All else equal, we expect shares to trade in line with peers tomorrow as the company pre-released production results and 2023 guidance. Elevated nickel prices continue to support strong cash flow generation while the company's by-products help offset inflationary pressures on operating costs. The feasibility study for expansion of the Moa processing plant has been submitted to Cuban authorities and approval is anticipated before the end of Q1/23. We continue to model expanded production rates by mid-2026.
Q4/22 Financial Results
• Revenue of $48.6 mln was below NBF Estimates of $55 mln but above Consensus of $44 mln driven by lower cobalt revenues due to timing of sales and lower volumes given continued near-term softness in the market.
• Adjusted EBITDA of $19.7 mln was below NBF Estimates/Consensus of $64/67 mln as Sherritt recognized a $12.8 mln environmental rehabilitation obligation expense adjustment on legacy Oil and Gas Spanish assets and a $10.7 mln share-based compensation expense.
• Adjusted EPS of $(0.02) compared to NBF/Consensus Estimates of $0.04/$0.07.
• Sherritt ended the year with $123.9 mln in cash (of which $20.3 mln was held in Canada) and $350.9 mln of long-term debt (ND/ EBITDA of 1.04x). Our Base Case assumptions sees Sherritt in a net cash position by end of 2023.
Sherritt received distributions from the Moa JV of $57.2 mln which resulted in H2/22 distributions exceeding those received in H1/22.
In Q4/22, the company repurchased ~$90 mln in principal of its second lien secured notes and junior notes at a discounted value of $80 mln.
Operating Results
• Q4/22 consolidated production results, including 4,112 t of finished nickel production were pre-released in January.
• Q4/22 Net direct cash costs (NDCC) at the Moa JV was US$7.00/lb slightly ahead of NBF Estimates at US$6.93/lb and up from US $3.60/lb in Q4/21 due to higher input commodity costs, including a 55% increase in global sulphur prices, 133% increase in diesel prices and a 15% increase in fuel oil prices, alongside lower cobalt by-product credit, partly offset by higher net fertilizer byproduct credit.
• Q4/22 energy production cash costs of $21.41/MWh were below NBF Estimates at $28.00/MWh.
2023 Guidance Reiterated
• Nickel production guidance remains 30,000 – 32,000 tonnes (NBF: 31,678 t - 100% basis), cobalt production of 3,100 – 3,400 tonnes (NBF: 3,323 t) and power production 575 – 625 GWh (NBF: 592 GWh).
• Operating cost guidance remains US$5.00 - US$5.50/lb of finished nickel sold (NBF:US$5.50/lb), with capex of $94.4 mln (NBF: $95.0 mln)
Moa Expansion Plans
• Sherritt expects 2023 will be a transition year for the Moa JV with a focus to ensure the expansion plan remains on time and on budget. The company expects that NI 43-101 report will be released by Q1/23 which will show the analysis for the economic Cut-Off Grade and Life of Mine, in which the current LOM is expected to extend to beyond 2040 (in line with NBF Estimates). This transition phase of mine expansion will include accessing new mining areas, bringing the new slurry preparation plant online in 2024.
• Sherritt has highlighted that construction of the slurry plant is progressing on schedule with civil construction 100% complete and all contracts for supply of materials and services awarded. Structural steel pre-fabrication is ongoing with 65% erected and field assembly of major equipment has commenced. The plant is expected to be completed in early 2024 and is anticipated to deliver several benefits including reduced ore haulage distances and lower carbon intensity from mining.
Our Sector Perform rating accounts for Sherritt's targeted exposure to nickel and cobalt improving the outlook for cash distributions from the Moa JV in the near term offset by the company's ongoing debt commitments and need for further clarity on anticipated growth initiatives at Moa. Sherritt is currently trading at 0.36x NAV compared to
peers at 0.93x.
Our $0.80 target is based on a P/NAV multiple of 0.65x.
We will formally incorporate Q4/22 financial results into our model and provide additional details following Sherritt’s Q4/22 Conference Call on Thursday, February 9, 2023 at 10:00 a.m. EDT (888 886-7786). Passcode: 06165116
Figure 1: Comparison of Q4/22 Results with NBF Estimates