Sherritt Reports Strong First Quarter Nickel and Cobalt Production

Sherritt International Corporation (“Sherritt”, the “Corporation”, the “Company”) (TSX: S), a world leader in the mining and hydrometallurgical refining of nickel and cobalt from lateritic ores, today reported its financial results for the three-month period ended March 31, 2021. All amounts are in Canadian currency unless otherwise noted.

CEO COMMENTARY

“Sherritt sustained the momentum we established following the successful close of our balance sheet initiative last year into 2021 as evidenced by our strong performance in Q1,” said David Pathe, President and CEO of Sherritt International. “Even while managing against the continuing global pandemic, we ended the quarter with improved finished nickel and cobalt production results at the Moa Joint Venture, a $5 million reduction in our long-term debt, our highest adjusted EBITDA in almost three years, and improved nickel and cobalt market conditions.”

Mr Pathe added, “In addition to continuing to work with our Cuban partners on overdue receivables, we will focus during 2021 on further developing and commercializing the know-how within our Technologies business. We have continued to make improvements to our patented process for upgrading bitumen, which produces lower emissions and virtually eliminates coke waste compared to current upgrading methods. It also eliminates the need for diluent when transporting bitumen by pipeline, thereby reducing costs and increasing pipeline capacity with no need for new investment in pipelines. We are also progressing with the patenting of a hydrometallurgical process for the treatment of high arsenic copper concentrates, which offers superior environmental benefits by rendering the arsenic inert and reducing emissions relative to current methodologies. We also continue to engage our Technologies team in the development of next generation battery-grade nickel and cobalt production from lateritic ores to lower capital intensity, reduce emissions, and eliminate waste. Over the longer term, Sherritt is well positioned to create significant value – both economic and environmental – as it capitalizes on the growing demand for high-purity nickel as the market adoption of electric vehicles accelerates.”

SELECTED Q1 2021 HIGHLIGHTS

• Adjusted EBITDA⁽¹⁾ was $30.2 million, up 602% from last year, and reflective of strong production totals at the Moa Joint Venture (Moa JV), improved nickel and cobalt prices, and reduced administrative costs. Q1’s Adjusted EBITDA total represents Sherritt’s highest since Q3 2018.
• Sherritt’s share of finished nickel production at the Moa JV was 4,188 tonnes, up 9% from last year while Sherritt’s share of finished cobalt production was 477 tonnes, up 19%. The growth was largely attributable to high inventories of mixed sulphides at the refinery in Fort Saskatchewan, Alberta and improved refinery reliability. Production totals for Q1 2020 were adversely impacted by the disruption of mixed sulphides deliveries to the refinery caused by rail blockades in Canada and by extended transit times for shipping vessels from Cuba.
• NDCC⁽¹⁾ at the Moa JV was US$3.83/lb, the lowest total since Q4 2019.
• Received US$5 million in distributions from the Moa JV, indicative of improved nickel and cobalt market conditions.
• Received US$5.7 million in Cuban energy payments. Sherritt anticipates continued variability in the timing of collections through the remainder of 2021, and is working with its Cuban partners to ensure timely receipts.
• Received a $20.3 million prepayment against nickel deliveries in 2021. The prepayment is consistent with Sherritt’s efforts to enhance its liquidity.
• Purchased an aggregate total of $5 million principal amount of second lien notes at an aggregate cost of $3.3 million. The $5 million debt reduction will also result in cash interest savings of $2.4 million through to the maturity of the 8.5% second lien notes in November 2026.
• Excluding depreciation and share-based compensation, administrative expenses declined by $1.5 million from Q1 2020.
• Sherritt’s emerging Technologies business continued to make progress on several of its research projects, including enhancing a proprietary process to fully upgrade bitumen. The enhanced process, which builds on previous research efforts, eliminates the need for diluent, increases the economic value of oil transported to downstream markets and provides a number of environmental benefits, including reduced carbon emissions and reduced coke waste.
• Launched an initiative at its Moa operations to electrify light vehicles in support of carbon reduction targets.
• Sherritt’s refinery in Fort Saskatchewan had its operating license renewed for 10 years by Alberta’s Ministry of Environment and Parks.
• Sherritt’s Board continued its search for a successor to CEO David Pathe who has agreed to stay on with the Company until a replacement is in place and an orderly transition has been effected.
  ^{(1) For additional information see the Non-GAAP measures section of this press release.}

