Sherritt Reports Strong Third Quarter Results and Provides Details of Its Moa JV Expansion Program

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TORONTO–(BUSINESS WIRE)–Sherritt International Corporation (“Sherritt”, the “Corporation”, the “Company”) (TSX: S), a world leader in the mining and hydrometallurgical refining of nickel and cobalt from lateritic ores, today reported its financial results for the three and nine months ended September 30, 2022. All amounts are in Canadian currency unless otherwise noted.

“We are very pleased with the progress we have made in meeting key strategic priorities for the year. With the signing of the agreement to address our Cuban receivables, we are pleased to announce that Sherritt’s Board has approved the next phase of our expansion plans at the Moa Joint Venture. We narrowed the scope of our expansion investment to the most critical components resulting in an estimated cost of US$50 million on a 100% basis. This demonstrates our capital discipline in pursuing our most valuable brownfields growth objectives,” said Leon Binedell, President and CEO of Sherritt International Corporation. “Reaching agreement on our Cuban receivables ahead of defining the expansion scope supports our sound capital and joint venture management. The investment, which builds on our previously approved SPP project, will expand mixed sulphide intermediate production by 6,500 tonnes of contained nickel and cobalt at Moa at a low capital intensity of approximately US$13,200 per annual tonne of contained nickel.”

“We continue to be encouraged by strong market fundamentals for our nickel, cobalt and fertilizer products which we expect will continue into Q4,” continued Mr. Binedell. “Equally important, after months of effort and negotiations, we have finalized an agreement with our Cuban partners on what we believe is a mutually beneficial, innovative arrangement to address our Cuban receivables over five years. This arrangement provides the cash we need to pursue our strategic objectives, and continue to fund our growth initiatives and debt obligations. In addition to the receivables agreement, we received government approval for the extension of our power generation contract for an additional 20 years. Concurrently, we finalized an extension to our “Moa swap” payment agreement, thus ensuring that we maintain our interest in this economically beneficial business while ensuring we have access to foreign currency from our Power business on a timely basis.”

SELECTED Q3 2022 DEVELOPMENTS

• Sherritt had earnings from operations and joint venture for the quarter of $21.3 million, compared to a loss of $10.8 million in the same period in the prior year driven by higher nickel and fertilizer sales volume and realized prices and by the timing of maintenance between the two periods. Our annual maintenance shutdown occurred in the second quarter of this year versus the third quarter last year. Net loss from continuing operations was $26.9 million, or $(0.07) per share, compared to a net loss from continuing operations of $15.5 million, or $(0.04) per share, in Q3 2021. The current period net loss was largely as a result of the recognition of a $48.5 million non-cash loss on revaluation of the allowances for expected credit losses (ACL) on the cobalt swap agreement (the Cobalt Swap) entered into subsequent to the quarter-end related to the repayment of the Energas conditional sales agreement (CSA) receivable as outlined below.
• Sherritt’s adjusted net earnings from continuing operations⁽¹⁾ was $13.9 million, or $0.03 per share for the quarter compared to an adjusted net loss from continuing operations of $13.4 million, or $(0.03) per share in Q3 2021. Similarly, for the nine months ended September 30, 2022 adjusted net earnings from continuing operations was $95.0 million, or $0.24 per share compared to an adjusted net loss from continuing operations of $28.7 million, or $(0.07) per share in the same period in the prior year.
• Adjusted EBITDA⁽¹⁾ in the quarter was $37.4 million compared to $17.6 million in Q3 2021. The improved Adjusted EBITDA was driven by higher nickel and fertilizer sales volume and realized prices and by the timing of maintenance between the two periods. The increase in sales volume was primarily as a result of increased production related to the timing of maintenance activities in the comparative quarters. For the nine months ended September 30, 2022 Adjusted EBITDA was $197.9 million compared to $65.8 million, or 201%, higher than the same period in the prior year.
• Sherritt’s share of finished nickel and cobalt production at the Moa Joint Venture (Moa JV) was 4,443 tonnes and 419 tonnes, respectively. Finished production was higher in the current quarter primarily due to timing of the planned annual maintenance shutdown. Our annual maintenance shutdown occurred in the second quarter of this year versus the third quarter of last year. For the first three quarters of this year, nickel production was 6% higher than the same period last year, while cobalt production was marginally lower primarily due to the higher nickel to cobalt ratio in the mixed sulphides from Moa.
• Finished nickel sales for the three months ended September 30, 2022 exceeded production volumes while finished nickel sales for the nine months ended September 30, 2022 were lower than production primarily due to logistics-related challenges in transporting finished product to customers experienced late in the second quarter and throughout the third quarter. The temporary order deferrals generally reconciled throughout the third quarter. The order deferrals were largely related to a more cautious restocking approach taken by consumers after resumption of economic activity in China following an easing of zero-COVID policies. The positive consumer sentiment of increasing economic activity in China was tempered by continued recessionary and global inflation fears as well as the reduction of steel manufacturing in Europe due to significantly increased energy costs and energy supply uncertainty. Affected sales orders were partially offset by higher netback sales to other markets and sales to new customers. Finished cobalt sales volumes for both three months and nine months ended September 30, 2022 continued lower than production volumes in Q3 2022, with a contraction in the consumer electronics sector compared with 2021 contributing to reduced lithium cobalt oxide demand.

