Sherritt International Corporation (SHERF) CEO David Pathe on Q3 2020 Results – Earnings Call Transcript

Sherritt International Corporation (OTCPK:SHERF) Q3 2020 Earnings Conference Call November 5, 2020 9:00 AM ET

Company Participants

Joe Racanelli – IR

David Pathe – CEO

Andrew Snowden – CFO

Steve Wood – COO

Conference Call Participants

Orest Wowkodaw – Scotiabank

Don DeMarco – National Bank

Greg Barnes – TD Securities

Tony Robson – Global Mining Research


Good morning, ladies and gentlemen. Thank you for standing by and welcome to the Sherritt International Third Quarter 2020 Results Conference Call and Webcast. At this time, all participants are in a listen-only mode. Following management presentation, we will conduct a question-and-answer session and instructions will be given at that time [Operator Instructions].

I would like to remind everyone that this conference call is being recorded today, Thursday, November 5, 2020, at 9:00 a.m. Eastern Time. I would now like to turn the presentation over to Joe Racanelli, Director of Investor Relations and Communication. Please go ahead.

Joe Racanelli

Good morning, everyone and thank you for joining us today. Before we begin, I’d like to remind everyone that we will be following a presentation that is available from our website at We will be making forward-looking statements and the risks associated with these statements are detailed in our presentation. In addition, copies of our Q3 MD&A financial statements are available on our website as well as from SEDAR.

With me, as customary, are David Pathe, Sherritt’s CEO; Andrew Snowden, our CFO; and Steve Wood, our Chief Operating Officer. They will be reviewing our financial and operational performance for Q3 in a couple of minutes and following management’s discussion, we will be opening up the call to questions. We will also be available for any follow-up discussions after today’s call. Please go ahead. David.

David Pathe

All right. Well, thanks, Joe. And let me say, thanks, everybody, for joining us as well this morning. It’s another busy week with a lot of companies coming out with earnings right now and lot of attention is still being paid to election results coming out from south of the border, so I appreciate you taking the time today. Q3 was a busy quarter for us as well.

A lot of moving parts, and so that brings up a few things that we want to spend a bit of time talking about this morning, see a few highlights there on slide 4, where I’m going to start before letting Steve and Andrew expand on a few points. But highlights, really, by far the biggest event of the quarter was the culmination and closing of our balance sheet initiative and, and so you would have seen that at the end of August. That closing was really the culmination now just a recovery, the years worth of work on our particular transaction but also probably 6 years worth of work and we trying to protect share from this rather than going to about to be presented to our entire capital structure.

The transaction itself eliminated $300 million worth of debt. The eliminated maturities in ’21, ’23 and ’25 and replace them with debt maturities in 2026 and 2029, thereby giving us a lot more runway on our debt maturity schedule, reduced our cash interest expense by about a third, and we completed our exit from about and all the associated risks that presented to us. And all of that it was achieved with no dilution to the equity.

So it’s a transaction that received very highs apart from all of our stakeholders and one we were very pleased to get done. But also simplified our financial statements and Andrew will talk a bit about a few of the impacts there in a couple of minutes. It is also a strong quarter from a production perspective, we hit our production targets for the quarter. So was the continuing effectiveness of our COVID response, which was an enormous part of a lot of people and continues to be, but there has been very effective.

And once again we can be on track to hit our guidance for the year. Thanks to all those efforts, production wasn’t the lower in Q3 compared to Q2, as we had talked about last quarter, we did move some scheduled maintenance as part of our global planning from the second quarter to the third quarter which moves our production ramp that resolved as we were expecting. But a good quarter from a commodity price perspective as well, and I’ll talk a bit more about nickel and cobalt markets are normal, but we did see both nickel prices and cobalt prices up in the quarter.

Strengthening demand for stainless steel production in China drove that as did greater interest and focus on the potential for nickel and batteries. As I say, I’ll talk about that in a few minutes. We’ll also talk a bit about Cuban collections in our ongoing efforts to work with our Cuban partners, due to COVID pandemic and the impact of that is having on Cuban and their ability to meet their obligations to us and our receivables agreements and we did see collections in the quarter and some success in our conversations between the subsequent quarter end, the dividend was declared in the third quarter.

