Anaconda squeezes Sherritt’s earnings (March 18, 2002)

Aussie laterite nickel miner Anaconda Nickel, engaged in talks with bond holders amid fears it may default on a US$420-million bond series, announced a large half-year loss that was echoed on the books of Sherritt International (S-T)

A $23.4-million, fourth-quarter writedown on the carrying value of Sherritt’s stake in problem-plagued Anaconda, combined with a $6.8-million writedown on some oil properties in Spain, took a bite out of Sherritt’s bottom line for 2001.

On the backs of the writedowns, Sherritt recorded a net loss of $9.2 million (or 15 per diluted share) for the three months ended Dec. 31, compared with net earnings of $19.5 million (15 per share) in the year-ago period. Excluding the writedowns, the company earned $14 million (9 per share) in the latest fourth quarter, in line with analysts’ estimates. Revenue climbed to $189 million from the $117.7 million recorded in the year-ago quarter.

During the third quarter of 2001, the company increased its stake in Anaconda by $7.8 million to about 40 million shares, representing 8.7% of the company. The investment was written-down by $23.4 million during the latest quarter to meet Sherritt’s estimate of its long-term net realizable value based on available information. Swiss-based metal trader Glencore International, with 33.8%, and Anglo American (AAUK-Q), with 23.7%, are Anaconda’s other principal shareholders.

Anaconda has struggled since 1999 to get its giant Murrin Murrin laterite nickel plant in Australia operating at capacity. The plant employs Sherritt’s technology for extracting nickel from low-grade lateritic ore. The project is well behind the originally estimated startup date of early 2000. Most recently, a lightning strike hit power transformers at Murrin Murrin, knocking out the plant and forcing Anaconda to move forward a scheduled 5-day maintenance shutdown.

Anaconda is looking to restructure its US$420-million debt with mainly U.S. bondholders. The company incurred a loss of A$457.5 million for the six months ended Dec. 31, 2001.

In October, Murrin Murrin’s principal contractor, Fluor Australia, filed suit in the Supreme Court of Australia against Sherritt and Dynatec (DY-T), which now owns Sherritt’s metallurgical design business. Anaconda Nickel has made claims against Fluor for alleged deficiencies at Murrin Murrin, which are now in arbitration. Fluor’s claim is against Sherritt and Dynatec as designers of the hydrometallurgical system used at Murrin Murrin.

The bulk of Sherritt’s quarterly revenue came from the company’s coal business (including its half-stake in the Luscar coal partnership, acquired in the second quarter), which chipped in $80.3 million. Metals revenue fell by $18.9 million to $55.4 million from the previous year on lower realized nickel and cobalt prices and lower fertilizer sales volumes (results from Sherritt’s fertilizer operations are now reported as part of the metals business). The metals business incurred an operating loss of $3.4 million during the fourth quarter, compared with operating earnings of $4.6 million in the corresponding period of 2000.

With added cash flow from the coal division, Sherritt’s cash flow from operations was $40.7 million, a nice turnaround from the $700,000 consumed in the 2000 fourth quarter.

For all of 2001, Sherritt’s net earnings were off sharply at $51.6 million (33 per fully diluted share), compared with year-earlier earnings of $115.6 (84 per share). Revenue climbed to a record $636.6 million from $480.4 million between the two periods, partly as a result of an $11.5-million increase in revenue from the oil and gas business, which enjoyed record oil production in Cuba. But the coal business was the real star performer, contributing $204.5 million in revenue from mid-May to the end of 2001. Cash flow from operations was $195.1 million, up $1.9 million from 2000.

Nickel and cobalt metal production rose slightly from the previous year, at 14,613 tonnes nickel and 1,471 tonnes cobalt. Nickel and cobalt sulphide production grew by 1,420 tonnes to 16,180 tonnes. The company realized US$5,695 per tonne for its nickel, off 31% from a year earlier, and US$9.80 per lb. for its cobalt, off 23%. During 2001, nickel averaged US$5,945 per tonne on the London Metal Exchange and cobalt spot prices averaged US$9.56 per lb.

The metals business recorded operating earnings of $3.7 million on revenue of $230.3 million in 2001, off from earnings of $61.9 million on year-earlier revenue of $299 million.

At the end of 2001, Sherritt had $147.9 million in cash and short-term investments, down from $261.3 million at the end of 2000.

Sherritt expects coal sales to increase as Luscar’s Line Creek and Coal Valley mine expansions become fully operational.