  The Corporation anticipates inventory levels for nickel will reduce to more typical levels by the end of 2022; however, given current market conditions, cobalt inventory levels are expected to reduce to more typical levels in the first quarter of 2023.

• Net direct cash cost (NDCC)⁽¹⁾ at the Moa JV was US$6.76/lb compared to US$4.53/lb in Q3 2021. NDCC was higher in the current year quarter due to higher input commodity costs, including a 131% increase in global sulphur prices, a 46% increase in fuel oil prices and a 156% increase in diesel prices, alongside lower cobalt by-product credit, primarily due to lower cobalt sales relative to the higher nickel sales volume as a result of delayed cobalt sales. Year-to-date to September 30, 2022, NDCC was US$4.39/lb compared to US$4.30/lb in the comparable 2021 period despite the increase in input commodity prices which were largely offset by higher by-product credits.
• In light of lower than expected sales in late Q2 and early Q3 and shipping delays, Sherritt did not receive any distributions from the Moa JV in Q3. Subsequent to the quarter, Sherritt received $20.6 million (US$15.0 million) as its share of distributions from the Moa JV. Given prevailing nickel and cobalt prices, planned spending on capital, including growth capital, working capital needs, and other expected liquidity requirements, Sherritt continues to anticipate higher distributions in the second half of 2022 compared to the first half.

(1)

Non-GAAP financial measures. For additional information see the Non-GAAP and other financial measures section of this press release.

EXPANSION PROJECT UPDATE

• With the signing of the Cuban receivables agreements, Sherritt’s Board approved US$50 million (100% basis) as the next phase of the Moa JV expansion plan. The scope of Sherritt’s expansion investment was narrowed to the most critical components and reflect the evolving market for nickel and cobalt. With a market focus on electric vehicle (EV) batteries, Sherritt sees an opportunity to focus its strategy on increasing production of intermediary products that will enable it to fully utilize existing capacity at the refinery and also consider direct sales of intermediate product into the EV battery supply chain.
• With the previously approved Slurry Preparation Plant (SPP) project, the estimated total cost of the two phases of the expansion is approximately US$77 million (100% basis).
• The second phase will focus on expanding mixed sulphide precipitate (MSP) intermediate production and consist of the completion of the Leach Plant Sixth Train and Fifth Sulphide Precipitation Train, and construction of additional acid storage capacity at Moa.
• Upon completion of the SPP, which is still expected in early 2024, and the second expansion phase at the end of 2024, the total increase in MSP is estimated at 20% of current production or 6,500 tonnes of contained metal, resulting in a total capital intensity of approximately US$13,200 per annual tonne of contained nickel.
• Sherritt estimates that two thirds of the increased production will be processed into finished nickel and cobalt fully utilizing the current refinery capacity to process the Moa feed, and the remaining could be sold as MSP.

LIFE OF MINE/UPDATED 43-101 TECHNICAL REPORT

The work to complete the Economic Cut-Off Grade (ECOG) and Life of Mine (LOM) development continues at the Moa mine.

• In Q3, resource model classifications and pit optimization activities were completed. The final development of the LOM is in progress with expectation of mine plan sequencing and reserves estimates to be completed during Q4.
• ECOG and LOM analysis using the latest methodologies are expected to extend the current LOM beyond 2040.
• Continued engagement with the Oficina Nacional de Recursos Minerales (ONRM), Cuba’s Natural Resources Agency, and alignment on the mine execution plan using the new methodologies is expected in Q4.
• Development of the NI 43-101 and peer review will occur during Q4 and early Q1 2023. The final draft of the 43-101 is expected to be released by the end of Q1 2023.

