Why did I invest in Sherritt ?Always good to check one’s investment thesis.
I bought into Sherritt starting last year because I believed this was a cheap stock with a potential 10 bagger as it used excess cash flow to delever and return cash to shareholders eventually. My outlook for nickel was positive and their expansion plan at $US 13,200 per ton with a 20% increase in production was a nice kicker. I also believed the assets/Cuban connection offered enough downside protection in case something went wrong.
Time to check the story. Management has delivered with the Cobalt swap and the debt repayment. They also improved pay practices by getting ride of part of that DSU guaranteed gravy train. Nickel and cobalt price sucks currently. Nothing that management can do about it. Cobalt swap will probably not generate any cash at current price BUT any amount not realized is pushed into the future. So, thank you Binedell for this.
Will price go up in the future ? I will venture Yes. It is after all a cyclical business. The cure to low price is low prices. The amplitude of the swings is anybody’s guess and we can talk EV, Indonesia, etc a long time. But prices will pick up again, this is the nature of the game. When ? Again, place your bets. But who knows, maybe this expansion project will be hailed as perfectly timed when it comes into production. Now, the risk : can Sherritt go bankrupt, like it appears the Caledonian companies are going or already in (talk about capacity getting out of market). My bet is no. They survived way worst off when they settled the Ambatovy debacle. And this refinery has some pretty good value with or even without Cuba with the reshoring taking place. Try building a new one for less than X billion (put whatever number you want here). And as the bond prices are holding their value, I would venture that bond investors are not sniffing a bankruptcy also.
So, still do not believe I can loose much. And I still have a pretty good upside.
I did notice that the expansion plan was compared to Ambatovy. This is wrong thinking. Ambatovy had a $4 Billion price tag and part of a former CEO dream to expand his empire. Current expansion is peanuts compared to this and way less risky than a greenfield project. If Sherritt ever diversify a la Ambatovy, I am out. In the meantime, hanging tight.
BTW, see all kind of recession talk and gloom and doom projections. Gee, I should sell all my stocks and buy some ammo and a cabin up north to ride out the coming big wipe out.
GLTA