We reached agreement that all of that would be redirected to us, not just our share but the Cuban share as well, according to aggregate of $50 million US coming to us, which will help our cash flow and help produce the overdue receivables now. That’s a quick run through just some of the highlights from the quarter. I’m going to have Steve now talk about a few of the operating results and highlights before Andrew gets into some finances and I come back and talk about outlook a little bit towards it. Steve, are you here?

Steve Wood

Yes, I’m here. Thanks, Dave. Good morning, everyone. Before we move on to the next slide that, I’d like to note that we’ve devoted considerable efforts over the past couple of years to fostering an environment where best practices for employee health and safety year followed closely. This has resulted in Sherritt regularly ranking in the lowest-quartile of our benchmark peer set data and we continue this trend in Q3. Overall, our total recordable injury frequency rate of 0.12 and lost-time injury frequency rate of 0.07. Both of which were improvements from our performance in Q2 of 2020.

As well, we continue to take necessary precautions to deal with COVID-19 and we continue to follow the experts’ advice to prevent workplace transmission of COVID-19 and to date, we’ve been successful in doing so. I’ll now move on to the next slide and building on that theme, Q3 saw the release of our 2019 sustainability report, in reading the report, you will see that we’ve made considerable progress on a number of fronts despite the liquidity restraints or constraints that we’ve been facing over the last several years.

Most notably, as you’ll see from that Slide 6, we’ve maintained greenhouse emissions in 2019 comparable to 2018 despite the increases in finished nickel and cobalt production of 8% and 4% respectively. We achieved our peer leading safety performance over a three-year period and during this time, our lost-time injury frequency rate decreased by 76% and we generated more than $500 million in economic benefits in economic spin off for our host communities where Sherritt maintains operations, including Canada and Cuba.

Turning now to Slide 7, to-date COVID-19 has had limited impact on our production activities at each of our operations, including Moa and our refinery in Fort Saskatchewan as well as power and oil production efforts. The only real impact that COVID-19 has had, was to delay the annual maintenance shutdown by several weeks and then pushed it from Q2 into Q3 due mainly to contractor availability.

This rescheduling coupled with four-day extension of the plant shutdown contributed to a drop in finished nickel and cobalt production, but as you can see from Slide 7, COVID-19 had no impact to mixed sulfides production, and on a 50% basis Moa produced 4671 tonnes of mixed sulfides in Q3 and that’s up 12% from last year. The improvement was largely due to normalized availability of diesel fuel supply relative to Q3 of last year when we were forced to implement diesel preservation measures on account of sanctions imposed against Venezuela, Cuba’s primary source of fuel supply.

Turning to finished production, we produced 3750 tonnes of nickel and 409 tonnes of cobalt in Q3 of this year. These totals represented declines of 9% and 6% respectively over the same period of last year, despite the extended duration of the maintenance shutdown cost for this year’s plant shutdown were consistent with last year’s. The limited impact of COVID-19 and operations is due in large part to the additional health and safety measures that we implemented starting in early March. These measures included practicing social distancing, increased use of hand sanitizers, workplace modifications and additional personal protective equipment. Our employee health and safety are paramount this year, and will take all the necessary measures to protect our employees. Measures implemented to date will continue to be in effect for the foreseeable future.

Now I’ll turn over to Slide number 8 regarding the Moa JV, MPR or our mining processing and refining costs declined by 20% in Q3 relative to last year. The decline was driven by a combination of factors, including lower input cost for sulfur and fuel as well as by expense savings generated by austerity measures we implemented earlier in the year. These austerity measures were implemented in the wake of the uncertainty caused by COVID-19 and DCC in Q3 was $4.04 U.S. per pound and that represented an improvement of 8% from last year and that’s despite lower nickel sales volume and lower realized prices for nickel and cobalt of 8 and 5% respectively. The lower end ECC reflected the decline in MPR costs, lower third party feed costs, and the 25% increase in cobalt byproduct credits.

