Sherritt International Corp T.S

Value investor club spring write up

[FrozenInOntario]

The author of the write up gave a few reasons why the stock could be a big winner.   The stock was trading 0.76 then versus 0.48 today.  Here they are with my assessment.

- High leverage causing fears of insolvency but a long debt maturity runway to solve the issue
Leverage going down with the debt buy back and more to come with the cobalt swap.

- Multi-year bullish thesis for core commodity facing a skeptical investor base
Thesis still unchanged and Sherrit is spitting out lots of free cash flow now

- History of management missteps, but old management replaced by a new competent management team
Still have to deal with the 2020 DSU/RSU but so far, new management has done all the right moves.

- High probability of earning its market cap in one year, taking leverage risk off the table and driving rerating
Yes sir

- Investor base limited due to jurisdiction, liquidity, small market cap concerns that ameliorate as the company rerates
Yes, but waiting for the rerate

- Multiple free options that provide valuation upside
We just had that a couple of them not included in the write up (debt buy back and cobalt swap)

So far, so good.   Financials are still messy but the picture is getting much clearer for all to see.

As to management, of course they are the risk as Friendo mentionned.   As soon as I see some signs of empire building, I am out.  Typically, cash flow increasing increase pressure for management to piss it away.   So far, they have done all the right moves. 

GLTA

[YourFriendo]

One thing I question is the purpose of buying back debt. The interest rate is actually cheap now.... con

[Ernieandbert]

1) the jr debt is certainly not cheap and 2) more importantly, both bonds have RP covenants in place so they either need to negotiate with bond holders to have those dropped/relaxed or...buy back the debt with FCF and eliminate the debt in entirety to eliminate the RP covenant.  Then they can pay a dividend or buy back stock or both.  So if you own stock, buying back the debt, at a

[FrozenInOntario]

Friendo, What do you want management to do with excess cash flow ?   They almost went under following the Ambatovy debacle.    So deleveraging is the only legitimate option. Moa expansion is kept reasonnable with pretty good bang for the bucks but from I read, you can guess that analysts still remember the ghosts of cost over runs from the past. Management while doing very well

[VerificateASAP]

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[YourFriendo]

Fair enough...a real mining company would have a plethora of brown belt / debottle necking to throw capital at instead of paying debt at interst rates that are comparible to high interest GIC. However, I would like to see them avoid selling their cobalt at discounted prices simply in order to generate cash flow to pay off debt..especially during Q1/Q2

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[Ernieandbert]

Friendo I think you are missing the point.   Although the coupon on the seniors is not exorbitantly high, they are trading at a stout  cash yield but most importantly they are extremely expensive if the co cannot buy back stock with the EV trading at 1x 2023 ebitda.  Or pay a high payout ratio dividend for that matter.   Bonds either need to be negotiated to allow that or they

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[JoJoRabbit11]

Yourfriendo is not an intelligent man Ernieandbert!

[YourFriendo]

Don't forget to pay rent on the 1st (unlike the previous 4 months) I'll bang on the floor when dinner is ready.

[YourFriendo]

No I see your point. All I'm saying is the senior debt is cheap in today's. I understand the necessity to pay it down prior divs / share but back, but as a major shareholder, I wouldn't want them forgo an opportunity (for example to stockpile cobalt) in order to pay down cheap debt.

[Albatross]

Just because in general interest rates have been going up doesn't make Sherritt's debt any less expensive. It just highlights the importance of reducing debt burden.  Once Sherritt has paid off its debt it should first look at share buybacks if share price remains below $3.00/share . Then it should look at distributions to shareholders. Long term (20 years) it should be looking into

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