Sherritt International: Nice Company But Nothing Exciting (OTCMKTS: SHERF)

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Nickel

The nickel market has been on a tear recently but it is necessary to understand that this is at least partly simply a technical issue, not a cyclical one nor structural.

Yes, sure, we all expect more nickel to be used in the electric vehicle revolution. But there are mines coming online and so on, we do not in fact expect any grand mismatch of supply and demand. Apart from anything else there are plenty of nickel laterites out there than can be exploited.

It’s also true that we’re all unsure what is going to happen to Norilsk and other Russian producers in this near future. But that’s also something we’d all expect to get solved one way or another soon enough.

Finally, there’s that spike in the price at the London Metal Exchange when nickel went briefly over $ 100,000 a ton. That was a short squeeze and while terribly exciting again is not a good guide to ongoing pricing.

So, sure, nickel miners are up but my best impression is that this is not the turn of a metals supercycle, not in this metal at least.

Sherritt International (OTCPK: SHERF)

Sherritt has been riding this nickel wave, as they should, as a mature nickel and cobalt miner. There are certain problems for American investors here – check with a lawyer – as the mine is in Cuba and that may or may not have some sanctions impact.

However, it’s worth pointing out that I wrote about Sherritt a year back. Saying roughly what I’m saying here, that it’s a fine enough company as it is but there’s nothing to excite. One proof of this being that I said I did not rate Sherritt as an investment back then and it’s only this excitement in the nickel price of the past few weeks that has lifted the price above what it was that year ago.

You really should read that piece of a year back.

For very little really has changed.

Sherritt’s operations

Sherritt has the same four legs to the business that it did back then. It managed to dump the hugely troubled Ambatovy project and that leaves it with the Cuban mine, an associated Cuban energy production business, the nickel and cobalt refinery in Canada and the nickel extraction technology business (the fertilizer business is an offshoot of that processing).

The Cuban mine they’re reassessing the grades they mine and extending the life of the operation by doing so. They continue to increase the productivity – reduce the costs – of the refinery. The energy business is held back by the usual difficulty of getting the cash out of a communist government. And given what happened at Ambatovy there’s a strange reluctance to flood the tech business with orders.

OK, in their results they point out that net nickel costs declined. But that was really about higher cobalt prices. And sure, higher Ni or Co prices benefit them, no doubt about that.

And yet

There’s really nothing to get very excited about here. OK, so, the metals they’re extracting, yes, that’s of interest. They’re able to dig themselves out of their debt burden, bit by bit. Extend terms, pay down, in general improve performance.

But there’s no oomph here.

They’re really fenced in

They can not expand the mining business and send the concentrate elsewhere – that would expose the buyer to US sanctions risks. So, if they expand mining they must expand their own processing capabilities. Which requires substantial capital which they’ll only gain access to slowly as that debt position declines.

So there’s no real ability to greatly expand production to take advantage of the current high nickel prices. They’re not prospecting elsewhere either. That hangover of Ambatovy rather precludes that.

There’s no great ability to expand the Cuban energy business – quite apart from anything else the difficulty of gaining payment for the output means it would be an odd decision anyway.

My view

I do, again, say read the last piece as that details the sanctions problems, explains Ambatovy. What we end up with is a small reasonably – now – well run nickel and cobalt miner. With no great expansion opportunities. Production’s not going to change much. It’ll vary with nickel and cobalt prices but not really with much else

The investor view

There’s no dividend so there’s no compelling reason to own Sherritt. For the excitement of the nickel and cobalt markets there are others that offer exposure but with greater expansion possibilities.

They tried the transformative deal in Madagascar and it did not work out well. In the end, nothing wrong here, just no particular reason to be very interested either. Play elsewhere.



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