Q1 2020 FINANCIAL HIGHLIGHTS

^{(1) For additional information see the Non-GAAP measures section.}

Cash, cash equivalents, and short-term investments at March 31, 2021 were $158.3 million, down from $167.4 million at December 31, 2020. The decrease was due to a number of factors, including consolidated cash used by continuing operating activities, use of $3.3 million towards the repurchase of 8.5% second lien notes with a principal value of $5 million, and $1.3 million in capital expenditures. The decrease was partially offset by a $20.3 million prepayment against nickel deliveries in 2021, receipt of US$5 million in distributions from the Moa JV, and the receipt of US$5.7 million in Cuban energy payments.

The US$5 million of distributions received from the Moa JV in Q1 2021 was indicative of improved nickel and cobalt realized prices. In Q1 2020, Sherritt received US$10 million in distributions from the Moa JV despite softening nickel prices in the quarter last year. Distributions in Q1 2020 were primarily due to the Moa JV ending 2019 with a higher available cash balance. Sherritt anticipates receipt of distributions from the Moa JV through 2021 based on prevailing nickel and cobalt prices, planned capital spend, and liquidity requirements for the Moa JV. Sherritt also anticipates the receipt of re-directed distributions from its Moa JV partner, and is currently in discussions with its Cuban partners to determine amounts and timing of these distributions.

Collections against overdue amounts owed to Sherritt by its Cuban energy partners in Q1 were adversely impacted by a combination of factors, including the ongoing effects of U.S. sanctions against Cuba, Cuba’s reduced access to foreign currency on account of the global pandemic, and the country’s launch of a currency unification process. Total overdue scheduled receivables at March 31, 2021 were US$154.2 million, up from US$145.9 million at December 31, 2020. Subsequent to quarter end, Sherritt received US$4.5 million in Cuban energy payments. Sherritt anticipates variability in the timing and the amount of energy payments through the remainder of 2021, and continues to work with its Cuban partners to ensure timely receipt of energy payments.

As at March 31, 2021, $74.4 million of Sherritt’s cash and cash equivalents was held by Energas in Cuba, down from $75.0 million at December 31, 2020. Excluding the cash held by Energas in Cuba, Sherritt’s cash was $83.9 million at March 31, 2021.

Adjusted net loss⁽¹⁾

^{(1) For additional information see the Non-GAAP measures section.}

Net loss from continuing operations for Q1 2021 was $1.9 million, or nil per share, compared to a net loss of $34.5 million, or $0.09 per share, for the same period last year. The improvement was driven largely by strong contributions from the Moa JV as a result of higher sales volumes and stronger realized prices.

Net loss for Q1 2021 includes a loss from discontinued operations net of tax of $3.7 million relating to a provision retained by Sherritt following the sale of its Coal operations in 2014 and a loss on the disposal of its Ambatovy Joint Venture Interests.

Adjusted net loss from continuing operations was $2.3 million, or $0.01 per share, for the three months ended March 31, 2021 compared to an adjusted net loss from continuing operations of $28.9 million, or $0.07 per share, for Q1 2019.

METALS MARKET

Nickel

After a strong start to 2021 marked by nickel prices climbing to a high of US$8.93/lb on February 21, the highest price since September 2014, nickel market conditions softened considerably through to the end of Q1. By March 31, nickel prices had dropped to $US$7.30/lb, down 18% from Q1’s peak.

The pullback was principally driven by the announcement in early March made by Tsingshan, a stainless steel producer based in China, that it plans to supply 100,000 tonnes of a nickel intermediate product amenable for use in electric vehicle batteries starting in October 2021. The news initially caused the markets to roil as some industry observers and media coverage suggested that the development would address the shortfall in nickel supply needed for the surge in demand for electric vehicles expected in the coming years.

Since the market’s initial reaction to the announcement, many industry experts have since raised questions about Tsingshan’s process, including the increased amount of carbon emissions its pyro-metallurgical process will produce, the capital spend required to refine nickel matte to a purer form, and the reduced recoverability of by-product metals, which increase production costs and lower by-product credits.

