Sherritt International (S-T) has shouldered such industry-wide hardships as lower commodity prices and higher costs, but the company is signalling its bullishness for the future by increasing its dividend, despite reporting a fourth-quarter loss.
Fourth-quarter earnings showed a net loss of 6¢ per share, compared to a gain of 10¢ per share for the same period last year. But the loss was largely attributed to $23.5 million, or 9¢ per share, in non-cash charges.
Non-cash charges mainly came from increased depreciation expenses due to changes in environmental rehabilitation obligations; increased finance expenses due to a redemption premium; and a deferred cost writeoff after redeeming 2014 debentures. Combined, these three factors accounted for $20.5 million in non-cash charges.
When earnings are adjusted for those non-cash charges they improve to $6.2 million, or 3¢ per share — which is better, but still shy of the previous year’s performance.
The turn for the worse came as weaker commodity prices met with higher operating costs in its metal and coal divisions. On the latter front, Sherritt suspended operations at its Obed Mountain mine.
Sherritt’s president and CEO David Pathe said the decision was based on the mine’s lower quality of coal and higher cost of production. Most of the employees from the mine were transferred to its nearby Coal Valley mine. Both Obed and Coal Valley are located in Alberta.
Pathe said that Obed didn’t significantly contribute to the company’s bottom line, especially since operations were scaled back before the suspension.
Speaking in a conference call, Pathe turned to the positives that came out of the quarter.
There was, for instance, the production of 27 million lb. nickel in the quarter and 88 million for the year. Both numbers represent the highest-ever nickel production totals for the company.
This related to the company’s progress at its Ambatovy joint-venture project in Madagascar. Sherritt is the operator and the largest stakeholder, with a 40% interest. Sumitomo and Korea Resources each have a 27.5% stake, while SNC-Lavalin (SNC-T) has a 5% stake.
The fourth quarter marked a milestone for the project, as it was the first full quarter of production at the mine. Sherritt acquired its interest by acquiring Dynatec in 2007. Construction on the mine began in 2008, and finished at the end of 2011.
“It’s taken five years, but Ambatovy is no longer a construction project — it is a producer,” Pathe said on the call. “And we are ramping up towards full capacity.”
Pathe conceded that the ramp-up has had some hiccups, as all operations of Ambatovy’s scale do, but that it was trending in the right direction, with throughput moving from 39% in September to averaging 40% in the quarter, and 46% in January.
“For 2013, the jagged pattern of throughput will continue,” Pathe said. “But the project works.”
This creates serious implications for shareholders. It means that Sherritt has some cost certainty going forward, as it anticipates no large, unforeseen capital injections into the mine. The facility in its current configuration, Pathe says, will move towards cash-flow neutrality and into profitability.
Such operational confidence led to another bit of good news for shareholders, as Sherritt boosted its dividend by 13% from 3.8¢, to 4.3¢ per quarter. The dividend is set to be paid at the end of March.
Sherritt shares have fallen 7% since releasing the results on Feb. 27, trading for $5.31 on Feb. 28, with 761,000 shares traded.
Why is this company trading at a 50% discount to book value? Perhaps a share buyback is in order.