Sherritt International Corp T.S

RE:Td Upgrade Nov 9 $1.10 - sig increase NAV from power bus

[Maxmoe]

Pretty gutsy report considering the amount of assets TD has in the USA. I remember the dark, bad old days, when Ian Delaney, his entire family, his executive team, were all on the black list for entry into Florida. And he and his lovely wife Kiki owned a condo in Florida at the time. If you were stupid enough to tell the nazi at the border you worked for Sherritt, owned shares in sherritt, or could spell sherritt, they'd turn you back.  Crazyass America

rkhosla wrote:

Sherritt International Corp.

(S-T) C$0.45

Extending Asset Lives Beyond 2040

Event

We have updated our model to reflect Q3/22 results and included a production expansion at the Moa nickel operations.

Impact: NEUTRAL

Management expects to demonstrate a Life of Mine plan for Moa, which will extend beyond 2040. We are currently modelling a mine life out to 2044. Sherritt expects to release an updated NI 43-101 technical report for Moa by the end of Q1/23.

 

Sherritt is moving forward with the next phase of its Moa JV expansion plan at a capital cost of US$50 million (100% basis). The scope of the expansion plan has been narrowed to the most critical components. Sherritt sees an opportunity to focus its strategy on increasing production of intermediary products that will enable it to fully utilize existing capacity at the refinery and also consider direct sales of intermediate product into the EV battery supply chain. An expansion of the Ft. Saskatchewan refinery has been put on hold.

 

Including the previously approved Slurry Preparation Plant (SPP), total capex for the expansion will be ~US$77 million (100% basis). The SPP will be completed in early 2024 and the second phase completed in late 2024. The full expansion plan will increase mixed sulphide production (MSP) by ~20%, or ~6,500 tonnes of contained metal. Adjusting for the expansion and inflationary adjustments to operating costs, our NPV-8% estimate for Moa has decreased slightly to $1,080mm (or $2.72/share) from $1,117mm ($2.81/share).

20-year extension for Sherritt's small but reliable power business. Cuba's Executive Council of Ministers approved a 20-year extension of Energas' power generation contract to March 2043. As a reminder, the previous contract was set to expire in 2023, at which time the power-generation assets would have reverted back to the Cuban government. In our view, the power business is not very large in scale (average three-year revenue of ~$37mm), but in the past, it provided Sherritt with a stable cash-flow base for its larger but more cyclical metals business. Our NAV-8% for the power business has increased to C$181mm (or $0.46/share) from C$25mm (or $0.06/share).

TD Investment Conclusion
 

We are maintaining our SPECULATIVE BUY recommendation. Our target price has increased to $1.10 (from $1.00).

Details

Sherritt reported Q3/22 adjusted EPS of $0.03. Q3/22 Adjusted EBITDA was $37.4 million.
 

Sherritt’s share of finished nickel and cobalt production at the Moa JV were 4,443t and 419t, respectively (TD: 4,125t and 431t, respectively). Reported cash cost for the quarter was US$6.76/lb of nickel (TD: US$3.70/lb).
 

Higher cash operating costs were affected by lower cobalt sales (relative to production) — management indicated that cobalt sales were negatively affected by a contraction in the consumer electronics sector compared with 2021 contributing to reduced lithium cobalt oxide demand. Higher input costs also affected operating costs. Nickel cash operating cost guidance for 2022 has been increased to US$4.50–US$5.00/lb (from US$4.00–US$4.50/lb previously).
 

Sherritt has reduced its 2022 growth capex guidance for the Moa JV to $10 million from $19 million due to the deferral of the spending on the next phase of the Moa expansion into 2023.

On October 13, Sherritt announced a comprehensive repayment agreement with its Cuban partners that should see $361.9 million owed to Sherritt by two Cuban entities repaid over a five-year period starting in 2023. The agreement addresses a long-standing source of frustration for Sherritt investors, given the lack of progress that has been made on repaying the overdue funds over many years. The five-year repayment time frame lines up well with maturities on Sherritt’s existing debt facilities, including its $317 million 8.5% notes due in 2026 and the $69 million 10.75% PIK notes due in 2029.

Under the terms of the agreements (the cobalt swap), General Nickel Company (GNC), Sherritt’s Moa JV partner, has agreed to assume certain liabilities of amounts owed to Sherritt by Union Cubapetroleo (CUPET) and Energas S.A. (Energas) in order to fully repay outstanding amounts over a five-year period. The outstanding receivable amounts owed to Sherritt from Energas and CUPET total ~$361.9 million.

Under the cobalt swap, over the five years beginning January 1, 2023, the Moa JV expects to distribute a maximum of 2,082 tonnes, or approximately 60% of current production (100% basis) of finished cobalt annually to the JV partners. GNC will redirect its 50% share of the total Moa JV dividends, up to 1,041 tonnes of finished cobalt per year, to Sherritt as repayment towards the outstanding receivables, provided that the total cobalt volume redirected has a value of at least US$57 million (~US$25.00/lb of cobalt).

Outlook
 

We have updated our model for Q3/22 results and revised our estimates for Moa and the Power business to reflect the expansion project and the operating contract extension. Our NAV-8% has increased to $2.02/share (from $1.87/share previously).

Valuation

Sherritt is currently trading at a P/NAV multiple of ~0.22x, compared with its small-cap producer group average of ~0.57x.

Justification of Target Price

Our target price is based on a 0.55x NAV-8% multiple to our net asset value estimate.  Our target multiple reflects higher political risks associated with the preponderance of Sherritt’s assets being located in Cuba.

Key Risks to Target Price

The main risks facing the company include forecast, financial, technical, and political

risks. Among other things, risks include those related to nickel and cobalt prices;

production volumes; input costs; the governing fiscal and legislative regimes; the timing

of key developments; market conditions; capital and operating costs; foreign exchange

rates; resources and reserves; operating parameters; permitting; environment; and

staffing and key personnel retention. Sherritt’s operations and assets could be affected

by COVID-19 travel, social-distancing, and other restrictions.