Sherritt to recoup $362M of debt from Cuban partners through ‘cobalt swap’

Sherritt International (TSX: S) has entered agreements with its Cuban partners to settle $362 million of total outstanding receivables over five years, beginning Jan. 1, 2023. The agreements, known as the “cobalt swap,” would allow the Moa joint venture in Cuba to prioritize dividend payments in the form of finished cobalt to each partner, and each partner’s share of these cobalt dividends will be redirected to Sherritt as debt repayment.

“We have been able to negotiate agreements that establish an effective schedule for the full repayment of the outstanding receivables by our Cuban partners within five years, and we believe this brings an end to the historical repayment uncertainty,” Leon Binedell, president and CEO of Sherritt, stated in a news release. “Combined with Sherritt’s portion of the dividends, this is expected to provide significant cash flow to deliver on our strategic priorities to reduce debt and aggressively expand our business.”

As per the terms of the cobalt swap, General Nickel Co. (GNC), Sherritt’s Moa JV partner, will assume certain liabilities owed to Sherritt by Union Cubapetroleo (CUPET) and Energas SA in order to fully repay outstanding amounts over the five-year period. GNC will in turn enter into payment agreements of an equivalent amount to the liabilities with the Cuban partners. This includes the Energas conditional sales agreement receivable of $332.4 million and trade accounts receivable from CUPET of $29.5 million.

Beginning in 2023, the Moa JV expects to distribute a maximum of 2,082 tonnes of finished cobalt annually — or approximately 60% of current production (on a 100% basis) — to the joint venture partners. Accordingly, Sherritt expects to receive a maximum of 1,041 tonnes of finished cobalt dividends per year in respect of its 50% share of the Moa JV.

GNC will redirect its 50% share of the total Moa JV dividends, up to 1,041 tonnes of finished cobalt per year, to Sherritt as repayment towards the outstanding receivables, provided that the total cobalt volume has a value of at least US$57 million.

If the cobalt dividend redirected by GNC has a value of less than US$57 million, GNC’s share of any cash distributions from the Moa JV in that year will be redirected to Sherritt. If the maximum cobalt volume distributed (1,041 tonnes) is not met in a given year, the volume deficit will be added to the threshold in the following year. Any shortfall in the annual minimum payment will also be added to the following year, such that the full repayment is expected to be made within five years.

Upon receipt of the finished cobalt dividends, the title to both Sherritt and its partners’ redirected share of the finished cobalt will be transferred immediately to Sherritt, and the physical product will be moved to a Sherritt warehouse in Fort Saskatchewan, from which Sherritt will sell the finished cobalt in the open market.

In addition to the cobalt swap, the payment agreement with Cuban partner Energas has been extended so it can fund its operating and maintenance costs, as well as cover future payments to Sherritt.

Sherritt expects to continue to receive about US$4.2 million (C$5.6 million) per month under a payment agreement with Moa JV and Energas, whereby the Moa JV converts foreign currency to Cuban pesos through Energas to support the JV’s local Cuban operating activities. These funds are then paid to Sherritt primarily to facilitate foreign currency payments for the Energas operations.

In 2008, Sherritt entered into a conditional sales agreement with Energas to build additional electrical energy capacity in Cuba, under which Energas was required to repay certain amounts advanced. However, due a number of events, including periods of low commodity prices, increased sanctions by the U.S. government, and the Covid-19 pandemic, access to foreign currency in Cuba to make payments on the liability had been significantly restricted.

Similarly, in regards to the trade receivable from CUPET, the lack of access to foreign currency has limited CUPET’s ability to pay amounts owing to Sherritt.

The cobalt swap provides a mutually beneficial arrangement to pay down the outstanding receivables in a reasonable timeline without relying on Cuba’s ability to access foreign currency, Sherritt said.

Shares of Sherritt International surged by 10.1% by early afternoon in Toronto following the latest announcement. The company’s market capitalization is at $170.6 million.