Sherritt scraps dividend, moves to protect liquidity

David Pathe, president and CEO of Sherritt International (TSX: S), did not mince words when he said the company needed to take action to protect its balance sheet so that it could withstand lower commodity prices, with “more than 60% of global nickel production underwater on a cash-cost basis.”

Sherritt announced after markets closed on Sept. 17 that it has suspended its 1¢-per-share quarterly dividend, noting that at current spot prices of US$4.50 per lb., nickel is down 32% since the company last cut its dividend in the first quarter of 2014, from 4.3¢ per share to 1¢ per share.

A world leader in mining and refining nickel from lateritic ores and the largest independent energy producer in Cuba — with oil and power operations across the island — Sherritt said prices for nickel and crude oil haven’t traded so low since 2009.

Sherritt also said it would cut capital expenses in 2016 by as much as 35%. Earlier this year the company trimmed its 2015 capex guidance by $15 million to $195 million.

Pathe was unavailable for an interview to discuss the cost-cutting measures, but in a press release the company said that suspending the dividend and cutting capital spending and operating costs are part of a strategy to maximize liquidity by conserving cash and equivalents, and short-term investments; manage capital spending and operating costs by aligning capital spending with cash-flow generation in 2016; and achieving financial completion at Ambatovy in Madagascar by the end of September, at which point the US$1.7-billion Ambatovy joint-venture financing (on a 100% basis and balance at June 30, 2015) becomes non-recourse to all the Ambatovy partners. (The company achieved this ahead of schedule, on Sept. 21). Sherritt is the operator with a 40% stake, and its partners are Sumitomo (27.5%), Korea Resources (27.5%) and SNC-Lavalin (5%).

Commenting on the cost-cutting news, base metals analyst Raymond Goldie of Salman Partners in Toronto said “the depletion of China’s inventories of high-grade nickel laterite ores, around the end of October, is likely to trigger a bull market in nickel,” adding that “the situation reported by Sherritt is likely to be one of the factors propelling nickel prices upward.”

At BMO Capital Markets, analyst Aleksandra Bukacheva estimated that eliminating the dividend would preserve $12 million a year, while reduced capital expenditures will save $68 million.

“Positively, the company’s focus on capital conservation is an adequate and welcome response to the continued and potentially extended commodity price downturn,” she wrote in a client note, adding that the move will “somewhat alleviate the company’s projected treasury depletion associated with corporate expenditures, interest and principal repayments, including its share of Ambatovy joint-venture debt interest and principal repayments, estimated at $123 million in 2016.”

But the analyst also said that the reductions “appear insufficient to align the company’s cash balances and cash generation with the timing of its debt maturity (i.e., a $250-million note due in 2018) if the nickel price were to remain at the current level,” and pointed out that Sherritt’s overall debt levels “also remain high at $3.3 billion.” 

In addition, Bukacheva said that while Sherritt expects to achieve financial completion at the Ambatovy project in Madagascar by the end of this month, “further operating cost reductions would be required to bring the mine into the positive cash flow territory,” given that its second-quarter cost of US$5.48 per lb. nickel “was 18% above the spot nickel price.”

At steady state production next year, however, she estimates that cash costs at Ambatovy will fall to US$4.11 per lb., or 9% below the current spot price. 

Ambatovy is the largest finished nickel and finished cobalt operation from lateritic ore in the world, and has an annual design capacity of 60,000 tonnes of nickel and 5,600 tonnes of cobalt.

The mine life is a projected 29 years, and the plant facilities were commissioned in 2012, starting up the same year.

Ambatovy reached commercial production in January 2014, and produced 14,821 tonnes of finished nickel (on a 40% basis).

News of the dividend and capex cuts sent Sherritt’s shares down 6¢ to 94¢, on 11.5 million shares traded.