Next, I’ll turn it over to our oil and gas operations on Slide 9. We produced 2886 barrels of oil per day in Cuba on a gross working interest basis in the quarter. This total marked the decline of about 29% from last year when we produced 4060 barrels of oil per day. The decrease was due to natural reservoir declines and as is to be expected the decrease in the number of barrels produced had a negative impact on our unit cost. Our unit costs for the quarter were $30.93 a barrel, and that’s up 45% from 2140 per barrel for Q3 of last year. The oil and gas business remains on track to achieve its production and unit cost targets for 2020, however.

And now I’ll turn over to Slide 10 regarding our power division. We produced 152 gigawatts of electricity in Q3 and that’s down 15% from last year when we produced 180 gigawatts in the same period. The decrease was due to the reduced availability of gas supply units operating costs in Q3, 2020, were $14.63 and that’s up 1% from $14.42 for last year. This increase was due to the timing of maintenance activities and some lower production and based on the performance through to the end of September, the power business is on track to achieve its 2020 guidance for production and planned capital spend. Unit cost, however, have been lowered to $20 to $21.50 per megawatt hour based on performance year to date and our anticipated power production in Q4.

Now I will turn to block 10 on slide 11 in Q3, Sherritt completed the analysis of on a second set of samples supplementing the preliminary testing that we did back in the second quarter. Unfortunately, the latest analysis confirm that the water produced during the test period, it’s from the loss circulation zone, those of you who followed our Block 10 developments will remember some of the challenges we experience in this zone and it’s located at a depth of approximately 5,300 meters and above the target oil reservoir.

The analysis also confirm that no viable technical solution to prevent the further flow of water into the existing well as possible. While we still believe that the Block 10 reservoir contains oil the existing well cannot be used for future production purposes. We are currently reviewing our options with respect to Block 10 including seeking an earn in partner and at this time we’re not contemplating any further investments in Block 10 without first securing an earn in partner.

That concludes my review of our operational results. I’ll now turn it over to Andrew Snowden, our CFO, who will review our Q3 financial results in more detail.

Andrew Snowden

Thanks, Steve, and good morning, everyone. I’ll start my discussion with a review of our cash position and liquidity through the quarter and as you can see here on Slide 13, our consolidated cash position at September 30 declined by around $7 million through the quarter and this was mainly due to costs associated with our balance sheet initiative which included the $16 million in early consent payments, which were made and that hold us during the quarter.

As a reminder, the, our consolidated cash position you see on this chart does include cash held by any gas in Cuba and so that’s the 83.1 you see in blue here and that amount was relatively flat through the quarter compared to the June 30 balance and these costs were partially offset though by the positive working capital change of around 22 million that you see on the slide and that’s due to timing of collections on ammonia sales and increase in accounts payable related to our shutdown activities, which was a scheduled maintenance work at the Fort Site that was referred to earlier and also higher Energas collections during the quarter.

And despite these higher Energas collections in Q3 and the collections was still below expectations and as Dave mentioned earlier, COVID-19 and the impact of U.S. sanctions have limited Cuba’s access to foreign currency and so those collections are not where we, we hope that would be. We are continuing to work with our Cuban partners to resolve the overdue amounts and they have been working hard to flow with what they can and the recent Moa Joint Venture dividend redirection again that Dave referred to earlier and you would have seen in our press release, as an example of that.

And in that example, really a 100% of the $15 million of dividends that would declared by the Moa JV in Q3, we’re all paid to Sherritt. I mean, so in addition to share receiving at 50% share of the dividends, so what would have been $7.5 million or CAD10 million, general nickel company, all Moa Joint Venture partner redirected its share of dividends to Sherritt and to be applied against amounts owed to us for MagneGas.

I do also want to point out of this cash, which was $16 million or CAD20 million what distributed after the quarter end. And so that’s not included in the cash position you see on this slide and that will be that we’re going to roll into our Q4 cash position. This redirection did involve a series of discussions between Sherritt and all Cuban partner and we’ve made in accordance with the June 2019 overdue receivable agreement that we’ve talked to in the past. Given where nickel and cobalt prices have been now for the past couple of months, we do anticipate receiving further dividends through the course of Q4. However, that it would be too premature at this point to speculate on whether will also be able to get dividend redirection from our Cuban partner and for those further dividends in Q4, but we’ll continue to have those discussions with our partners.

