Salman Partners: Buy rating and $7.25 target for SherrittAccording to Salman Partners:
Sherritt International (S - TSX - $0.99; Target $7.25; BUY)
Suspends dividend payments and considers cutting capex
Event:
Last night, Sherritt announced that:
a. because of low nickel and oil prices, it had suspended the $0.01 per share quarterly dividend;
b. Sherritt expects to achieve financial completion at Ambatovy by the end of this month. Thus, beginning October 1, 2015, "the US$1.7 billion Ambatovy Joint Venture Financing (100% basis, balance at June 30, 2015) becomes non-recourse to all the Ambatovy partners";
c. Actions are already in progress, or are to be implemented in 2016, to cut capital spending and operating costs;
Sherritt added that "capital expenditures for 2015 were revised downward by [Cdn] $15 million to the current $195 million expected," as previously disclosed. "Capital expenditures for 2016 will be finalized along with production guidance at the end of this year ... we are targeting a reduction of 25 – 35% from the current 2015 guidance of $195 million."
Implication:
We currently expect Sherritt’s share of capex next year to be Cdn$213 million, and Cdn$187 million in 2017. We anticipate that Sherritt’s cuts in 2016 capital expenditures to around Cdn$135 million could involve backloading of costs into 2017. Thus, until we know which expenditures are being cancelled and which deferred, we retain our present, conservative outlook for Sherritt’s capex program.
To illustrate Sherritt’s sensitivity to changes in capex, if Sherritt were to reduce next year’s expenditures to Cdn$135 million with no effect on subsequent capex or cashflows from operations, that change would take our estimate of Sherritt’s Net Asset Value from Cdn$10.86/share to Cdn$11.04/share.
Recommendation:
Our valuation of Sherritt is based on estimating the Net Present Value of the company’s free cash flows. We are indifferent as to whether those free cash flows benefit shareholders directly, in the form of dividends; or indirectly, by capital gain.
Accordingly, our target price remains unchanged at Cdn$7.25/share.
We continue to recommend purchase of Sherritt’s shares, preferably coinciding with what we expect to be the bottom in nickel prices, around the end of October 2015 (see our accompanying story on “Nickel”).
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Nickel
"More than 60% of global nickel production is underwater"
Event:
This morning, nickel prices (basis: three-month contracts on the London Metal Exchange) fell 1.4% to US$4.47/lb. "More than 60% of global nickel production is underwater on a cash cost basis," reported Sherritt International (S – TSX; Cdn$1.00; BUY) last night, adding that its Ambatovy project "is proving its potential as one of the world’s largest and lowest cost integrated laterite nickel operations".
Implications:
We continue to believe that 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; the situation reported by Sherritt is likely to be one of the factors propelling nickel prices upward.