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spk01: Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Shared International Second Quarter 2021 Results Conference Call and Webcast. At this time, all participants are in a listen-only mode. I would like to remind everyone this conference call is being recorded today, Friday, July 30, 2021, at 10 a.m. Eastern Standard Time. I will now turn the presentation over to Joe Racanelli, Director of Investor Relations. Please go ahead, sir.
spk02: Good morning. Thank you, Julianne. And good morning, everyone. Before we begin, I'd like to point out a couple of items. First off, we released our financial results last night, and full copies of our press release MD name financial statements are available from our website as well as from CDAR. We will be using a presentation this morning, a copy of which can be found via the IR section of our website. And we will be making four looking statements today, and the details of the risks and certainties of those are outlined on page three of our presentation. With me today are Leon Binadel, our CEO, Steve Wood, our Chief Operating Officer, and Nathan Reeve, our Interim Chief Financial Officer. And just before I turn it over to Leon, I want to remind everyone, Leon was appointed CEO of Shared June 1st. He brings to Shared more than 25 years of industry experience, building shareholder value, and leading enterprise-wide transformations. So please go ahead, Leon.
spk03: Thank you, Joe. Good morning, everyone, and thank you for joining us today. As Joe mentioned, I was appointed as CEO of Sherrod at the beginning of June, and I'm delighted to be with you today. My first quarterly results call with our investors. I've had the opportunity to meet a number of you over the past month, and I do look forward to meeting a number of other investors in the coming months following this call. We had a strong quarter. Our second quarter operational and financial results build on the momentum we established with the close of our balance sheet initiative last year. This momentum is most visible if we review some key metrics. We increased our nickel and cobalt production by 2 and 12 percent respectively, which are good results. We grew adjusted EBITDA by 114 percent to $18 million, despite the significant rise in input costs tied to commodity prices and $7.3 million of expenses relating to a 10 percent workforce reduction in our corporate office and the departure of some senior executives. We received $14 million in distributions from the MOA JV for our 50 percent share of dividends, indicative of improved market conditions, and received another $14 million that was redirected by our JV partner to fund Energas operations. Our financial results were driven largely by high nickel and cobalt prices, a trend that we expect will continue in the near term, as well as in the longer term as we transition to a more sustainable energy future. With respect to overdue receivables, we experienced the variability that we anticipated and discussed at our last conference call. Despite the impact of COVID-19 pandemic and U.S. sanctions on Cuba's economy, we were able to collect US dollars 5.8 million from our Cuban energy partners. We will comment on the situation in Cuba and expectations around the receivables later during this call. I'll also provide an outlook and talk about some recent developments towards the end of this call. But first, I would like to hand over the call to Steve Wood, our Chief Operating Officer, to discuss our positive operating results for a quarter. Steve?