Nickel prices since Tsinghan’s announcement have improved modestly and currently trade at US7.80/lb. Over the near term, nickel prices are expected to fluctuate in concert with the world’s economy as it reacts to the impact of the global pandemic.

The economic impact of COVID-19 on nickel market fundamentals in Q1 was evident by the increase in nickel inventory levels on the London Metal Exchange (LME), which rose by 7% to 260,244 tonnes by March 31. In contrast, inventory levels on the Shanghai Future Exchange (SHFE) shrank nearly in half to 8,972 tonnes.

As mining operations resume production activities, nickel inventory levels may rise given that supply could exceed demand as a number of industries that are large consumers of stainless steel, such as the food and hospitality sector, will experience a delayed or slower economic recovery, particularly if the third wave of the pandemic is prolonged.

The long-term outlook for nickel remains bullish, however, due to the strong demand expected from the electric vehicle battery market. Over the past six months, in particular, multiple automakers and governments have announced plans for significant investments to expand electric vehicle production capacity to meet growing demand. In 2020, more than 3.2 million electric vehicles were sold despite the global pandemic. Industry observers estimate that the number of electric vehicles sold in 2021 will grow by approximately 70%. As a result of Class 1 nickel’s unique properties, it remains as the dominant metal in cathode chemistries being adopted by automakers. Sherritt is particularly well positioned given our Class 1 production capabilities and the fact that Cuba possesses the world’s fourth largest nickel reserves.

Cobalt

Cobalt prices experienced a significant surge in Q1 2021, rising 46% according to data collected by Fastmarkets MB. Standard grade cobalt prices on March 31 closed at US$22.75/lb, up from US$15.60/lb at the start of the quarter.

Cobalt prices since the start of 2021 largely rose on news reports that consumers in China have started to stockpile inventory to take advantage of weak prices in anticipation of stronger demand expected with accelerated growth of electric vehicle demand in the coming years. Cobalt is a key component of rechargeable batteries providing energy density and stability.

The rise of cobalt prices in Q1 also reflected improved market conditions as demand grew from sectors particularly impacted at the start of the pandemic, such as the aerospace sector and consumer electronics. During the first wave of the pandemic, cobalt prices declined to US$13.90/lb from U$15.53/lb at the start of 2020. Industry observers expect cobalt prices to continue to rise in the near term with prices forecasted to peak at US$32/lb in 2023.

The outlook for cobalt over the long term remains bullish as demand from the EV sector in China alone is expected to grow annually by 26% through 2025.

REVIEW OF OPERATIONS

Moa Joint Venture (50% interest) and Fort Site (100%)

^{(1) For additional information see the Non-GAAP measures section.
(2) Average standard grade cobalt published price per Fastmarkets MB.}

Mixed sulphides production at the Moa JV in Q1 2021 was 3,931 tonnes, down 2% from 4,014 tonnes produced in Q1 2020. The decline was primarily due to the negative impact of heavy rainfall on mining operations and variations in ore quality. Lower mixed sulphides production was offset by high feed inventory levels at the refinery in Fort Saskatchewan, Alberta. Weather conditions at Moa have since improved and mixed sulphides inventory continues to be replenished.

Finished nickel production in Q1 2021 totaled 4,188 tonnes, up 9% from the 3,836 tonnes produced in Q1 2020 while finished cobalt production for Q1 2021 was 477 tonnes, up 19% from the 400 tonnes produced in Q1 2020. The growth was largely attributable to high inventories of mixed sulphides at the refinery and improved refinery reliability. Finished nickel and cobalt production totals in Q1 2020 were impacted by the reduced availability of mixed sulphides due to the disruption of deliveries to the refinery caused by rail blockades in Canada and by extended transit time for shipping vessels from Cuba.

Consistent since the start of the global pandemic in February 2020, production of mixed sulphides and finished nickel and cobalt were not affected by the spread of COVID-19 in Q1 2021 largely because of additional health and safety measures implemented to protect employees, suppliers and various stakeholders at operations at Moa and at the refinery in Fort Saskatchewan.