DEVELOPMENTS SUBSEQUENT TO QUARTER END

• Sherritt issued its 2021 sustainability, climate, and tailings management reports as well as its sustainability scorecard outlining the Corporation’s performance on environmental, social, and governance (ESG) matters. Sherritt continues to progress on its commitments to achieving net zero greenhouse emissions by 2050, obtaining 15% of overall energy from renewable sources by 2030, reducing nitrogen oxide emission intensity by 10% by 2024, and increasing the number of women in the workforce to 36% by 2030.
• Sherritt finalized the Cobalt Swap agreement with its Cuban partners to settle its total outstanding Cuban receivables over five years, beginning January 1, 2023. Under this agreement, the Moa JV will prioritize payment of dividends in the form of finished cobalt to each partner, up to an annual maximum volume of cobalt, with any additional dividends in a given year to be distributed in cash. All of the Cuban partner’s share of these cobalt dividends, and potentially additional cash dividends, will be redirected to Sherritt as payment to settle the receivables until the annual maximum cobalt volume and dollar amount limits, including the collection of any prior year shortfalls, has been reached.

• Sherritt and its Cuban partners finalized an extension to the Energas Payment Agreement (the Moa Swap) to fund the operating and maintenance costs of Energas, as well as cover future payments that would be owed to Sherritt. Sherritt expects to continue to receive approximately US$4.2 million ($5.6 million) per month under a payment agreement between Sherritt, Moa JV and Energas. The Moa JV converts foreign currency to Cuban pesos through Energas to support Moa JV’s local Cuban operating activities. The foreign currency is then paid to Sherritt primarily to facilitate foreign currency payments for the Energas operations and to fund dividend repatriations to Sherritt.

• Cuba’s Executive Council of Ministers approved the twenty-year extension of Energas’ power generation contract with the Cuban government to March 2043. The extension of this economically beneficial contract supports Sherritt’s on-going investments in Cuba, helps facilitate the Cobalt and Moa Swaps, and supports Cuba’s long-term energy security.
• The Corporation paid interest of $13.2 million on the 8.50% second lien secured notes at the end of October. There were no mandatory redemptions on these notes for the two-quarter period ended June 30, 2022 as the conditions pursuant to the redemption provisions of the indenture agreement were not met. While 50% of the excess cash flow, as defined in the indenture agreement, for this period was $5.5 million, the Corporation did not meet minimum liquidity condition at the interest payment date.

Q3 2022 FINANCIAL HIGHLIGHTS

	For the three months ended								For the nine months ended
	2022			2021					2022			2021
$ millions, except per share amount	September 30			September 30			Change		September 30			September 30			Change
Revenue	$	30.2		$	20.7		46%		$	130.2		$	73.6		77%
Combined revenue(1)		190.1			120.2		58%			613.8			414.2		48%
Earnings (loss) from operations and joint venture		21.3			(10.8)		297%			118.8			(12.0)		nm(2)
Net (loss) earnings from continuing operations		(26.9)			(15.5)		(74%)			71.0			(27.8)		355%
Net (loss) earnings for the period		(26.3)			(16.2)		(62%)			70.5			(32.5)		317%
Adjusted EBITDA(1)		37.4			17.6		113%			197.9			65.8		201%
Net (loss) earnings from continuing operations ($ per share)		(0.07)			(0.04)		(75%)			0.18			(0.07)		357%
Cash provided by continuing operations for operating activities		18.8			16.2		16%			50.0			14.7		240%
Combined free cash flow(1)		0.1			19.3		(99%)			21.9			40.9		(46%)
Average exchange rate (CAD/US$)		1.306			1.260		4%			1.283			1.251		3%

(1)		Non-GAAP financial measures. For additional information see the Non-GAAP and other financial measures section of this press release.
(2)		Not meaningful (nm).

						2022			2021
$ millions, as at						September 30			December 31			Change
Cash and cash equivalents						$	137.6		$	145.6		(5%)
Loans and borrowings							398.6			444.5		(10%)

Cash and cash equivalents at September 30, 2022 were $137.6 million, up from $124.6 million at June 30, 2022. The increase in cash was primarily due to continued strong fertilizer pre-buys for fall season sales as a result of a generally successful harvest in western Canada, partly offset by the lack of distributions from the Moa JV during the quarter, and $10.4 million of capital expenditures.

