NB Daily Bulletin- july 30Sherritt International Corporation
Q2/21 Shows Cobalt Tailwinds Offset Input Price
Pressures
S (TSX) STOCK RATING TARGET EST. TOTAL RETURN
C$0.50 Sector Perform
(Unchanged)
C$0.60
(Unchanged)
20.0%
Q2/21 Financial Results
This note is a follow-up to our first look at Sherritt's Q2/21 financial and
operational release (see NBF July 29) with additional commentary and
updated valuation. Adjusted EBITDA of $18mln (NBF $15mln) was lower q/
q, though topped NBF estimates supported by production of 9.3mln (highest
since Q1/19) and NDCC of US$4.58/lb (2021G of US$4.25-4.75/lb). S' balance
sheet remains adequate with cash & equiv of $153.8mln and long-dated debt
maturities ($358mln maturing 2026 and $75mln in 2029).
Conference Call Highlights
The conference call highlighted the following: (1) the ongoing political
situation in Cuba (protests) are not impacting Sherritt's operations or the
JV arrangement with its Cuban partners; and (2) new CEO Leon Binedell in
place (since June 1) is looking to introduce some strategy changes including
possible debottlenecking of Moa (with hopes to increase production levels
5-10%), and over a longer timeframe, S may look to explore brownfield
expansion opportunities.
Model Updates
We updated our model to reflect reported Q2/21 operational and financial
results. We took into account commentary on some cost headwinds S is
facing, including higher input costs particularly fuel and natural gas, with
some offset from savings from the unification of currency in Cuba and cobalt
prices that remain elevated. With this, we have raised our FY21 NDCC
estimate to US$4.33/lb (was US$4.18/lb). S reaffirmed the 11-day shutdown
at the Fort Saskatchewan refinery scheduled in August (11 days, happens
every ~2 years) though we previously already incorporated this into our
model. Overall, following model updates our NAVPS fell -1.2% and is now
$0.77 (was $0.78).
Maintaining Sector Perform and $0.60 target. Following model updates, our
NAVPS is now $0.77 (was $0.78). Our target is based on 0.75x NAVPS. S is
trading at a P/NAV of 0.65x
Investment Summary
Sherritt is a diversified Canadian-based resource company. Sherritt’s main business units include the
production and sale of nickel, cobalt, oil & gas and electrical power. The company operates in Cuba and
Canada. Existing operations provide S with a base of operating cash flow.
Near pure-play Ni/Co producer with long-life asset. Sherritt’s value proposition is underpinned by its
ownership in the long-life, 37,000 tpd Moa JV, Cuba (50%), which comprises of ~70% of our asset NAV
estimate. Notably, the Moa mine produces LME-grade Ni and Co in the briquette form preferred by EV
battery manufacturers. With this, Sherritt is a near pure-play Ni/Co investment offering exposure to upside
metal pricing on the order of ~+$35 million EBITDA for each US$1.00/lb increase in nickel prices.
Maintaining Sector Perform Rating and $0.60 target. Target based on 0.75x NAVPS (unch).
Conference Call Highlights
· Increasing MRP costs. S is seeing inflationary pressures on its Mining, Processing and Refining (MRP)
costs, including Increase driven by: higher fuel, sulphur and natural gas prices. Q2/21 also saw some
one-time impacts related to the purchase of sulphuric acid for the acid plant maintenance
shutdown, with some offset from lower labour costs driven by Cuba’s currency unification.
· Contract benefit expenses in H2/21. S noted some impact from contract benefit and severance in
Q2/21 ($2.4mln) and expects additional costs in H2/21 (~$3.7mln)
· Opportunities at Moa. New CEO mentioned looking into opportunities to expand production at Moa;
in the near term, the focus will remain on debottlenecking strategies (with hopes to increase
production 5-10%) and over the longer term, Sherritt plans to look into brownfield opportunities.
· Ongoing political tensions in Cuba not impacting Sherritt. S noted that the protests in Cuba are
not impacting Moa’s operations or Sherritt’s agreements with its JV partners.