Second quarter finished nickel and cobalt production will be impacted, however, by the annual maintenance shutdown of the refinery in Fort Saskatchewan. This year’s shutdown will be a full-facility shutdown, including all of the refinery and utility plants, that occurs once every six years. The extended interval between full-facility shutdowns reflects ongoing commitments to asset management and operational excellence measures implemented over the past several years. This year’s shutdown is expected to last approximately 11 days compared to the typical five-day annual shutdowns. Sherritt’s guidance for 2021 production, unit cost and capital spend at the Moa JV was based on a full-facility shutdown.

Sales volume for finished nickel and cobalt in Q1 2021 were up 11% and 25%, respectively, from last year. The year-over-year increase was largely due to higher production and improved market conditions as a result of economic recovery since the onset of the global pandemic.

Total Moa JV revenue in Q1 2021 was $126.3 million, up 35% from $93.5 million last year. The revenue increase was attributable to a number of factors, including higher realized nickel and cobalt prices as well as higher nickel and sales volumes, but partially offset by lower fertilizer prices and reduced fertilizer sales volumes. In Q1 2021, realized nickel and cobalt prices were up 31% and 14%, respectively, from last year. Realized prices may be impacted by the timing of deliveries and settlement against contract terms.

Mining, processing and refining (MPR) costs per pound of nickel sold for Q1 2021 were down 5% to US$5.09/lb largely due to the effect of Cuba’s unification of its currencies in lowering labour and other service costs. Lower labor costs were offset by higher sulphur costs and fuel prices, which rose 24% and 32%, respectively, from Q1 2020. MPR costs in Q1 2021 were also impacted by the purchase of sulphuric acid in anticipation of the planned sulphuric acid plant shutdown at Moa in Q2 2021 for maintenance repairs.

Net direct cash cost (NDCC) per pound of nickel sold in Q1 2021 was US$3.83/lb, down 12% from last year. The improvement was largely due to higher cobalt by-product credits and lower MPR costs than Q1 2020.

Sustaining capital spending in Q1 2021 was $4.7 million, down from $6.6 million in Q1 2020. The year-over-year decrease was due primarily to the timing of planned capital expenditures. Sherritt’s share of planned spending at the Moa JV and Fort Site in 2021 is forecasted at US$44 million, primarily earmarked for the continued replacement of mine and plant equipment.

Oil and Gas

^{(1) For additional information see the Non-GAAP measures section.}

Gross working-interest oil production in Cuba in Q1 2021 was 2,202 barrels of oil per day (BOPD), down 33% from 3,277 BOPD produced in Q1 2020. Lower production was primarily due to natural reservoir declines at Puerto Escondido/Yumuri, the absence of new development drilling, and expiration of the Puerto Escondido/Yumuri production sharing contract (PSC) on March 19, 2021.

Revenue in Q1 2021 was relatively unchanged at $7.5 million when compared to $7.1 million for Q1 2020 as a higher reference oil price offset the reduction in production.

Unit operating costs in Cuba in Q1 2021 were $20.64 per barrel, down 24% from Q1 2020 due to higher recoveries and lower labour and third-party service costs resulting from the effect of Cuba’s currency unification and the expiration of the PSC.

With the expiration of its sole production sharing contract and the absence of new development drilling, Sherritt has not provided any production, unit costs or capital spend guidance for its Oil and Gas business unit for the balance of the year due to limited near-term visibility. Sherritt continues its efforts to secure an earn-in partner for drilling and exploration activities for its concessions on Block 10 and Block 6A. Sherritt is not contemplating any further investments in drilling or exploration activities without first securing an earn-in partner.

Power

^{(1) For additional information see the Non-GAAP measures section.
(2) Gigawatt hours (GWh), Megawatt hours (MWh).}

Power production in Q1 2021 was 95 gigawatt hours (GWh) of electricity, down 38% from 153 GWh for the comparable period of 2020. The decline was due to the completion of previously deferred maintenance activities on a turbine at the Boca de Jaruco power production facility. The facility has returned to production following the maintenance shutdown.

The average-realized price in Q1 2021 was $54.81 largely unchanged from Q1 2020. The modest variance was primarily due to fluctuations of the Canadian currency relative to the U.S. dollar.

Revenue in Q1 2021 totaled $5.9 million, down 37% from $9.4 million for last year primarily due to lower power production as a result of scheduled maintenance activities.

