With inflation hitting 5.9 per cent in January, public companies are feeling the crunch of higher prices.
With the Bank of Canada (BoC) raising its benchmark interest rate to 4.5 per cent in tow, and with it the cost to borrow money, and unemployment near a record low, the current macro environment is especially difficult to operate at an optimal level without adequate capital on hand.
This is why, during uncertain times such as the present moment, many investors tend to limit their pool of prospective allocations to the cash-flowing and the cash-rich.
With this thesis in mind, The Market Herald’s Cash-Rich Report introduces you to profitable companies with coffers fortified to weather a multitude of headwinds.
Generations of commodities leadership
Founded in 1927, Sherritt International (S) is the largest independent energy producer in Cuba, as well as a multinational nickel and cobalt miner and refiner supplying the electric vehicle (EV), stainless steel, specialty steel, chemical and welding applications markets.
The company operates a nickel mine in Moa, Cuba, and a refinery in Alberta capable of producing 35,000 tonnes of nickel and 3,800 tonnes of cobalt per year.
It also offers a line of products through its wholly-owned fertilizer business and sulphuric acid and ammonia production facilities.
Additionally, Sherritt’s technologies group is developing a suite of solutions for oil and mining companies to improve their value and environmental performance. Its expertise includes pressure hydrometallurgy for the mining industry and hydroprocessing solutions to upgrade heavy hydrocarbons.
Margin of safety
While there’s no avoiding that high inflation has affected the company’s input costs as of late – including a 119 per cent YoY increase in global sulphur prices, a 109 per cent YoY increase in diesel prices, and a 40 per cent YoY increase in fuel oil prices – its assets as a whole paint an attractive value proposition.
Firstly, given the expected global shortages in nickel and cobalt, as electrification displaces fossil fuels, Sherritt’s active production infrastructure makes it a prime partner for original equipment manufacturers keen on securing long-term energy metal supplies.
According to Rystad Energy, nickel demand will outstrip supply by 2024, with the global supply and demand gap widening to 0.56 Mt by 2026.
The picture for cobalt is less accretive, with S&P Global Market Intelligence seeing demand and consumption maintaining parity through 2025. Conversely, the EV market is growing rapidly – Statista sees EV revenue at a 17.02 per cent CAGR through 2027 – and the political risk of almost 70 per cent of global supply stemming from the Democratic Republic of Congo puts a premium on producer diversification.
Regarding Sherritt’s Cuban oil operations, it benefits from a large-scale presence backed by extraction expertise with the country’s complex fold and thrust-belt reservoir and an over 20-year relationship with the government through production-sharing contracts.
Finally, the company’s technology division orients it toward the future through ongoing discussions with potential partners to enhance metals recovery, including Open Mineral AG, and create value-added products from bio-oil refinery waste.
In terms of financial strength, Sherritt is working with considerable reinforcements. It ended 2022 with C$123.9 million in cash, with positive operating cash flow from C$5.3 million to C$40 million in four of the last five quarters. It produced positive net income from C$14.1 million to C$81.1 million in three of those same five quarters, with volatility tying back to inflation catalyzed by post-pandemic demand and fallout from the Russia-Ukraine war.
The company’s cash reserves will be supported by annual US$57 million payments in the form of cobalt over the next five years relating to its Cuban Energas conditional sales agreement and trade accounts receivables from Union Cuba-Petroleo. Management believes these inflows will facilitate business growth, such as increasing annual mixed sulphide precipitate production by 20 per cent or 6,500 tonnes of contained nickel and cobalt over the next few years.
Given how Sherritt’s cash on hand and yearly cobalt payment are over C$8 million above its C$194 million market cap, potential investors should take note that the current share price is offering exposure to the company’s assets basically for free.
Looking ahead
Sherritt’s priorities for 2023 include advancing technology solutions toward commercialization, increasing Cuban gas supply to capitalize on geopolitical price volatility, and completing the Moa Mine’s updated NI 43-101 technical report by the end of Q1, which is expected to extend the life of mine beyond 2040.
To achieve its goals without having to exhaust cash reserves – which should see it through interest rate normalization judging by inflation’s steady drop from 8.1 per cent last summer – the company will likely have to see a rise in cobalt prices from current decade lows and sustained growth in nickel prices as emissions relegate internal combustion to the history books.
Until then, research will have to justify an allocation based on evidence for undervaluation, macro electrification tailwinds, and blue-sky in-house innovation leading to satisfactory long-term returns.
Sherritt International (S) shares are down by 93.65 per cent over the past 26 years, including 62.5 per cent over the past five years, fitting squarely into the category of an out-of-favour stock.