Next, I’d like to spend a couple of minutes just walking through a number of the one-off accounting impact you will have seen in our Q3 results that summarize here on Slide 14. The most significant changes in Q3 really relate to our balance sheet initiative and that’s impacted both our balance sheets and also our Q3 earnings during the quarter.

Firstly, our existing $580 million of debenture debt that were maturing in 2021, ’23 and ’25 were exchanged for forward of 30 million of new second lien and junior notes maturing in 2026 and ’29 and this exchange resulted in a significant reduction in all debt and thereby a recognition of $143 million gain in all our Q3 income statement.

In addition, the exchange of our 12% ownership interest in the impact of the joint venture for the $145 million we owe to Sumitomo and Kores gave rise to a gain on disposition of about $260 million. That gain represents $145 million liability towards the given being greater than the assets transferred and also a $130 million of unrealized foreign exchange gains, that’s under the accounting rules where we classified from accumulated other comprehensive income. The operating results from Ambatovy 2020 and 2019 were reclassified within our income statement and the presented as discontinued operation for accounting purposes, so there has been a, have noise in our Q3 income statement as a result of this transaction.

In addition, as Steve mentioned earlier with the data we got on Block 10 and we did have a write-down on the assets and capital spends that related to Block 10 and were held in our balance sheet, until we are able to secure [indiscernible] partner, as Steve mentioned, we will not be making any further investments into Block 10, but you will see that there is an impairment of around $115 million in our Q3 results.

Finally, we along with our Cuban partner converted the more expansion loans into shares. Moa Joint Venture’s capital structure, you will see this summarized on the top right of Slide 14 and this agreement resulted in a decrease of our expansion on receivable balance, which was $274 million, and equivalent increase in our investment in the Moa JV. Both shareholders did have the same value of loan into the joint venture and both shareholders do continue to hold a 50% interest in the business that have no change in the equity ownership in any way, shape or form.

But because of that simplified capital structure now will result in all distributions from the Moa JV being in the form of dividends going forward rather than historically what some of those distributions have been repayments against the Moa expansion loan. Finally, I want to take a few moments to review our new long-term debt obligations with you, and as you can see on the next slide here to Slide 15, Sherritt now has no debt maturities for the next six years with our next maturity coming up in November 2026, when the $358 million in second lien notes the due, these notes pay a semi-annually interest of October and April of each year in the annual interest rates is 8.5% and in fact, we actually made our first interest payment last Friday and for the stub period from the issuance date which was August 31 to October 31. That was a $5 million payment we made just last Friday.

And in addition to the secondly notes, there was also the $75 million in junior notes, which were offered as additional consideration to our debt holders and these notes pay interest of 10.75% annually, twice a year to those — that’s in January and July of each year and Sherritt have the option to pay that in cash or — I should point out over the default option for that interest is to be picked rather than cash payments, and that means that the additional junior notes will be issued in lieu of cash interest payment and that will resettle that maturity of the instruments in August of 2029.

Finally, I should just point out at the close of the transaction resulted in the reclassification of our tax obligations back to long-term liabilities and you’ll recall that many of those were classified as current last quarter due to some defaults which were in place, but those defaults were cured as part of our debts initiative and so all of our debt is now back classified of long-term — I mean, you’ll see that as a key change in our balance sheet as well.

So that concludes my remarks, I’ll pass the call back to Dave for his final comments.

David Pathe

Okay. I’m just a few things I want to touch on a little bit for you before we take your questions. The first is the U.S. elections given the impacts of U.S. policy towards Cuba — as on Cuba and consequently on us in any number of ways, as we’ve talked about over the last few years and particularly with the ramping up with that over the last few years. We have been quite a number of questions of what the US elections mean for us, and here we sit 36 hours after election night still with no clear winner.

A couple of things I can’t say is that first of all, we have never made business decisions predicated on any assumption of what’s going to happen in the U.S. or U.S. policy towards Cuba and that has continued to be through this — this has been in the last few years and then leading up to this election. Over the course of the election, Joe Biden did make some comments about his desire over time to return to more of the Obama-era policies, U.S. policies towards Cuba and that of course may have costed some boats in Miami, Tuesday night, but we think that there is a possibility seeing that unfold over time so there is impacted by the administration that have a lot of priorities out of the gate, but that has been more stated policy intention that would be positive for Cuba implants going to be positive for us.