Despite not receiving distributions from the Moa JV in the third quarter of 2022, distributions to the end of the quarter totaled $43.4 million (US$34 million). Distributions from the Moa JV are determined based on available cash in excess of liquidity requirements, including anticipated nickel and cobalt prices, planned spending on capital, working capital needs, and other expected liquidity requirements. Sherritt continues to expect distributions in the second half of 2022 to exceed the amount received in the first half of the year. To date in Q4, Sherritt has received $20.6 million (US$15 million) as its share of distributions from the Moa JV.

Sherritt also received US$12.5 million ($16.2 million) from Energas in Q3 which was used to facilitate foreign currency payments for the Energas operations. Concurrent with the finalization of the Cobalt Swap, Sherritt and its Cuban partners agreed to extend the Energas Payment Agreement to fund the operating and maintenance costs of Energas, as well as to cover future payments that would be owed to Sherritt. Sherritt expects to continue to receive approximately US$4.2 million ($5.6 million) per month under the agreement.

Of the $137.6 million of cash and cash equivalents, $36.9 million was held in Canada, up from $28.6 million as at June 30, 2022, and $95.8 million was held at Energas, up from $91.8 million as at June 30, 2022. The remaining amounts were held in Cuba and other countries.

The Cobalt Swap agreement

As announced on October 13, Sherritt finalized an agreement with its Cuban partners to settle the total outstanding Cuban receivables over five years, beginning January 1, 2023. Under the agreement, the Moa JV will prioritize payment of dividends in the form of finished cobalt to each partner, up to an annual maximum volume of cobalt, with any additional dividends in a given year to be distributed in cash. All of the Cuban partner’s share of these cobalt dividends, and potentially additional cash dividends, will be redirected to Sherritt as payment to settle the receivables until the annual minimum payment amount and cobalt dividend volume, including the collection of any prior year shortfalls, has been reached.

On January 1, 2023, the outstanding receivable amounts owing to Sherritt from Energas S.A. (Energas) and Union Cuba-Petroleo (CUPET) – estimated to total $362 million – will be assumed by General Nickel Company (GNC), Sherritt’s Moa JV partner, who in turn will enter into payment agreements of an equivalent amount, denominated in Cuban pesos, with Energas and CUPET. This amount includes the Energas conditional sales agreement (Energas CSA) receivable of $332.4 million and trade accounts receivables from CUPET of $29.5 million. This reflects the total amount owing to Sherritt from Energas and CUPET rather than only the overdue amounts (US$153.2 million at September 30, 2022) based on scheduled payments. The Energas CSA balance includes the total amount owing, excluding the 33 1/3% elimination reported in Sherritt’s consolidated financial statements.

No interest will accrue on the Energas CSA to ensure repayment within five years; however, in the event that the total outstanding receivables are not fully repaid by December 31, 2027, interest will accrue retroactively at 8% per annum from January 1, 2023 on the unpaid principal amount, and the unpaid principal and interest amounts will become due and payable to Sherritt by GNC.

Over the five-year period beginning January 1, 2023, the Moa JV expects to distribute a maximum of 2,082 tonnes, or approximately 60% of current production (100% basis), of finished cobalt annually to the joint venture partners (finished cobalt dividends). Accordingly, Sherritt expects to receive a maximum of 1,041 tonnes of the finished cobalt dividends per year in respect of its 50% share of the Moa JV. GNC will redirect its 50% share of the finished cobalt dividends, up to 1,041 tonnes per year, to Sherritt as repayment towards the outstanding receivables, provided that the total cobalt volume redirected has a value of at least US$57 million. Any shortfall in the annual minimum payment amount and cobalt dividend volume, will be carried forward to the subsequent year such that full repayment is expected to be made within five years.

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

This transaction represents a significant milestone for Sherritt and is expected to provide significant cash flow to deliver on the Corporation’s strategic priorities to reduce debt and actively expand its business through:

• reasonable certainty the amount will be paid over the five year term of the loan as it is independent of Sherritt’s Cuban partner’s ability to access foreign currency;
• a reasonably certain cash flow to Sherritt of US$114 million annually through the sale of cobalt, half of which will be used to repay the amounts receivable;
• the receipt of the majority of the payments prior to the maturity of the second lien notes in November 2026; and
• an opportunity for early settlement of the receivables through enhanced repayment if the market value of the cobalt increases.