spk06: Thank you, Leon, and good morning, everyone. I'd like to start my discussion as we normally do in our internal meetings with a safety share. We've devoted considerable efforts over the past several years to fostering an environment where best practices for employee health and safety are employed. This has resulted in Share-It regularly ranking in the lowest quartile of benchmark peer set data. And we've continued this trend in the second quarter of 2021 when we had a total recordable injury rate of 0.26 and a lost time incident rate of 0.14 and these compared at 0.26 and 0.09 respectively for the same period of 2020. The numbers are good relative to our peers and we continue to drive towards zero. I'll now turn to slide six. Like many other mining companies, Sherrod has been deeply committed to environmental, social and governance matters over the years. In Q2, we upgraded our ESG targets to strengthen our commitment over both the near and longer terms. Our targets, some of which you can see on slide six, transcend a number of categories including employee health and safety, climate, and diversity and inclusion. Most notable amongst our targets is the commitment to achieving net zero greenhouse gas emissions by 2050. Other targets include obtaining 15% of our energy requirements from renewable sources and doubling the percentage of women in our workforce by 2030. I should make it clear that we aim to upgrade our ESG targets in step with technological and other developments in the future. The full list of our targets will be published in our 2020 sustainability report, which is slated for release in September. Turning now to our production results for the quarter, starting with the MOA JV on slide 7, you'll see that on a 50% basis, the MOA JV produced 4,230 tons of finished nickel and 476 tons of finished cobalt in Q2. These totals represent increases of 2% and 12%, respectively, from the comparable period in 2020. This growth was attributable to a number of factors. Most notably, we had higher mixed sulfites availability and improved refinery reliability relative to last year. Cobalt production also grew in the second quarter because of the higher cobalt to nickel ratio in the mixed sulfite feed relative to last year. I would like to remind everyone that Q3 will be impacted by a full quarter, sorry, full facility shutdown that is expected to last approximately 11 days. This full shutdown is done every six years, and we've been able to extend this interval because of our efforts on asset management and operational excellence. The planned maintenance shutdown was taken into account when we issued our guidance for the year. Based on performance through June 30th, we want to reiterate our guidance for production, NDCC, and planned capital spend at the MOA JV. Turning now to our unit costs at the MOA JV on slide 8, MPR, or mining, processing, and refining costs, increased by 23% in the second quarter relative to last year. The increase was attributable to a number of factors, including higher maintenance costs, higher input costs, and added costs stemming from the purchase of sulfuric acid necessary during the acid plant shutdown down at MOA due to scheduled maintenance repairs. As you can see from slide 8, input costs rose dramatically in Q2 compared to last year, and in particular, fuel oil prices rose by 160%, sulfur prices were up 65%, while natural gas prices climbed 46%. These increases were partially offset by lower labor costs due to the impact of Cuba's unification of its currencies. Turning to net direct cash costs, NBCC was $4.58 per pound of nickel sold, and that's up 17% from $3.92 per pound in the second quarter of last year. The increase was driven by higher input costs, which offset the 73% rise in cobalt byproduct credits. Looking ahead, Q3 should see some improvement to MPR and NDCC, as we don't plan to purchase sulfuric acid now that the scheduled maintenance repairs at MOA's acid plant have been completed. Turning to our power division on slide 10, we produced 115 gigawatts of electricity in the second quarter, and that's down 25% from last year when we produced 153 gigawatts. gigawatts in the second quarter. The decrease relative to last year was driven by the scheduling of maintenance activities that had been previously deferred. These maintenance activities were concentrated at the production facility in Boca de Jeruco. Repairs have been since completed and power production has resumed. Unit operating costs in the second quarter were $21.03, and that's up 49% from 14-12 for last year. The increase was due to lower production and higher maintenance costs, but partially offset by lower labor and third-party costs due to the effects of Cuba's currency unification. I'd like to wrap up my discussion on the power business by pointing out that we are currently in discussions with our Cuban partners to extend the power generation agreement with Energas. This agreement is currently slated to expire in March of 2023, and we anticipate that it will be renewed. That concludes my remarks on operational performance, and I'll now turn the call over to Nathan for discussion on our financial results. Nathan?