Similarly, as we’ve talked about a number of times, the Trump’s administration has had an increase in the aggressive policy towards Cuba, we’ve seen our sanctions wrapping up in the number of rounds of increases over the last few years, we have always point out business of that is the reality. I know the Cubans have run their business on the assumption that, that is not going to run. They’re reclining on the assumption that’s not going to change in time, so they’re prepared to carry on in that circumstance. And as you can imagine, they are keen observers of U.S. politics and we’ll be watching over election since closely only one and we’ll see in the coming hopefully days or coming days a week, how that ultimately plays out.

I also wanted to talk a little bit more about that nickel and cobalt prices I mentioned off the top, it was a good quarter for both and you can see on the graph on page 18 that we did see both move up nicely and in the quarter and we’re seeing the benefits of that in some increasing and dividends out of the more joint venture in the third quarter and into the fourth quarter. Since the quarter ended, those prices have come off a little bit, but largely sustained and that is expected to continue at least in the very near term here through this quarter and into the year.

There is some expectation and then certainly uncertainty with COVID as we move on to outlook a bit in the next slide and, some softness in some industries that are stainless steel consumers, but we will see some softness in lacking in demand in the next year and that could lead to some surfaces and some softness in volatility in the nickel price, we are continuing to launching that we’re still having seeing no trouble actually selling material, but there is some softness in the demand generally and some of the recent drop in prices has driven on. I’m not just strength of stainless steel market in China, but speculation about what batteries ago and given some high-profile events which depends and some high profile announcements in Canada of automakers making new investments into the electric vehicles.

So we continue to believe that even if there is some volatility and softness through the course of next year is depending on how they all COVID pandemic plays out and the extension impact of the second wave such that the underlying story of nickel is compelling as evidence that will move into electrification transportation that’s still expected that in the nickel supply on, 40% of nickel supply will go to electric vehicles and batteries by 2040, up from single-digit percentages today and that’s still a fundamental shift in the nickel market that is coming.

We did mention our press releases and some of you may have seen that given that expected volatility next year in particular and the impact of that has on us our cash flows and the impact that it’s having in our ability to predict cash flows out of Cuba next year, we did take advantage of the recent run-up in nickel prices to some support in for our cash flows in 2021. Historically, we did not, we are quite deliberately not undertaking hedging transactions with respect to nickel price in order to preserve the market exposure to the nickel price that, that shareholders look to our score, but because there was an opportunity where the nickel prices worth for us to lock in some floors on a synthetic basis in the cash-settle, there is no physical settlement here, but guaranteeing as a nickel price of $650 on 25% of our share production through next year. It does give us some certainty and predictability against the downside risk to our cash flow distributions from the Moa Joint Venture in the event that we do see some downside volatility of the nickel price over the course of next year.

We went quite deliberately and do not count the upside, you’ve seen other companies put in place not just [indiscernible] as well as cap stuff as part of their hedging strategy. We believe that we chose not to do that given the theme of the electric vehicles, I still firmly believe that there is an inflection point coming in the nickel market here that is difficult to predict the timing of that — we did not want to be on the long side of that with respect to in the hedging instrument. And so this opportunity came along with the relative strength in nickel prices in the last few weeks. I gave us the opportunity to give us some certainty in our cash flow for next year and preserves the upside potential in the nickel market.

As you know, when you’ve heard us say in the past, every dollar in the nickel price is worth about $50 million [ph] a year to us in the cash flow and we were keen to preserve that upside leverage in the nickel price. Longer term, now that we are through our debt restructuring, which are going to have been the primary focus of the company, not just in the last year for the past five, six, seven years as I mentioned off the top. I think we will be looking to do is now bring greater focus to our technologists, business and the research and development and innovation that goes on there.

