Problems at Ambatovy hurt Sherritt’s Q2 earnings

Sherritt International (TSX: S; US-OTC: SHERF) reported a $30.1-million net loss in the second quarter, largely due to its Ambatovy joint-venture nickel–cobalt project in Madagascar, where it reduced the project’s annual production guidance following mechanical issues during the June quarter.

The loss amounted to 10¢ per share, missing analysts’ average estimates of minus 8¢ per share. This is well below the negative $10.7 million, or 4¢ per share, realized in the same period last year.

Sherritt’s owns 40% of Ambatovy and its share of losses at the project was $51 million, including $40 million for depletion, depreciation and amortization.

The quarterly loss came as prices for nickel and cobalt gained strength, leading to higher revenues for the company’s metal business.

Nickel prices have gained 35% since the start of the year, driven in part by greater demand for stainless steel, the Indonesian ban on iron-ore exports and a drop in Chinese nickel pig-iron production, David Pathe, Sherritt’s president and CEO, said on a conference call.

Cobalt prices climbed 13% year-to-date, reflecting stronger demand.  

Revenue from the company’s three segments — metals, oil and gas, and power— grew 7% to $130.2 million, from $121.7 million.

Including the company’s share in the Moa and Ambatovy joint ventures, adjusted revenue jumped 47% year-over-year to $305 million. (Moa is a fifty-fifty partnership between Sherritt and Cuba’s General Nickel Co.)

The rise in adjusted revenue was primarily due to Ambatovy reaching commercial production earlier this year, and bringing in $77.8 million of revenue during the three months ended June. 

Nickel and cobalt production at Ambatovy grew over the year before, but only slightly since the first quarter because of “mechanical challenges and unanticipated maintenance failures.” 

Quarterly nickel production at the project on a 100% basis was 9,004 tonnes at cash costs of $7.19 per lb., missing BMO’s $5.45 per lb. cost estimate, analyst Aleksandra Bukacheva writes in a note.

Due to the weaker year-to-date performance at Ambatovy, Sherritt lowered the project’s annual production guidance for finished nickel to 37,000 to 41,000 tonnes on a 100% basis, from 40,000 to 45,000 tonnes, and for cobalt to 2,700 to 3,100 tonnes, from 3,300 to 3,800 tonnes, Bukacheva says.

During the quarter the project recorded its first positive adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of $5.3 million, where Sherritt’s share was $2.1 million.

Total adjusted EBITDA was $75.4 million, up 42% from the year before. That growth was in part due to the fact that the company took an impairment charge in its power business in the second quarter of 2013.

This year Sherritt realized a $13-million gain during the June quarter after it sold its non-core coal assets for net proceeds of $804.3 million. It used $365 million to repay debt.

“As a result of the sale of its coal assets, Sherritt’s cash position improved to $466 million [versus $235 million in first-quarter 2014], while debt dropped to $2.2 billion from $2.5 billion,” Bukacheva says.

Adjusted operating cash flow from continuing operations was 1¢ per share in the June quarter, down from 9¢ per share earlier.

Looking ahead, the company’s focus will stay on Ambatovy. The project should finish its ramp-up by mid-2015, after which C1 costs should come down to $3 to $5 per lb.

“We remain confident this asset will be the long-life, low-cost asset that we have always believed it will be,” Pathe said.

Sherritt is evaluating its operations and capital allocation to improve efficiencies and reduce costs. It has realized savings of $25 million year-to-date.

Its shares added 17¢ to close July 30 at $4.61, on 1.1 million shares traded. Bukacheva has a $6.50 price target and an “outperform” rating on the stock.