Has Sherritt International Corporation Bottomed?

| About: Sherritt International (SHERF)

The iPath Dow Jones-UBS Commodity Index Total Return ETN (NYSEARCA:DJP) was trading as high as $53.22 in April 2011. The index is currently trading at $38.18 or 28.3% below the April 2011 peak.

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Sherritt International Corporation (OTCPK:SHERF) peaked at $9.90 in February 2011 and is currently trading at $4.26 or 57.0% below the February 2011 peak.

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The first insight

Last summer the iPath Dow Jones-UBS Commodity Index Total Return ETN bottomed at $37.27 in June and rallied 22.1% during the next three months. This summer the index bottomed at $36.47 and is currently trading at $38.18.

Last summer Sherritt International bottomed at $4.07 and rallied 50.4% during the next four months. This summer Sherritt International bottomed at $3.88 and is currently trading at $4.26.

The second insight

The insiders are buying Sherritt this month:

  • Dean Chambers purchased 4,415 shares on July 16 pursuant to a purchase/ownership plan. Dean Chambers currently holds 65,163 shares or less than 0.1% of the company. Dean Chambers is Executive Vice President and Chief Financial Officer.
  • Sean McCaughan purchased 4,360 shares on July 16 pursuant to a purchase/ownership plan. Sean McCaughan currently holds 8,730 shares or less than 0.1% of the company. Sean McCaughan is Senior Vice President, Coal.
  • David Pathe purchased 6,020 shares on July 16 pursuant to a purchase/ownership plan. David Pathe currently holds 61,238 shares or less than 0.1% of the company. David Pathe is President and Chief Executive Officer of Sherritt.
  • Karen Trenton purchased 4,510 shares on July 16 pursuant to a purchase/ownership plan. Karen Trenton currently holds 8,195 shares or less than 0.1% of the company. Karen Trenton is a senior officer of the company.

The company

Sherritt is a world leader in the mining and refining of nickel from lateritic ores with projects and operations in Canada, Cuba, Indonesia and Madagascar. The company is the largest thermal coal producer in Canada and is the largest independent energy producer in Cuba, with extensive oil and power operations on the island. Sherritt licenses its proprietary technologies and provides metallurgical services to mining and refining operations worldwide.

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The metals business focuses on low cost production of finished nickel and cobalt from the development of Cuba's extensive nickel resources, as well as the Ambatovy Joint Venture in Madagascar.

In Cuba, Sherritt has a 50/50 partnership, The Moa Joint Venture, with General Nickel Company S.A, which annually produces approximately 38,000 tonnes of nickel plus cobalt.

In Madagascar, the Ambatovy Joint Venture nickel project began production in 2012. Sherritt, the project operator, has a 40% ownership position, Sumitomo and Korea Resources each have a 27.5% stake, and the project's engineering contractor, SNC-Lavalin, has a 5% interest. The Ambatovy Joint Venture has an annual design capacity of 60,000 tonnes of finished nickel and 5,600 tonnes of finished cobalt.

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The company expects consolidated finished nickel production of approximately 78,000 tonnes (100% basis) in 2013 as Ambatovy continues its ramp-up and achieves commercial production during the year.

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Sherritt is Canada's largest thermal coal producer, with seven active surface mines in the provinces of Alberta and Saskatchewan. Sherritt produces approximately 98% of the thermal coal mined in Canada. It supplies both domestic utilities and international companies with fuel for electricity generation.

Sherritt's coal operations are delineated into three distinct entities:

  • Prairie Operations - 100% ownership
  • Mountain Operations - 100% ownership
  • Carbon Development Partnership [CDP] - 50% ownership

Collectively, Sherritt's coal operations produced approximately 35 million tonnes of coal (100% basis) in 2012. Total tonnage of coal mined by Sherritt in 2013 is expected to be lower than the prior year by approximately 10 million tonnes due to the transfer of mining operations at the Highvale mine to the customer/owner. The impact on the adjusted EBITDA of the business is limited to the annual fees earned.

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Oil and Gas

Sherritt explores for, develops and produces oil and gas, primarily from fields situated in Cuba, from which the company produced approximately 94% of its worldwide net oil production during 2012. Since 1992, Oil and Gas has successfully built its Cuban operations from a modest enhanced oil recovery program into an intermediate exploration and production business that contributes significantly to Sherritt's success.

Sherritt also has several oil and gas interests in Spain, Pakistan and the United Kingdom.

Gross working-interest oil production in Cuba for 2013 is expected to be approximately 18,000 bopd, 11% lower than 2012, due to natural reservoir declines.

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Sherritt holds an indirect one-third interest in Energas, a joint venture established to generate electricity for sale to the Cuban national electrical grid. The remaining two-thirds interest in Energas is held equally by two Cuban agencies, Union Electrica and Cubapetroleo.

Energas produced approximately 11% of Cuba's electricity in 2012.

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The company reported the first-quarter financial results on April 24 with the following highlights:

Revenue $286.5 million
Net income $23.1 million
Cash $442.2 million
Debt $2.0 billion

The coal business accounted for 62.7% of the first quarter revenues but for only 38.0% of the adjusted EBITDA.

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The company's cash generation and available liquidity are sufficient to meet the ongoing needs of the businesses as well as the obligation to fund Ambatovy until it is able to generate free cash flow.

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There have been four different insiders buying the shares and there have not been any insiders selling the shares during the past 30 days. There are seven analyst buy ratings, two neutral ratings and zero sell ratings with an average target price of $6.69. The stock is trading at a P/E ratio of 47.33 and a forward P/E ratio of 7.34. The company has a book value of $12.50 per share and the stock has a dividend yield of 4.04%. I believe the stock could be a good pick below the book value and below the analyst target prices based on the seasonality and the intensive insider buying.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in OTCPK:SHERF over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.