Sherritt hit by low nickel prices at Ambatovy

Sherritt International (TSX: S) is bracing for a $1.6-billion non-cash impairment at its Ambatovy nickel-cobalt mine in Madagascar due to lower nickel prices, months after it cancelled its quarterly dividend for 2015 and 2016 to reduce costs. 

Nickel — which is used to make stainless steel — has had its price hammered by oversupply and lower demand since the Chinese slowdown. The spot nickel price recently closed at US$3.74 per lb., down 43.5% over the past year.

Sherritt has a 40% stake in the Ambatovy mine and is the operator. Its partners are Japan’s Sumitomo (32.5%) and Korea Resources (27.5%).

Using a long-term nickel price of US$8.50 per lb., the firms anticipate a total after-tax impairment of US$2.4 billion at Ambatovy.

“We used a combination of analysts’ consensus and economic forecasts to determine the long-term nickel price,” Sherritt’s media relations representative Scott Tabachnick says.

The last time the spot nickel price traded above US$8 per lb. was in September 2014.

For the year ended 2015, Sherritt’s share of loss totals $1.6 billion, including $1.3 billion on its 40% stake in Ambatovy’s impairment, and $300 million on the “incremental carrying value of investments” related to mineral rights acquired from Dynatec, a previous owner of Ambatovy, in 2007.

The mineral rights are also part of Ambatovy, Tabachnick says.

He notes that the writedown is non-cash and “won’t affect the cash flow.”

In 2015, Ambatovy’s 100% nickel and cobalt production was 47,271 tonnes and 3,464 tonnes, up 28% and 19% from 2014.

In December the mine ran at 85% of its design capacity, compared to an average 79% annually. Its full-year design capacity is 60,000 tonnes of nickel and 5,600 tonnes of cobalt.

 “We achieved phenomenal results in terms of ramp-up and operational success,” Tabachnick says.

Meanwhile, Sumitomo reported it would take a 77-billion yen ($938-million) writedown on its 32.5% share in Ambatovy, citing low nickel prices in the last three months of 2015.

It also withdrew its earnings guidance for the fiscal year ending in March 2016.

“There is a possibility that we may post impairment losses in additional projects,” it said in a release.

Regarding Sherritt’s price forecasts for nickel, Tabachnick says the company “plans for various scenarios,” and that “for this type of market we need to be prepared for any eventuality, and not just rely on when the nickel price might change.”

CIBC analyst Tom Meyer estimates that 65% of the nickel produced globally is losing money at current spot prices. Meyer says “production curtailments will soon work through the market to support nickel prices.”

Meyer has a $2 target and an “outperform” rating on shares of Sherritt.

The stock touched a 52-week low on Jan. 13 of 53¢, down 83.6% from the $3.23 high reached last May. At press time on Jan. 18, it traded at 64¢ per share.

Sherritt’s fourth quarter and full-year financials should be out on Feb. 10.