey, good morning, everyone. So with cashflow from the current range, you mentioned a 20 cent reduction based on MSP, but can you talk about your expectations beyond 2023 as it relates to other components in phase two?

23:48 So what we've outlined today and also when we announced the expansion is that we expect that the expansion volumes will drive our NDCC down by around 20 cents per pound from 2025 when those volumes come into play. But in terms of our guidance for 2023, we see a range of 5 to 550. based on current cobalt pricing environment, as well as fertilizer pricing environment, which are lower than 2022. But those are offset by moderated input commodity prices that we've seen migrating closer towards 2021 levels.

24:34 Okay, thank you. And you talked about nickel sulfate. Can you provide further guidance as to what shipping costs and pricing you're expecting in various geographical regions?

24:47 I guess, Gordon, you're referring to the intermediate products? Yes. At this stage, what we anticipate given current market dynamics is that there are fairly high pay abilities for intermediate products and we'll see how the market shapes up. We have not provided any guidance as to what we expect those pay abilities to be at this stage as we're in early stage conversations with potential customers. However, we do hold the option, should payabilities not play out to justify the margin loss on refining metal, we would convert back into full refining of all of Moe's MSP and take the advantage of producing refined nickel product to capture the full margin, if you will.

25:36 And the Fort Saskatchewan has the capacity once it's completely bottomed, I think?

25:44 Currently the capacity is sufficient to be able to process two-thirds of the additional volume. The other remaining third we anticipate we could through operating improvements and some other smaller debodiment activities able to capture some of that, but we still hold the option to do some additional capital at the refinery to capture the full volume.

26:09 Okay. And just one more, if I may. Seeing the impact on EBITDA, could you talk about expenses related to both the oil and gas as well as the technology division and what to expect going forward?

26:23 So currently we are not producing any oil in the oil business as we've outlined, but are providing some services to a third party in drilling services. while we're in process in seeking earning partners or alternatives for our oil business for the long term. In terms of the drilling services, we're also providing some of those services to access the additional gas wells for the power business. So there are services revenue anticipated in 2023. In terms of... the technologies business, it is premature for us to engage in discussions around what EBITDA contributions those may be.

27:10 The nature of those endeavors in commercializing the technologies business, it's more akin to M&A, transaction-based or participating in developing of new opportunities. So it will be premature until those opportunities are fully fleshed to be able to comment on what those EBITDA contributors might be. But we are very encouraged by the first agreement that we signed with Open Minerals to explore using those technologies in the precious metal space.

27:43 Okay, thanks very much. Appreciate the call. Thank you, Gordon. Thank you. Next question comes from Shane Nagel at National Bank Financial. Let's go ahead.

27:56 Thanks, Operator. I just have a few questions around the cobalt. Obviously, prices have fallen off a bit here. And if I understand the swap agreement correctly, you're to receive 50% of the distributions redirected to an aggregate of 57 million U.S. And if you look at what the 27, I'm assuming half of that is what's been redirected from the JV to cover the receivable. You're kind of on pace for the year, $36.5 million, which is about 20 million shy of that number. So does that just come out of the JV in terms of redirected cash flow towards yourselves? And is that concerning at all given, obviously, the CapEx plans that the JV has ongoing at Moa?

28:38 Hi, Jane. Thanks for the question. I did want to clarify in terms of the total value of the cobalt we're expecting. It is U.S. $114 million. annually and that is 50-50 split. So 50% of that would be towards the receivable, the settlement of the receivable. Based on our forecast and the capital spending and our outlook, we're confident that the Mojoin Venture can support both the expected capital expenditures as well as be able to distribute at least the $114 required under the Cobalt swap.

29:20 And I think, Shane, just on your comment around if the cobalt price is below the reference price when we struck the volume of cobalt, that deficit, if that exists, will be made up in cash dividends. And right now, with the nickel market being as robust as it is, there's no concern that we will not be able to reach that minimum level of at least the $57 million U.S. cash, whether it's from cobalt or cash.

29:49 right and so does that i guess it's uh it's technically a cash distribution from the jv but it's to cover these shortfalls but but you will receive those dividends is that just payable in q4 on an annual basis or is there like a quarterly run rate that that would be topped up to so the the distributions are made from the joint venture monthly uh first uh in the form of cobalt and then if that 114 million threshold is not met then it's through cash distributions Okay, the one final adjustment.

30:20 And we would expect that during the, sorry, what's that?

30:22 So one final payment to top it up to that 114 if it's

30:28 not there by the year end. Yeah, or sooner, as soon as that cash is available to distribute. Right.

30:34 Okay. And has there been any consideration of alternative ways to monetize the swap? I mean, is your partner being incentivized as maybe just selling all that Cobalt now, putting the cash, drawing down the receivables. Are there third parties that are interested in it? Obviously, Cobalt's rolled off of it. Maybe a bit hamstrung on your options there, but is there any alternative ways to monetize that swap at the present time?

31:00 So, as I mentioned, we do receive title to that product once it's distributed, and we're currently selling that to existing customer contracts and on the open market. We will consider alternatives to monetize any of the excess but that'll be dependent on market conditions or contractual terms. But that is something that would be a possibility and something that we would look into.

31:27 Okay. And then just one last one, just kind of sticking with the cobalt theme here, is we're obviously lower than the budgeted amount in your guidance. Do you have any indication of how the sulfur is trending? We've seen acid prices elsewhere come down. Just wondering how domestically that looks for you in Cuba and if that's enough to offset kind of what we've seen in terms of the weakness of the cobalt market.

31:51 Yeah, it's a good question and a good observation. In terms of sulfur, as I mentioned, we're trending closer towards where sulfur pricing on a landed basis was in 2021. We've guided around $230 per ton delivered at MOA. Last year was around $4.50 in 2022, so substantially lower than that on the sulfur front. And so that is a significant offset to the lower cobalt prices that we've seen. So we've seen that moderation on input commodity prices, as you mentioned, and that's countering some of the moderation in cobalt prices in 2023. And so that's why we've guided NDCST broadly in line with where we landed on NDCC for 2022.

32:42 Okay, thanks. That's all from me. Thanks. Thank you, Shane. Thank you. That concludes today's question and answer session.

32:55 You may proceed. Thank you, Joanna. And thank you, everyone, for your time today. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and we ask that you please disconnect your lines.