The diagram in Appendix 1 summarizes the key components of the Cobalt Swap.

Adjusted net earnings (loss) from continuing operations⁽¹⁾

					2022						2021
For the three months ended September 30		$ millions			$/share			$ millions			$/share
Net (loss) earnings from continuing operations		$	(26.9)		$	(0.07)		$	(15.5)		$	(0.04)
Adjusting items:
Sherritt – Unrealized foreign exchange (gain) loss – continuing operations			(4.6)			(0.01)			7.9			0.02
Corporate – Severance and other contractual benefits expense			–			–			3.1			0.01
Corporate – Unrealized losses on commodity put options			–			–			(1.3)			–
Corporate – Realized loss on commodity put options			–			–			1.7			0.01
Moa Joint Venture – Inventory obsolescence			0.1			–			1.3			–
Fort Site – Inventory obsolescence			–			–			1.0			–
Oil and Gas – Gain on disposal of property, plant and equipment			–			–			(1.2)			–
Oil and Gas – Realized foreign exchange gain due to Cuban currency unification			–			–			(10.0)			(0.03)
Oil and Gas and Power – trade accounts receivable, net ACL revaluation			(1.1)			–			(1.4)			–
Power – Energas conditional sales agreement ACL revaluation(2)			48.5			0.12			–			–
Other(3)			–			–			0.7			–
Total adjustments, before tax		$	42.9		$	0.11		$	1.8		$	0.01
Tax adjustments			(2.1)			(0.01)			0.3			–
Adjusted net earnings (loss) from continuing operations		$	13.9		$	0.03		$	(13.4)		$	(0.03)

					2022						2021
For the nine months ended September 30		$ millions			$/share			$ millions			$/share
Net earnings (loss) from continuing operations		$	71.0		$	0.18		$	(27.8)		$	(0.07)
Adjusting items:
Sherritt – Unrealized foreign exchange gain – continuing operations			(9.5)			(0.02)			(3.3)			(0.01)
Corporate – Gain on repurchase of notes			(13.8)			(0.03)			(2.1)			(0.01)
Corporate – Transaction finance charges on repurchase of notes			1.2			–			–			–
Corporate – Severance and other contractual benefits expense			–			–			5.5			0.02
Corporate – Unrealized losses on commodity put options			(0.9)			–			3.0			0.01
Corporate – Realized losses on commodity put options			0.9			–			2.5			0.01
Moa Joint Venture – Inventory obsolescence			0.5			–			1.3			–
Fort Site – Inventory obsolescence			–			–			1.2			–
Oil and Gas – Gain on disposal of property, plant and equipment			(1.3)			–			(1.2)			–
Oil and Gas – Realized foreign exchange gain due to Cuban currency unification			–			–			(10.0)			(0.03)
Oil and Gas and Power – trade accounts receivable, net ACL revaluation			0.4			–			0.1			–
Power – Energas conditional sales agreement ACL revaluation(2)			49.0			0.12			2.7			0.01
Other(3)			–			–			(0.4)			–
Total adjustments, before tax		$	26.5		$	0.07		$	(0.7)		$	–
Tax adjustments			(2.5)			(0.01)			(0.2)			–
Adjusted net earnings (loss) from continuing operations		$	95.0		$	0.24		$	(28.7)		$	(0.07)

(1)		A non-GAAP financial measure. For additional information see the Non-GAAP and other financial measures section of this press release.
(2)		Primarily related to the recognition of a $48.5 million non-cash loss on the revaluation of the ACL on the Energas CSA receivable related to the signing of the Cobalt Swap subsequent to period end and in part as a result of the suspension of interest on the Energas CSA over the five-year period of the agreement.
(3)		Other items primarily relate to losses in net finance (expense) income.

In the three and nine months ended September 30, 2022, the net loss and net earnings from continuing operations, respectively, include the recognition of a $48.

Contacts

For further investor information contact:

Lucy Chitilian, Director, Investor Relations

Telephone: (416) 935-2457

Toll-free: 1 (800) 704-6698

E-mail: investor@sherritt.com

Sherritt International Corporation

Bay Adelaide Centre, East Tower

22 Adelaide St. West, Suite 4220

Toronto, ON M5H 4E3

www.sherritt.com

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