Unit operating costs in Q1 2021 were $25.89/MWh, up 78% from $14.57/MWh for last year. The year-over-year increase was attributable to lower sales volume. The increase was partially offset, however, by impact of a strengthening Canadian dollar as costs are denominated in U.S. currency, and by the effect of Cuban’s unification of its currencies in lowering labour and third-party service costs.

The Power business unit had negligible capital spend for the three-month period ended March 31, 2021.

OUTLOOK

2021 Production, unit operating costs and capital spending guidance

Sherritt’s targets for production, unit costs and capital spending in 2021 remain consistent with guidance announced on January 25, 2021 based on operational results achieved in Q1 2021, prevailing commodity prices and input costs, and planned capital spend for the year.

^{(1) Spending is 50% of US$ expenditures for the Moa JV and 100% expenditures for Fort Site fertilizer and utilities.}

NON-GAAP MEASURES

The Corporation uses combined results, Adjusted EBITDA, average-realized price, unit operating cost/NDCC, adjusted earnings/loss and free cash flow to monitor the performance of the Corporation and its operating divisions. Management believes these measures enable investors and analysts to compare the Corporation’s financial performance with its competitors and/or evaluate the results of its underlying business. These measures do not have a standard definition under IFRS and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with IFRS. As these measures do not have a standardized meaning, they may not be comparable to similar measures provided by other companies. See Sherritt’s Management’s Discussion and Analysis for the three months ended March 31, 2021 for further information and reconciliation of non-GAAP measures to the most directly comparable IFRS measure.

CONFERENCE CALL AND WEBCAST

Sherritt will hold its conference call and webcast April 29, 2021 at 10:00 a.m. Eastern Time to review its Q1 2021 results. Dial-in and webcast details are as follows:

Please dial in 15 minutes before the start of the call to secure a line. Alternatively, listeners can access the conference call and presentation via the webcast available on Sherritt’s website.

An archive of the webcast and replay of the conference call will also be available on the website.

COMPLETE FINANCIAL STATEMENTS AND MANAGEMENT’S DISCUSSION AND ANALYSIS

Sherritt’s complete condensed consolidated financial statements and MD&A for the three months ended March 31, 2021 are available at www.sherritt.com and should be read in conjunction with this news release. Financial and operating data can also viewed in the investor relations section of Sherritt’s website.

ABOUT SHERRITT

Sherritt is a world leader in the mining and refining of nickel and cobalt from lateritic ores with projects and operations in Canada and Cuba. The Corporation is the largest independent energy producer in Cuba, with power operations across the island. Sherritt licenses its proprietary technologies and provides metallurgical services to mining and refining operations worldwide. The Corporation’s common shares are listed on the Toronto Stock Exchange under the symbol “S”.

Forward-looking statements

This press release contains certain forward-looking statements. Forward-looking statements can generally be identified by the use of statements that include such words as “believe”, “expect”, “anticipate”, “intend”, “plan”, “forecast”, “likely”, “may”, “will”, “could”, “should”, “suspect”, “outlook”, “potential”, “projected”, “continue” or other similar words or phrases. Specifically, forward-looking statements in this document include, but are not limited to, statements set out in the “Outlook” section of this press release and certain expectations regarding production volumes, operating costs and capital spending; supply, demand and pricing outlook in the nickel and cobalt markets; the impact of COVID-19; continued qualification for the Canada Emergency Wage Subsidy (CEWS); the potential impact of Cuba’s currency unification; anticipated payments of outstanding receivables, including re-directed distributions from the Corporation’s Moa Joint Venture partner; the impact of U.S. sanctions on Cuban; and amounts of certain other commitments.

Forward looking statements are not based on historical facts, but rather on current expectations, assumptions and projections about future events, including commodity and product prices and demand; the level of liquidity and access to funding; share price volatility; production results; realized prices for production; earnings and revenues; environmental rehabilitation provisions; availability of regulatory and creditor approvals and waivers; compliance with applicable environmental laws and regulations; debt repayments redemptions and deferrals; collection of accounts receivable; and certain corporate objectives, goals and plans. By their nature, forward looking statements require the Corporation to make assumptions and are subject to inherent risks and uncertainties. There is significant risk that predictions, forecasts, conclusions or projections will not prove to be accurate, that those assumptions may not be correct and that actual results may differ materially from such predictions, forecasts, conclusions or projections.

