Sherritt bleeds red ink in Q1, debt concerns remain in spotlight

, Investment

In a worst-case scenario, Sherritt could walk away from Ambatovy, effectively abandoning its obligations.

Analysts are disappointed with Sherritt International Corp.’s first quarter results, which can only be described as ugly as the company deals with a very weak nickel market. There is plenty of red ink, notably in adjusted earnings (negative 43 cents a share) and free cash flow from the metals business (negative $11.9 million).

RBC Capital Markets analyst Fraser Phillips said nickel production and realized prices were both lower than expected, while costs were higher. He noted cash costs at the new Ambatovy mine in Madagascar increased eight per cent quarter-over-quarter to US$4.41 a pound. That is well above recent nickel prices, which have traded around US$4.00 for the last several months.

Sherritt’s balance sheet remains a major concern, as the company is not generating enough cash at current nickel prices to service all of its major debt repayments, which start coming due in 2018.

National Bank analyst Steve Parsons said Sherritt needs either much higher nickel prices or a deal with its lenders to blunt debt concerns.

The company also has short-term issues to deal with at Ambatovy, where it chose not to make a US$50 million cash call in January because of a dispute over loan repayments with the mine’s joint venture partners. Until that is resolved, Sherritt’s economic interest in the mine is just 12 per cent instead of the planned 40 per cent.

Parsons said it remains to be seen if joint venture partner Sumitomo Corp. will extend flexibility to Sherritt to resolve the dispute, or will look to increase its effective ownership of Ambatovy.

“The latter should not be unexpected,” he said.

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