Sherritt International Corp says more than 60% of global nickel output underwater despite recent price rally

TORONTO — Nickel prices have jumped almost 40 per cent since bottoming out in January, yet most miners of the steelmaking metal are still bleeding cash at a rapid rate.

Canadian nickel miner Sherritt International Corp. noted this week that more than 60 per cent of global output is losing money on a simple cash margin basis. Once capital spending and other costs are added in, the actual percentage of production underwater is even higher.

The nickel price rally has accelerated over the last few weeks, which has injected some hope back into the industry. But Sherritt’s disclosure shows that the sector is still in the midst of a severe crisis. Nickel is currently worth about US$4.69 a pound, compared to a peak of more than US$24 in 2007.

“This rally in the last few weeks is perhaps more robust than some false starts we’ve had over the last year,” chief executive David Pathe said in an interview on Tuesday.

“But it’s got a ways to go before we think we’re at a long-term nickel price that’s sustainable.”

Nickel prices have been slammed over the past couple of years due to middling demand, high inventories and rising supply from the Philippines.

The recent rally is tied to speculation that an environmental crackdown by the Philippine government will lead to mine closures. But so far, only a handful of very small mines have shut down.

Major mine shutdowns are needed to bring the market back into balance. But companies are reluctant to shutter their operations, because closures are costly and time-consuming and miners risk missing out on a recovery if they go through with them. For a lot of firms, losing a bit of money quarter after quarter makes more sense in the short term than a shutdown.

“We continue to believe nickel producers can’t continue to bleed cash forever,” Pathe said.

Jessica Fung, a commodity strategist at BMO Capital Markets, said a key part of the problem is that a lot of high-cost nickel pig iron producers in China are effectively “backward integrated” with stainless steel mills that use nickel ore, so there is no strong strong profit motive to shut down. She said the nickel market is “structurally oversupplied” by about 100,000 tonnes a year, and does not see the surplus disappearing anytime soon.

Toronto-based Sherritt has implemented a handful of key measures to survive the bear market. It struck a deal in May to extend maturities on US$720 million of corporate debt, meaning it expects to have no repayments due until 2021. It is also nearing an agreement with the lenders to its new Ambatovy mine to defer repayments. Separately, the company built an acid plant at its Moa operation in Cuba, which should reduce costs.

Ambatovy, which is in Madagascar and cost US$5.3 billion to build, remains a major problem for Sherritt. The mine is not currently profitable on a cash margin basis, and Sherritt has stopped putting in money until it can settle loans among its partners. As a result, its effective stake has fallen from 40 per cent to just 12 per cent.

Pathe said he is confident the partner loan issues can be resolved. And in the meantime, he noted that Ambatovy is not causing problems for Sherritt’s balance sheet since the company has stopped funding it.

Sherritt reported an adjusted second quarter loss from continuing operations on Monday of US$116.1 million, or US39 cents a share, which was below analyst expectations.

Financial Post

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