There are a number of projects and opportunities that we are working on using the expertise that we’ve worked of over the last 50 or 60 years, making us a world leader in hydrometallurgy and process or process and saving development to find new ways of processing, particularly nickel and cobalt is lower costs, lower capital intensity and make processes more environmental-friendly that innovation has continued and gone on over the last few years.

There are a number of different projects we are working on that, as well as different step out opportunities that are based in entirely and I will have some expertise in hydrometallurgical processing. You’re going to speak of the project in the past we beginning to look now at ways in to bring find ways to commercialize that, we are also working on processes to you think again our expertise to remove arsenic from hires in the copper concentrates.

The message of leaching nickel, cobalt and copper from [indiscernible] and our debt restructuring is behind us and we have some runway, will see more greater focus from us in terms of how we look at the past to bring some of those ideas and innovations into reality and into commercial and put them on apps towards commercialization for great incremental sources of cash flow per Sherritt.

Given the increasing demand that we are expecting for nickel and cobalt and copper, over coming years with the electrification of vehicles and transportation. We think there is a real market opportunity for us and we now have the time lines to be a little bit devote some focus to that and demonstrate the differentiating expertise that exists within share on those kinds of initiatives.

So that’s what we really want to tell you about this morning, as you can see there has been a lot going on. It’s been a busy quarter but a very productive quarter as a result of our restructuring, we have the strongest balance sheet, we’ve had really since before the financial crisis and our introduction of the invited project and we are on track to reach our production guidance for the year. Like, we really are now at a turning point for the company given what we’ve been able to accomplish and potentially on the cost of an inflection point with respect to nickel prices and the opportunities that creates for us as a company, so we are feeling quite excited now about what the future holds.

And at this point, operator, we’d be happy to take any questions the analysts might have.

Question-and-Answer Session


[Operator Instructions] Your first question is from Orest Wowkodaw with Scotiabank.

Orest Wowkodaw

What if we could get a bit of color on the Cuban oil and gas business, obviously blocked to in pan out. And I’m just wondering what that means going forward, is that business effectively winding down after this year? Or do you still have production? And is it material after this year?

David Pathe

Orest, I’ll start with that. Right, so Block 10, as you’ve heard today and saw in the press release, that they drilling campaign that we undertook there has ultimately not succeeded. As Steve alluded to, to what the issues that we had with loss circulation zones on the way down the hole due to some of some excess water from those zones getting into the reservoir. The work we have done it back at the beginning of the year was to try and see of those off of that water was coming in through the drill line and pursuing that off that the same water was still getting in and the conclusion, we’ve come to us that is finding its way through the formation.

Despite the fact you recall in this past conversations we’ve had around to the fold and thrust geology that we work with — we reach those multiple sheets, typically we do get isolation between the sheets, but the events that kind of fully flow for one-sheet to the next. But here clearly there is some kind of activity outside of our drill hole that was detectable from the seismic and the work that was done in advance and nonetheless, we do continue to believe that there is oil in both the lower sheets that we were targeting in — on the upper zone of that were given where oil prices have gone at the moment and where we are as a company from our early perspective, we are not spending more money on that business at the moment, we do think if conditions improve both market-wise and in Cuba, there will be opportunities to attract capital and partners into perhaps Block 10 or other blocks that we have rights to in Cuba.

But in the near term, you’re right our existing production as it could seen over the last couple of years has declines given the agent and reservoirs of those in those production sharing contracts do expire at the end of the first quarter next year. We’ve seen the significant ramping down of the scale of our operations in Cuba as a result of where we are on — in our existing production and on Block 10. In the future — so, our production will disappear next year in the from our existing walks with those contracts revert back to the Cubans whether there is any further activity in Cuba will depend on whether we’re able to attract new capital or market conditions change it.

Orest Wowkodaw

I mean when those wind down, is there going to be some kind of — kind of annual holding costs or maintenance costs to keep that business sort of on-part from a cash flow perspective?

David Pathe

No, I mean, at that point in time, we’ve already scaled down significantly given that the existing contracts or really basically it run out position, we will still have the power business in Cuba but the cost of that business — the division as a whole will be reduced significantly as a result of, there is no further activity in the oil business.

