Sample ModelHere is the model I was using in 2021. I haven't really updated it but you can simply plug in more recent estimates for NDCC, for capex, for cash taxes, and for royalty payments and get a more up to date estimate. Thats what I do but I'm sorry I don't have time to do that right now..
Rough Estimate of SCN Nickel Operations Contribution to Net Free Corporate Cash Flow at Current and Higher Nickel Prices:
This has to be a rough estimate for the following reasons: 1. I’m using the midpoint NDCC guidance for the year. With current cobalt prices higher this will have a positive impact (reduce NDCC) but also other input prices will have risen and have had a negative impact (increase NDCC). Net net it should have a positive influence but we don’t know by how much exactly. 2. Taxes paid in Cuba and Alberta, and the royalty payments paid to the Cuban government are based on income and market value of mixed sulphides respectively. Because they are based on percentages, as nickel/cobalt prices rises these numbers will also expand. I’ve used 2020 numbers but these will understate these costs as commodity prices rise and overestimate cash flow at higher nickel prices in the At Higher Nickel/Cobalt Prices section below. None the less, the following gives a an approximate framework for looking at how the nickel operation funds the business.
Mid point of production guidance is 33,000 tonnes. Sherritt’s share is 16,500 tonnes or 16,500 X 2204.62* = 36,376,230 pounds
Nickel at $8.50 – 4.50 NDCC (midpoint of 2021 guidance) = $4.00 cash flow
36,376,230 pounds X $4.00 = $145,504,920 USD cash flow
145,504,920 X 1.26 (current fx) = $183,336,199 CDN cash flow
- $57,000,000 capex (2021 guidance)
- $30,400,000 approx cash interest costs ($357.5m 2026 debs at 8.5%)
- $22,000,000 corporate costs (elevated to $24m in 2020 but expected to revert)
- $9,000,000 technology division costs (perhaps small amount of double counting here with corporate costs)
- $ 8,500,000 cash taxes (2020 number for Cuba and Alberta at 23% of earnings)
- $ 12,000,000 royalty to Cubans (2020 number at 5% of the market value of mixed sulphide production)
= +$44,436,199 net cash flow / approx. 400,000,000 s/o
= 11 cents per share net cash flow
At Higher Nickel/Cobalt Prices:
At $10 nickel the net cash flow number (all else being the same) is +$113,187,274 or 28 cents per share
At $12 nickel the net cash flow number (all else being the same) is +$204,855,374 or 51 cents per share
At $15 nickel the net cash flow number (all else being the same) is +$342,357,523 or 86 cents per share
Notes:
Consider what multiple to be assigned to this cash flow stream. I’m inclined to use 10X for simplicity, because of where interest rates are, and because investors are likely to bump their multiple higher as the cycle matures, as the price rises and as they anticipate further price increases.
Incremental value drivers include: Cuban receivables recovery , technology division commercialization(s) and/or monetization(s) (including stock listing), and power division.
*metric tonnes