spk04: Thank you, Steve, and good morning, everyone. I would like to begin my remarks with a discussion of our adjusted EBITDA performance in Q2. Even though this is a non-GAAP measure, adjusted EBITDA provides a strong indicator of our performance. In Q2, adjusted EBITDA grew by 114% to 18 million. As you can see from the waterfall chart on slide 11, which shows movement from the end of Q1 2021, despite the continuing strength in production and nickel and cobalt prices, there were a number of increased costs and G&A expenses that took a toll on our financial performance in Q2. As you heard from Steve, input costs relating to the price of fuel oil supply, sulfur, and natural gas rose dramatically in Q2. In addition, we purchased sulfuric acid. Combined, these NPR costs represented a negative swing of almost $7 million from our adjusted EBITDA results in Q1 of 2021. Other negative impacts to adjusted EBITDA include $7.3 million in G&A expenses composed of two items. Firstly, $1.8 million of expenses relating to a 10% workforce reduction in Sherratt's corporate office. which will result in a reduction of corporate costs by approximately $1.3 million annually. And secondly, $5.5 million in other contract benefits relating to the planned departures of senior executives. I should point out that we expect to incur an additional $3.7 million in contract benefit expenses in the second half of the year, as well as additional share-based compensation expense accelerated over the remaining term of service of the departing senior executives. Moving to slide 12. Largely as a result of improved market conditions and strong sales volumes, the Mohr Joint Venture distributed US $28 million in Q2, of which we received our 50% share, or US $14 million. In addition, GNC, our MOA joint venture partner, redirected its 50 percent share, or U.S. 14 million, to us to fund Energas operations. As a result of these redirected amounts, coupled with Cuban energy payments, we do not anticipate liquidity constraints for the power business through the end of 2021. The MOA joint venture has been a reliable distributor of cash over the years. Although amounts have varied over this period due to fluctuations in commodity prices, input costs, and capital expenditures, the MOA joint venture's low-cost operations and dependable production results typically result in quarterly distributions. Just since the start of 2019, the MOA joint venture has distributed U.S. $163 million of cash on a 100% basis. as you can see from the chart on slide 12. Share its share of these dividends is the sum of the blue and red bars in the chart, or $116 million US. As we have discussed previously, the MOA JV board decides on amounts to be distributed to each partner on a quarterly basis. Factors that go into that decision-making process include available cash, prevailing metals prices, expected input costs, and planned capital spend. Through June 30th, capital spend at the Moore JV and Ford site was US$10 million. We've guided US$44 million for the year, so we expect an increase in capital expenditures over the second half of 2021. Nevertheless, given prevailing nickel and cobalt prices and Moore joint venture liquidity requirements, we anticipate distributions through the course of 2021. Moving to slide 13, as Leon noted in his opening remarks, we experienced variability in our collections against overdue amounts owed to us by our Cuban partners in Q2. In Q2, we received U.S. 24.5 million in Cuban energy payments, a total that included U.S. 14 million in redirected distributions from GNC to fund Energas operations. As a result, total overdue amounts at the end of the quarter were largely flat from the end of Q1. Despite the receipt of U.S. 24.5 million in energy payments, collections in Q2 were impacted by a number of factors. These include Cuba's limited access to foreign currency on account of the COVID-19 pandemic, the continued effects of U.S. economic sanctions against the country, and Cuba's efforts to unify its currencies. Since the start of Q3, we have received U.S. $1.6 million in energy payments. While we continue to work with our Cuban partners to ensure timely receipt of payments, we nonetheless expect collections to be varied through to the end of the year due to the factors I just noted. Before turning the call back to Leon, I would like to conclude my remarks with a review of our liquidity position on slide 14. At June 30th, 2021, our cash and short-term investments totaled 153.8 million, largely in line with the 158.3 million at the start of the quarter, as you can see from the slide. Our cash position was impacted by a number of developments in the quarter. Chief among them was the payment of $15 million in interest on our 8.5% second lien notes, the use of $1.3 million towards the repurchase of second lien notes with a principal value of $2 million, the use of $2.9 million towards capital expenditures, and operating cash outflows of $11.7 million before considering dividend receipts. The decline in cash position was offset, however, by the receipt of US $14 million or $16.9 million Canadian in distributions from the Moher joint venture and redirected amounts from GNC after consolidation adjustments of $11.3 million. While our total liquidity went down, cash held in Canada went up by $1 million to $77 million by the end of the quarter. Finally, I should add that we drew $8 million against our $70 million credit facility at Quarter End. As a result, total available liquidity at June 30th was $215 million. That concludes my remarks. I will now turn the call back to Leon for his concluding comments.
