Sherritt International (TSX: S; US-OTC: SHERF) reported a second-quarter net loss of $10.7 million, or 4¢ a share, falling below earnings of $40.8 million, or 14¢ a share, a year ago.
On an adjusted basis it still realized a loss of 4¢ per share, missing analysts’ average estimates of 7¢ per share in earnings, and below last year’s normalized profit of 15¢ per share.
The second-quarter miss resulted primarily from a $16-million loss that the diversified miner realized in its power division. “The writedown of overdue receivables in Madagascar from a leased electricity generation facility caused the loss. The writedown accounted for [approximately] 5¢ a share in reduced earnings. All of the A/R [accounts receivable] has been written off,” Desjardins analyst John Hughes notes.
Also hurting profits were weaker nickel, cobalt and coal prices and lower nickel and cobalt sales.
“The headline story for everybody in our space including us this quarter is commodity prices, and it’s a challenging commodity price environment that we saw out in the first quarter [and it] has only become more challenging,” Sherritt’s CEO David Pathe said on a July 31 conference call.
Despite that, Pathe notes the company had a strong operational quarter, with all its divisions — metals, coal, oil and gas, and power — performing in line with expectations. Attributable sales for the June quarter totalled 8.6 million lb. nickel, 800,000 lb. cobalt, 6.4 million tonnes of thermal coal, 1 million barrels of oil and 153 gigawatt hours of electricity.
Revenues were $338.5 million compared to $377.1 million in the same period of 2012. Apart from the softer commodity prices, revenues were impacted by lower sales from the company’s Prairie coal operations in Western Canada due to the termination of the mining contract at the Highvale mine at the start of 2013.
Year-over-year adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) dropped $50 million to $87.1 million, and operating cash flow dipped 2¢ per share to 20¢ a share.
“And we had a pretty good EBITDA, given the commodity price environment across all our business units, and I think our operating cash flow held up pretty well from the perspective of the price environment that we’re operating in,” Pathe commented.
The dipping commodity prices led Sherritt to reduce its capital spending plans for the year by 13%, or $37 million, across its operations.
The miner also trimmed its 2013 nickel production forecast at the Ambatovy joint-venture project in Madagascar by 4,000 tonnes to 31,000 tonnes on a 100% basis, as “the production start-up at the smelting/refining plant is taking longer than budgeted,” Hughes writes in a brief note. Sherritt holds a 40% interest in Ambatovy, Sumitomo and Korea Resources each have a 27.5% stake, and SNC-Lavalin, the project’s engineering contractor, holds the remaining 5%.
The large lateritic nickel mine is anticipated to reach commercial production later this year and was built for US$5.3 billion, below the last US$5.5-billion estimate.
Hughes describes Sherritt’s second-quarter results as a “slight negative.” But he adds that “we remain confident of the production start-up at Ambatovy, and recognize the one-time nature of the A/R adjustments.” Hughes has trimmed his $5.90 target price to $5.30 but has kept a “buy–average” risk rating on the company.
Sherritt is the largest thermal coal producer in Canada and the largest independent energy producer in Cuba, with several oil and power generating assets on the island. It also mines or processes nickel from its operations in Canada, Cuba, Indonesia and Madagascar.
The miner recently ended at $3.90, within a 52-week trading range of $3.88 to $6.18.
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