Orest Wowkodaw

And then just finally on Block 10, the impairment I think was $116 million, is that indicative of the cash you’ve spent trying to drill it over the last couple of years or does that also include a bunch of historical stuff as well.

David Pathe

There is some historical stuff in some parts in there as well. I don’t have a specific breakdown for you today, but if you’re interested in that, we can get you a bit more detail in the proposition to that so right to that number.

Orest Wowkodaw

But I think it’s probably close to $100 million just in the last couple of years with that high?

David Pathe

Yes, I think that [Indiscernible] that’s going to be right.


Your next question is from Don DeMarco with National Bank.

Don DeMarco

What is the cost for the nickel hedging 25% of your production for one year?

David Pathe

So there is a derivative contracts and they’re actually a series of monthly contracts over the course of January through December 2021. They were placed over the course of a couple of days. The aggregate cost in order of magnitude was about $5 million.

Don DeMarco

And given your outlook for nickel and some concerns about demand, would you consider increasing that to maybe a 50% weighting?

David Pathe

We spent a lot of time in the last few weeks looking at various options and what we were budgeting and expecting out of the joint venture in terms of dividends next year and how much downside protection of, because you can do the variables you can play with is at what price level you set the floor. And I know what proportion of production you renter into a relative and the synthetic hedge in terms of giving us some certainty and clarity on our cash flows at different nickel price scenarios, the cost of hedging, and on the floor at 650, where it is relative to analyst forecast next year. That means what we determined is really kind of the optimal spot for us to be in, that’s what we execute it on.

Don DeMarco

And finally on the RCF extension, can you provide a little bit of color on how that process is going, but you received a three month extension what is being negotiated here. Is it an increase in size, upsizing the RCF? Or is it purely just to extend the maturity?

David Pathe

It’s really around covenants and we were looking for and expect to achieve. And I think was into, I think we’re now getting that we’re pretty much there. The working relationship with the banks has been strong throughout our all restructuring process, there is only once they got done that we got into the conversations small with the banks about what it will be more significant extension. We’re looking at probably an 18-month extension to the revolver and using of the covenants compared to what we had before, we restructuring given the stronger position with the balance sheet, is it now. I think the facility will end up at the same size in the same banks and given our history with all of them and I think you’ll see news from us in the next couple of weeks with conversations really been around using the covenant package compared to what we see over there [indiscernible].


Your next question is from Greg Barnes with TD Securities.

Greg Barnes

David, with the winding down of the oil business and you noted in this quarter, you had reduced availability of natural gas for the power business. Is that going to be an ongoing issue for the power business now?

David Pathe

The power business, it has seen over the last few years as declines in gas availabilities that expectation will continue somewhat, although we do expect that to level off a little bit, but we did production fields that we were operating, we’ll revert back to the Cubans, but they won’t be continuing to operate them. So there is gas, there is to run those businesses for quite some time that our contracts on those business expire in 2023. However, we will be made in the continuing our discussions with Cubans about seeing those extended more time to recover that the overdue amounts, so that are, they’re, rolling into us.

And we expect to be able to achieve that in time, but there is generally reduction of gas level availability will continue at some extent in the years in the future. Ultimately, the right solution for the Cuban, just to get into LNG importation and they’ve looked at that with different parties for years. Their challenge there is attracting the capital to do it and that’s been a more difficult by COVID. Ultimately, that will be the right direction for the country to go.

Greg Barnes

But you do expect to extend your agreements on the power business beyond 2023.

David Pathe

I guess what you said. Fine. Yes. We have a high level conversations we’ve had in Cuba that is what we expect will happen.

Greg Barnes

And then just on the equitization of the Moa expansion loans. Can you explain that a little bit and how your ownership interest doesn’t change?

Steve Wood

So those loans are long-time loans is you’re familiar with Greg with both Sherritt and our Moa JV partner in Cuba which is general nickel company and both funding expansion back in kind of 2005 period and during that time both Sherritt and Cuban partner both loaned the same amount of funds into the JV. So we had equivalent loans of about $270 million each into the JV. So during the quarter when those loans were converted to equity, new shares were issued equally to both Sherritt and to our Cuban partner and because that was issued on an equal basis we still both hold a 50% interest in that joint venture.