The Corporation cautions readers of this press release not to place undue reliance on any forward looking statement as a number of factors could cause actual future results, conditions, actions or events to differ materially from the targets, expectations, estimates or intentions expressed in the forward looking statements. These risks, uncertainties and other factors include, but are not limited to, the impact of the COVID-19 pandemic, changes in the global price for nickel, cobalt, oil and gas, fertilizers or certain other commodities; security market fluctuations and price volatility; level of liquidity; access to capital; access to financing; the risk to Sherritt’s entitlements to future distributions from the Moa Joint Venture; risk of future non-compliance with debt restrictions and covenants and mandatory repayments; Sherritt’s ability to replace depleted mineral reserves; risks associated with the Corporation’s joint venture partner; variability in production at Sherritt’s operations in Cuba; risks related to Sherritt’s operations in Cuba; risks related to the U.S. government policy toward Cuba, including the U.S. embargo on Cuba and the Helms-Burton legislation; potential interruptions in transportation; uncertainty of gas supply for electrical generation; the Corporation’s reliance on key personnel and skilled workers; the possibility of equipment and other failures; risks associated with mining, processing and refining activities; uncertainty of resources and reserve estimates; the potential for shortages of equipment and supplies, including diesel; supplies quality issues; risks related to environmental liabilities including liability for reclamation costs, tailings facility failures and toxic gas releases; risks related to the Corporation’s corporate structure; political, economic and other risks of foreign operations; risks associated with Sherritt’s operation of large projects generally; risks related to the accuracy of capital and operating cost estimates; foreign exchange and pricing risks; compliance with applicable environment, health and safety legislation and other associated matters; risks associated with governmental regulations regarding climate change and greenhouse gas emissions; risks relating to community relations and maintaining the Corporation’s social license to grow and operate; credit risks; competition in product markets; future market access; interest rate changes; risks in obtaining insurance; uncertainties in labour relations; uncertainty in the ability of the Corporation to enforce legal rights in foreign jurisdictions; uncertainty regarding the interpretation and/or application of the applicable laws in foreign jurisdictions; legal contingencies; risks related to the Corporation’s accounting policies; identification and management of growth opportunities; uncertainty in the ability of the Corporation to obtain government permits; risks to information technologies systems and cybersecurity; failure to comply with, or changes to, applicable government regulations; bribery and corruption risks, including failure to comply with the Corruption of Foreign Public Officials Act or applicable local anti-corruption law; the ability to accomplish corporate objectives, goals and plans for 2021; and the Corporation’s ability to meet other factors listed from time to time in the Corporation’s continuous disclosure documents. Additional risks, uncertainties and other factors include, but are not limited to, the ability of the Corporation to achieve its financial goals; the ability of the Corporation to continue to realize its assets and discharge its liabilities and commitments; the Corporation’s future liquidity position, and access to capital, to fund ongoing operations and obligations (including debt obligations); the ability of the Corporation to stabilize its business and financial condition; the ability of the Corporation to implement and successfully achieve its business priorities; and the ability of the Corporation to comply with its contractual obligations, including, without limitation, its obligations under debt arrangements. Readers are cautioned that the foregoing list of factors is not exhaustive and should be considered in conjunction with the risk factors described in this press release and in the Corporation’s other documents filed with the Canadian securities authorities, including without limitation the Management’s Discussion and Analysis for the three months ended March 31, 2021 and the Annual Information Form of the Corporation dated March 17, 2021 for the period ending December 31, 2020, which is available on SEDAR at www.sedar.com.

The Corporation may, from time to time, make oral forward-looking statements. The Corporation advises that the above paragraph and the risk factors described in this press release and in the Corporation’s other documents filed with the Canadian securities authorities should be read for a description of certain factors that could cause the actual results of the Corporation to differ materially from those in the oral forward-looking statements. The forward-looking information and statements contained in this press release are made as of the date hereof and the Corporation undertakes no obligation to update publicly or revise any oral or written forward-looking information or statements, whether as a result of new information, future events or otherwise, except as required by applicable securities laws. The forward-looking information and statements contained herein are expressly qualified in their entirety by this cautionary statement. 

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