spk03: Thank you, Nathan. Before turning to the outlook for nickel markets and opportunities for growth from our technologies business, I'd like to spend a few moments reviewing the recent developments in Cuba and putting these into perspective. As many of you know, Cuba experienced a number of public demonstrations by 11th. These protests received significant attention by foreign media and sparked considerable amount of discussion on social media. While it cannot be denied that the protests took many observers of Cuba by surprise, The conditions that triggered these demonstrations, including the impact of U.S. sanctions on Cuba, the spread of COVID, and the reduced availability of food and medical supplies, and the economic hardship caused by the reduced access to foreign currency, are all well known. From Sherrod's perspective, I'd like to make clear that we have not experienced any disruption to operations and do not anticipate any changes to the structure of our joint venture or our investment in Cuba. We will obviously monitor developments closely and continue to take measures to protect our interests and support measures Cuba has initiated to reform its economy, and we are in active discussions with the Cuban government in this regard. The impact of the pandemic has taken a serious toll on Cuba's economy and it's effectively put an end to foreign travel to the island. Cuba is taking measures to reduce the spread of COVID and has made significant progress with respect to its vaccination rollout, and anticipate to achieve its target rollouts by the end of the year. This is an important effort by Cuba to underpin a recovery to tourism and its ability to earn foreign currency. As you know, Cuba has a vibrant biomedical sector, and to date Cuba has developed five COVID vaccines, which is remarkable, of which two have already been approved and are being administered. Cuba is the only Latin American country to develop its own vaccines. and to date, 22% of Cuba's population is fully vaccinated, and another 10% is partially vaccinated. The success of Cuba's vaccination development is encouraging and could potentially result in an influx of foreign currency, as a number of nations in the Caribbean, South America, and Asia are lined up to acquire vaccines, and the Cubans have recently entered into a deal with Iran. It is developments like these that could support Cuba's ability to earn foreign currency in order to support its economy more broadly, but also its ability to more rapidly repay its overdue receivables. Turning over to the outlook for nickel. On slide 17, key to Sherrod's growth in the coming years is the strong outlook for nickel. In fact, demand forecasts from various industry analysts, including CREU and Wood Mackenzie, are particularly bullish and has recently been upgraded from their forecasts at Q1. They estimate that total nickel demand is slated to grow at 3.5% compound annually over the next 20 years. In the near term, demand will be fueled by post-pandemic recovery spend, particularly as sectors that are large purchasers of stainless steel products, such as hospitality, resume their commercial activities. We have seen very strong stainless steel demand, and it is particularly encouraging that this near-term nickel demand is broad-based and not purely driven by the EV sector. Over the long term, demand will grow largely on the back of electric vehicle adoption, which has gained significant traction in 2020, despite the pandemic, and is forecast to grow even more rapidly this year. Europe and Asia has led this growth, and with countries like Canada pulling forward their targeted ban on internal combustion vehicle sales to 2035, this will further support demand expectations. Turning to slide 18. Strong market fundamentals and a number of industry developments triggered increases in nickel and cobalt prices since the start of the quarter. Through July 29, nickel climbed to $8.97 US dollars per pound, or 17%, while cobalt prices rose 9% to $24.86 per pound in US dollars. And nickel briefly breached $9 a pound yesterday. Higher nickel prices, in particular, were driven by news of possible supply disruptions or further curtailment of nickel pig iron from Indonesia, a supply impact from labor strike at an operation in Ontario, flooding of two mines in Russia, for example. These supply side challenges coupled with strong demand drove nickel prices in the quarter. Higher cobalt prices are driven by a number of factors, including increased demand from markets that were particularly hard hit at the start of the pandemic, including the aerospace sector, which uses cobalt in engine parts. Just as encouraging, we are witnessing increased demand, particularly in Asia, from the battery makers in anticipation from accelerated electric vehicle demand. Cobalt provides battery stability and is unlikely that cobalt will be eliminated entirely from battery chemistries. Current market fundamentals are expected to be sustained and strong prices are anticipated through