Sherritt International Corp

Sherritt International Corp (TSX: S) is engaged in mining and refining of nickel from lateritic ores with projects and operations in Canada, Cuba, and North America. The segment includes Moa JV and Fort site, Metals Other, Power, Corporate and Other segments.

Q2FY20 Financial Highlights: Sherritt International Corp declared its quarterly result, wherein the company reported revenue of CAD 40.9 million as compared to CAD 46.5 million in the previous corresponding period (pcp). The decline was majorly due to sluggish performance from all the reporting segments. The quarter was marked by significantly higher loss from associate of CAD 26.3 million against CAD 12.1 million in pcp. Administrative expenses, during the quarter, came in higher at CAD 12.3 million as compared to CAD 10.3 million in pcp. Lower revenue, along with higher expenses took a toll on the group’s operating performance. Adjusted EBITDA stood 6% y-o-y lower at CAD 8.9 million, as compared to the previous corresponding quarter. Consequently, loss from operations, joint venture and associate deteriorated to CAD 45.5 million from a loss of CAD 26.9 million in pcp. Loss before tax widened to CAD 114.1 million from CAD 89.8 million in pcp, primarily attributable to a higher net finance expense, slightly offset by a lower revaluation of allowances for expected credit losses. Net loss for the period stood at CAD 114.5 million as compared to CAD 90.4 million in Q2FY20.

Q2FY20 Income Statement Highlights (Source: Company Reports)

Risks: Further outbreak of COVID-19 might result in temporary shutdown in operations. The group’s supply chain, workforce, market and trade flow might get affected owing to the evolvement of COVID-19 pandemic. Further, the company is exposed to commodity price volatility.

Stock Recommendation: The stock of S has corrected ~18% in the last one year. Despite a tepid economic scenario, the company reaffirms its production guidance of Nickel to 32,000 tonnes to 33,000 tonnes, from earlier 32,000 tonnes to 34,000 tonnes, which is commendable. Production of finished Cobalt has been lowered slightly, while the company expects stable Oil and Gas production for FY20. Despite a stable average realized prices, the company has reported a decline in its top-line, which is a drag for the company. The company mentioned that in the near term, nickel prices are expected to be volatile given the ongoing economic uncertainty caused by the pandemic. As mining operations resume production activities, nickel inventory levels may rise given that supply could exceed demand as a number of industries that are large consumers of stainless steel, such as food and hospitality sector, will experience a delayed or slower economic recovery. Further, the company has a significant amount of debt in its balance sheet, which is significantly higher than the industry median. The stock of S is quoting at a higher valuation. On an EV to Sales basis, the stock is available at 5.0x on TTM basis, as compared to 4.1x of industry (metals and mining) median. Though the company reaffirmed its production guidance, deteriorating operating performance, higher debt and sluggish industry outlook kept us on the sideline. Hence, considering the aforesaid facts, we give a ‘Watch’ stance on to the stock at the closing price of CAD 0.180 on July 31, 2020.

S Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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