Sherritt surges as Obama ends US isolation of Cuba

U.S. President Barack Obama’s call for a “new approach” in the U.S. government’s relationship with Cuba, including the establishment of diplomatic relations and an easing of economic and travel restrictions, has lifted the shares of Sherritt International (TSX: S; US-OTC: SHERF), which has been operating on the island state for more than two decades.

“We have a unique position in Cuba — we’re the most successful investor — and we see that as a differentiating characteristic,” David Pathe, Sherritt’s president and CEO, said in an interview on Dec. 15, a day before Obama declared he was ending America’s “outdated approach” to the communist country.

Sherritt has interests in nickel mining, oil and gas production, and electricity generation in Cuba, and its oil and gas business there accounted for 26% — or $219.7 million — of Sherritt’s $858 million in adjusted revenue during the first nine months of 2014.

The company set up its oil and gas business in Cuba in 1992 and today is the largest oil producer in the country, with three commercial oil fields under two production-sharing agreements (PSAs). In June Sherritt extended its Puerto Escondido/Yumiri PSA for another decade until March 2028, and on Dec. 18 signed two new PSAs on blocks 8A and 10 in central and northern Cuba, each of which have a 25-year term. The company is also awaiting final approval for two more PSAs on the west side of Havana.

“Oil and gas is a significant producer of our free cash flow,” Pathe said. “We can produce a barrel of oil for less than ten bucks, and with world pricing as it has been until recently — and even today — we make good margins in our oil business in Cuba.”

Outside the town of Moa in eastern Cuba, Sherritt owns 50% of the Moa nickel and cobalt joint-venture with the Cuban government holding the rest. The JV was established in 1994 and turned out 9,227 tonnes of finished nickel and 875 tonnes of cobalt on a 100% basis in the third quarter of 2014.

Moa’s lateritic nickel and cobalt ore is mined from an open pit, processed into mixed sulphides containing nickel and cobalt on-site, and then shipped to the east coast of Canada. From there it is moved by train to the JV partners’ Fort Saskatchewan facility in Alberta for refining into finished nickel and cobalt.

News of Obama’s historic policy shift lifted Sherritt’s shares 26% to $2.87, with 9.5 million shares changing hands. Among other benefits, a thaw in relations could eventually mean more U.S. shareholder ownership in the company. In 1996, the U.S. government passed the Helms-Burton Act, which permitted lawsuits against companies that do business in Cuba.

Outside Cuba, Sherritt is two and a half years into what the company originally contemplated as a three-year ramp-up at its Ambatovy nickel project in Madagascar, and says it is on track to reach 90% of nameplate capacity by mid-2015.

“While ambitious, we feel it is achievable,” Pathe says, who was appointed president and CEO of the company in January 2012. “It would be one of the most successful ramp-ups ever for a large-scale nickel laterite facility.”

Commercial production kicked off in January 2014, and the project is running at 70% of nameplate capacity. The plant underwent commissioning and start-up in 2012.

Ambatovy is the largest finished nickel and cobalt project in the world, and has dominated Sherritt’s attention since the company acquired its stake in the asset in 2007, Pathe says. The project has an annual design capacity of 60,000 tonnes of nickel and 5,600 tonnes of cobalt over an estimated 29-year mine life.

“We’re on the cusp of finally demonstrating that the asset is the great long-life asset we’ve been telling the world it’s going to be,” he says.

Sherritt owns a 40% stake and is the operator, with joint-venture partners Sumitomo (27.5% interest), Korea Resources (27.5%) and SNC-Lavalin (TSX: SNC; US-OTC: SNCAF) (5%).

Ambatovy has been a massive undertaking, with the plant area alone taking up 4 sq. km. The open-pit mine is located in the highlands, where ore is processed on-site and sent as slurry via a 220 km pipeline to a process plant and refinery, south of the Port of Toamasina.

Because Madagascar is a poor country with unreliable electricity and little infrastructure, Sherritt had to build three coal-powered turbines and a dedicated port facility. “We spent the first year focused on the utility corridor and stable production at the autoclaves, as well as building miles and miles of pipelines,” Pathe says. “While three years may sound like a long time … if you compare it to other large-scale lateritic nickel projects that have been started up in the last 20 years, I think ours will look like a successful ramp-up.”

Pathe also points out that Ambatovy is one of the few laterite projects that produces finished LME nickel, unlike Vale’s (NYSE: VALE) Goro nickel mine or Glencore’s (LSE: GLEN) Koniambo nickel mine, both located on New Caledonia in the South Pacific.

He also notes that once Ambatovy reaches 90% nameplate capacity, the company could produce a pound of nickel at a cost ranging from US$3 to US$5 per lb., placing the project in the second quartile of producers.

During his more than two years at Sherritt, Pathe says he has brought focus to the business, and has “drilled down” on where the company felt it had its most valuable skills and expertise. That’s one reason why Sherritt exited the coal business a year ago. “We felt we didn’t have any unique attributes with the coal business,” he explains.

Pathe says he has brought discipline to the way Sherritt allocates capital and manages costs, as well as its balance sheet.

“We’ve paid down well over $700 million in debt, and we’ve said we’d proactively deal with a series of debentures that were set to mature in 2015,” he says. “We’re in solid shape. We’ll finish the year with upwards of $500 million of cash in the bank and we don’t face debt maturity until 2018, so we have no financing exposure next year.”