the balance of the year. We've talked about our technologies group and how it provides opportunities for growth in the past. Most of these discussions centered on how we are commercializing or seeking to commercialize the proprietary solutions developed by our research team in Fort Saskatchewan. While it's certainly true that it is an important area of focus and will contribute to transformational growth, I want to take a couple of moments to expand on the role played by our technologies group more broadly. It is important to view technologies as both an incubator of technology solutions but also as a provider of services. As an incubator, commercial applications such as the solution to make arsenic and copper concentrates inert or the solution to upgrade heavy bitumen to a more valued product and at the same time eliminate the use of diluent in the delivery of bitumen could be licensed or sold to a broad range of customers including mining and oil companies or provide for a royalty or metal stream to share it. We also expect to work with commodity traders or companies providing funding to resource companies in this regard. We have commenced discussions with potential customers for these technologies as well as financiers. Initial feedback is encouraging. We will provide regular updates as material developments warrant. At this time, we cannot provide more specifics on our commercialization strategy or potential terms we may seek as these are commercially sensitive and may negatively impact our ability to negotiate acceptable outcomes. As a service provider, services are provided to customers to help them improve efficiencies, eliminate production bottlenecks, and increase the economic value of minerals. The technologies group has provided these services to the MOA joint venture over the years and will continue to do so and it has led to the identification of some near-term opportunities we can capitalize on at the MOA JV. We are in discussions with our partners to seek alignment on pursuing these opportunities and we'll share more. In addition, the technologies group also supports share it in its merger and acquisitions opportunities. It is a valuable asset to have these capabilities in-house to rapidly evaluate opportunities and to understand potential synergies. In summary, I'd like to thank everyone for joining us on the call today. And as you've heard, we had a strong second quarter. We've made progress on a number of fronts and plan to build on this momentum throughout the rest of the year. Looking ahead, our production results at the MOA JV in Q3 will reflect the impact of the full facility shutdown that Steve had mentioned, which will occur in the third quarter. Despite this approximate 11-day shutdown, our guidance for production, capital spent, and net direct costs remain unaffected. We also anticipate that the economic uncertainty caused by the global pandemic will continue in the near term, resulting in collections on overdue amounts from our Cuban energy partners to remain a challenge in the near term. Over the longer term, the outlook for nickel and cobalt prices remain favorable, and we believe that we are well-placed to take advantage of these. I'd like now to turn over the call for questions.
spk01: Thank you. If you would like to ask a question, please press star followed by the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from Don DeMarco from National Bank Financial. Please go ahead. Your line is open.
spk07: Thank you, operator, and good morning, gentlemen. First question about the acid plant and costs. So the acid plant is now operational. But while it was down, you had to purchase sulfuric acid. Can you quantify the impact on Q2 and DCC of having to purchase that sulfuric acid? Of course, this could be a tailwind for Q3, so I'm just trying to understand what magnitude that might be.
spk03: Don, we don't have that number readily at hand, but we will get back to you with that shortly. But as you rightly pointed out, we do not anticipate the cost associated with purchasing of acid to occur. And the acid plant is only scheduled to be maintained every 24 to 30 months. And therefore, there's a prolonged period of time where we won't see this reoccur in our operating cost.
spk07: Okay. That's helpful. Could you walk us through the $14 million of redirected distributions to Energas?
spk03: Sure. I think the way to look at this is that the prevailing nickel and cobalt prices are very positive and therefore has created the ability for the MOA joint venture to redirect $14 million U.S. of dividends paid to our joint venture partner. That redirection was applied to Energas given liquidity constraints that Energas had experienced broadly in line with the foreign currency challenges that Cuba has experienced. We believe that Energas is now fully financed and that its liquidity requirements are suitably met and that any future redirections or future contributions from the Cuban partners and from Cuba will be directed towards Sherrod. Okay.
