Barron's - FYI
Batteries are a hot area. Any good plays?
Sobol: Sherritt International [S.Canada] is a Canadian company that is one of the largest foreign investors in Cuba. It has three businesses: oil and gas, power generation—it’s a large power producer in Cuba—and a nickel and cobalt business. It mines nickel and cobalt primarily in Cuba, and it also has a joint venture in Madagascar.
Canada has enjoyed an exceptional relationship with Cuba over many years dating back to Prime Minister Justin Trudeau’s father, Pierre, who was prime minister in the 1970s.
Cobalt has been a hot commodity.
Sobol: Cobalt is one of the key ingredients for making batteries for electrified vehicles, and the price of cobalt is up almost 250% over the past couple of years. Two-thirds of it is mined in the Democratic Republic of the Congo, in Africa, which is unstable.
There have been child-labor issues there and political instability. The government also is putting the squeeze on producers in the country by imposing higher taxes and surcharges. So Sherritt owns one of the lowest-cost nickel/cobalt mines in the world, in Cuba, and it is particularly strategic because it is outside of the Democratic Republic of the Congo. The company is a turnaround.
What happened?
Sobol: The company made a bad investment in Madagascar. It bought into a large mine that ended up having major cost overruns. It had to restructure debt, and it has restructured the joint-venture agreement in Madagascar to ring-fence liabilities. So the company now is well positioned to start generating a large amount of free cash flow from the nickel/cobalt mine. At current commodity prices, it trades at less than three times annual Ebitda.
The stock only trades in Canada?
Sobol: It trades at about 1.05 Canadian dollars [80 U.S. cents] a share. That’s about a C$420 million market cap. So it’s a small company but is really well positioned.
Part of the story on EV materials involves nickel. People do not differentiate between Class 1 nickel, which is the kind of nickel you need for EV batteries, and lower-grade nickel. Class 1 nickel inventories globally are relatively low. When you look at more-conservative estimates of what EV demand will be over time, there is a very low supply of Class 1 nickel, and that’s what Sherritt produces.
So the story at Sherritt is mostly about nickel/cobalt?
Sobol: Correct. All of the upside is a function of the nickel/cobalt business.
Given the amicable relations between Cuba and Canada, you don’t see much political risk?
Hess: That’s correct. We commissioned a risk analysis of Sherritt, and we have a high degree of comfort in this relationship.
Thank you both.
https://www.barrons.com/articles/4-stocks-to-play-the-electric-vehicle-revolution-1530303230?mod=hp_highlight_2&tesla=y