Sherritt reports loss but boosts dividend on back of Ambatovy

Sherritt International (S-T) had to shoulder some of the same industry wide hardships as lower commodity prices and higher costs, but the company signaled its bullishness for the future by increasing its dividend despite reporting a fourth quarter loss.

Fourth quarter earnings showed a net loss of 6¢ per share compared to a gain of 10¢ per share for the same period last year. The loss, however, was largely attributed to $23.5 million, or 9¢ per share, in non-cash charges.

The main sources of the non-cash charges were increased depreciation expenses due to changes in environmental rehabilitation obligations; increased finance expenses due to the redemption of a premium, and a deferred cost write-off connected to the redemption of 2014 debentures. Combined those three factors accounted for $20.5 million in non-cash charges.

When earnings are adjusted for those non-cash charges they improve to $6.2 million or 3¢ per share. Better, but still shy of the previous year’s performance.

The turn for the worst came as weaker commodity prices met with higher operating costs in its metals and coal divisions. On the latter front, Sherritt suspended operations at its Obed Mountain mine.

Sherritt’s president and CEO, David Pathe, said the decision was based on the mine’s lower quality of coal and higher cost of production. Most of the employees from the mine were transferred to its nearby Coal Valley mine. Both Obed and Coal Valley are located in Alberta.

Pathe said Obed was not a significant contributor to the company’s bottom line especially since operations has already been scaled back before the suspension.

Speaking on a conference Pathe turned to the positives that came out of the quarter.

There was, for instance, the production of 27 million lbs of nickel in the quarter and 88 million for year — both numbers represent the highest ever nickel production totals for the company.

That positive was directly connected to progress at its Ambatovy joint venture project in Madagascar. Sherritt is the operator and the largest stakeholder with a 40% interest. Sumitomo and Koreas Resources each have a 27.5% stake while SNC-Lavalin (SNC-T) has a 5% stake.

The fourth quarter marked a milestone in the project’s existence as it was the first full quarter of projection at the mine. Sherritt acquired its interest via the acquisition of Dynatec in 2007. Construction on the mine began in 2008 and was finished at end of 2011.

“It’s taken 5 years,” Pathe said on the call, “But Ambatovy is no longer a construction project, it is a producer and we are ramping up towards full capacity.”

Pathe conceded that the ramp-up has had some hiccups, as all operation of Ambatovy’s scale do, but that it was trending in the right direction with throughput moving from 39% in September, to an average of 40% in the quarter and then 46% in January.

“For 2013 the jagged pattern of throughput will continue,” Pathe said. “But the project works.”

That fact has some serious implications for shareholders. It means that Sherritt now has some cost certainty going forward as it anticipates no large unforeseen capital injections into the mine. The facility in its current configuration, Pathe said, will move towards cash flow neutrality and then into profitability.

Such operational confidence led to another bit of good news for shareholders as Sherritt boosted its dividend by 13% from 3.8¢ to 4.3¢ per quarter. The dividend is set to be paid at the end of March.

Since releasing the results on Feb. 27, Sherritt shares have fallen 7% and were trading for $5.31 in Toronto on Feb. 28 on 761,000 shares traded.