Your next question is from Tony Robson with Global Mining Research.

Tony Robson

Obviously, the receivables you’ve getting out of Cuba has picked up of late with $16.3 million during the quarter on the energy side in the $15 million post that date. Just wanted to know, I do not think Andrew touched in part in his presentation, but could we expect to see the receivable stay at a fairly healthy rise for the coming quarter or six months or whatever.

Steve Wood

Thanks, Tony. That’s certainly what we are working on with our partners. COVID 19 has had a pretty dramatic impact on Cuba as [indiscernible] they’ve done quite a good job. And as we may have spoken about in the past in terms of managing the disease and infection within the country itself, but it has had quite a significant impact versus but their tourism business which one of the largest sources of foreign currency, it went to zero within the matter of a couple of weeks in March and hasn’t yet come back, they are now working towards getting some resort areas open and open to recover some of tourist season over the course of this, this winter.

But it remains to be seen just how much demand will actually be from typically job of tourists primarily from Canada and then some from Europe and the extent, which they able to do that will depend on how as the disease progresses in some of those jurisdictions over the next six months. Clearly, it’s an important issue for us and it’s a topic a regular conversation with our Cuban partners at from top to bottom, there is a real intent on the part of Cubans partners to meet their obligations to us and they recognized the importance of that to us and to them in terms of the keeping in gas business going and their ability to attract new foreign capital into the country at some point.

But the hard currency is scarce on the ground at the moment, and then they’re having very difficult economic time. So there is some uncertainty around that you’re seeing dividend re-direction of certain encouraging and as Andrew mentioned, we’re expecting to see more dividends out of the joint venture over the course of the fourth quarter based on the prices have been the last few weeks and there’ll be an ongoing conversation about trying to capture a disproportionate share of those expected future dividends as well — as well as trying to get more predictability about what cash flows will look like through 2021.

And I expect one way know that the Cubans will find enough to kind of keep things going and if the disease improves globally, they will see the benefits of that and consequently, but trying to manage that has been a big priority for us over the last few months and that was part of the motivation behind the hedging strategy of 2021 as well as just give us some certainty of been a multiple of cash flow given to the heightened uncertainty that the COVID-19 creates not just on nickel prices go down and collections next year. I appreciate that doesn’t really answer your question, but it at least gives you some context of the dynamic of the ongoing relationship there. Tony, is there, that’s helpful.

Tony Robson

Thank you. Understand it’s crystal ball game to some extent here. Can I have a follow-up question please, completely different topic? Cobalt, nice to see that recovered from the kind of at lows of April and so on, but the price still seems to be a bit softer given we still have tender closed that was 25,000 tonnes, so a huge supply for the world. Is it the price of $14 to $15 a pound just reflects fairly weak economic data ex China? Is there any hope for any strength in the cobalt market you see in the short term, ignoring the sort of longer-term maybe story. Thank you.

David Pathe

Yeah, I mean, nice. I mean that’s another invitation to crystal ball day somewhat, but I guess what I can tell you is that the physical in spot market is in better shape than it was 3 or 4 months ago a few million back in the spring early/summer, the world was relatively a wash and physical cobalt and some producers are having trouble moving material that has tightened up somewhat — there is a bit risk market for cobalt now and perhaps I just driven by some of the contractions in supply you’ve seen for various reasons.

And so that does potentially bode well for continued improvements in the cobalt pricing, but you still have all the other uncertainties in the global economy at the moment that could continue to push that one way or one way or the other, so the only thing I can really tell you to kind of be on that I get the moment on these would be — we have seen a been a strength in the pricing and the physical market is in better shape than it was a few months ago.


At this time, there are no further questions. I would like to turn the call back over to management for closing remarks.

David Pathe

All right, well as ever. Once again, thanks for joining us continue on through that you’re working on the things we’ve been talking about here, as we saw Q3 was a busy quarter and busy times continue. As Joe said off the top, we’re always happy to catch up later for as you’re working through where us and where we are, any other questions that come up, happy to connect and help you work through those and talk about what we’re doing these days. So thanks for taking the time to join us this morning and we look forward to talk to you again soon.


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