spk07: Okay, great. So Leon, in its new role as CEO, I see maybe perhaps a subtle changes to strategies such as increased emphasis on the technologies group and innovations that share it. But is that true? And do you expect to make any other strategic shifts now that you've been in the role now for some time? Or will you wait for a period of time before making any more significant decisions?
spk03: At this stage, what we're looking at capitalizing on is the significant advancement of the technologies that we've mentioned. We believe that there is a significant market for those opportunities and that those will present a significant benefit to Sheraton and its shareholders and therefore are prioritizing the commercialization of those technologies. At the same time, we're also looking at identified near-term brownfields expansion within the MOA joint venture to try and capitalize on the low cost of capital per output that that will provide for us and then seek to capitalize on those opportunities. And then more broadly, when we look at the momentum in the market and the move towards electric vehicles and the expected prolonged support in the demand of nickel and cobalt in particular, we are also actively seeking to understand what opportunities the market may present for us and what Sherrod can bring to those opportunities in terms of synergies. So we're looking at those opportunities for growth. In terms of the oil business, we're still seeking to find an earning partner, and there's no change in strategy there that we are not looking to invest additional capital into that opportunity at this point in time.
spk07: Okay. Okay, that's all for me. Thanks again. Thank you, Don.
spk01: Your next question comes from Gregory Barnes from DD Securities. Please go ahead. Your line is open.
spk05: Thank you. Leon, I think this is the first time in a very long time I've heard Sherrod talk about possible brownfield expansions of molar. And you've mentioned one in the MD&A about the slurry prep plant. But what other things are you looking at, and what do you think molar can do?
spk03: We've done some engineering and analysis in the past, and there's been some historical attempts at growth, if you will. Where we stand today, we understand really a de-bottlenecking strategy of what the options are available to us given available capital. So for any sort of step change, if you will, we understand what the capital requirements are both at MOA in Cuba as well as at the Ford site in order to capitalize on those. We're busy going through a process of determining what the most sensible cutoff is for the next stage of expansion. And once we have alignment with our joint venture partner on that, we will be able to articulate that. But the low capital cost opportunities in the near term are more incremental growth opportunities. broader brownfield expansions on a little bit further data, but we are looking at those opportunities as well.
spk05: So deep bottlenecking, Leon, and like the slow prep plant and things like that, you could add, what, 5% production capacity, something like that, something in the order of that? I don't know, just throwing numbers around.
spk03: Yeah, we're looking at growing in a 5% to 10% range.
spk05: Great. That's it for me. Thanks.
spk03: Thank you, Greg.
spk01: Your next question comes from Tony Robson from Global Mining Research. Please go ahead. Your line is open.
spk00: Thank you. Good morning, and thank you for taking my question. Beyond, for Moab Bay, beyond what looks to be a fairly messy quarter three for unit costs, how should we think about costs, say, into 2022? If oil prices stay where they are and gas prices stay where they are other than maintenance issues, should we expect to see sort of higher cost plateauing at a higher level than we've been used to the last 12 months? Thank you.
spk03: As you pointed out, there are a number of factors that impact operating costs for us, principally those that were mentioned in terms of oil, gas, and sulfur prices. At the same time, with the Cuban currency unification other input costs and services and labor is partially offsetting those. And whilst we are exposed to some of those input commodity prices, and they will be what they will be, we do anticipate that the impact of sales commodity prices for us will have a more significant benefit to the group. We have looked and will continue to look at opportunities to mitigate some of those input cost fluctuations. But at this stage, we have not hedged any of those input costs.
spk00: Thank you.
spk01: We have no further questions in queue. This concludes today's Q&A session. I would like to turn the call over to Mr. Leon Binadel for closing remarks.
spk03: Thank you, operator. And thank you, everyone, for joining us on our second quarter conference call today. It was an absolute pleasure to talk to you and look very much forward to talking to you at future quarters and other opportunities to engage with our shareholders. Thank you very much.
spk01: This concludes today's call. You may now disconnect.
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