Sherritt International Corp. (OTCPK:SHERF) Q4 2013 Earnings Conference Call February 19, 2014 2:00 PM ET
Paula Myson - Director, Investor Relations
David Pathe - President and CEO
Dean Chambers - EVP and CFO
Matt Murphy - UBS
Greg Barnes - TD Securities
Anoop Prihar - GMP Securities
Patrick Morton - RBC
Alec Kodatsky - CIBC
Good afternoon, ladies and gentlemen. Thank you for standing-by. Welcome to the Sherritt International Corporation Fourth Quarter 2013 Results Call. At this time, all participants are in listen-only mode. Following the presentation, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] I would like to remind everyone that this conference call is being recorded, today, Wednesday, February 19, 2014 at 2 PM Eastern Time. I will now turn the conference over to Ms. Paula Myson, Managing Director, Investor Relations and External Communications. Please go ahead.
Thank you, Ron and good afternoon everyone. Our fourth quarter and full year 2013 results were released this morning. A copy of the release, along with the MD&A and full financial statements are available on the website. Today’s conference call is being webcast. So in addition to those on the line, anyone may listen to the call by accessing our website homepage and using the webcast link. We will put a replay of the webcast on the site later today.
Before we begin our comments, I would like to remind everyone that today’s press release and certain of our comments on the call will include forward-looking statements. We would like to refer everyone to the cautionary language included in the press release and to the risk factors described in our SEDAR filings.
With us today is, David Pathe, our President and CEO and Dean Chambers, our Executive Vice President and Chief Financial Officer. We will begin with prepared remarks this afternoon and then open up the call for questions. And with that, I will turn the call over to David.
All right. Thank you Paula and thank you everybody for taking the time to join us this afternoon. As you have all seen by now, we released our Q4 financial statements this morning. There is a lot in there and so I will ask Dean to take you through some of the more significant items in a moment. But first I'd like to talk for a few minutes just about some of the more significant events of 2013 and how they fit with our strategy and where we are going from here.
For some time now we've been talking about becoming a more focused company, a company that’s focused on our businesses where we have real differentiating experience and expertise. We see that in our nickel business, where we're world leaders in the metallurgy and processing of complicated ores and we also see that in our Cuban businesses where we have developed successful operating relationships over 20 years. Our announcement that we are exiting the coal business in December is consistent with that strategy.
In addition to narrowing our focus, that transaction gives us the financial strength and flexibility to look after our balance sheet and grow our core businesses, even in times of low commodity prices as we are in now. I will come back to how we're going to do that in a moment but first I want to talk about a few other highlights.
We haven’t spoken since our announcement of commercial production at Ambatovy. We now have achieved ore throughput of 70% of capacity for the 30 day period. Since that time as well we have been able to maintain that level of production. That achievement has some accounting implications that Dean will touch on but let me talk for a minute about why that achievement is encouraging.
More important in the absolute level of throughput and I have always maintained that 70% is no more meaningful that 68% or 72%, is the stability that we are now seeing in the operation. Over the course of 2013, we spoke a number of times about the saw tooth [ph] nature of the ramp up curves with significant swings of production up and down that we experienced over much of 2013. After Q3 particularly we spoke of some of the mechanical challenges we have seen as we progress up the ramp up curve and whether that was leaky pipes and pumps that failed and we had a couple of more significant issues in Q 2013 that we addressed. But what we're seeing now is an increasing level of stability operation and therefore much less dramatic swings in production.
Getting that stability is what’s important to making these operations run well over the longer time. We have always said that getting them running and keeping them running is how you succeed and how you make money at these and we are seeing that take place now and that stability is giving us the ever increasing confidence that we can achieve full capacity and ultimately move beyond that.
On the cost side, obviously now that we have achieved commercial production starting with Q1, 2014, we will get full cost disclosure consistent with what we can just do with that in the Moa joint venture. But for Q4, we had finished nickel production little under 50% of capacity. Our costs today are consistent with the ranges that we gave at Investor Day last year.
Overall, the progress we are seeing now in Ambatovy continues to reinforce our belief that this will be the great low cost 30 year long life asset we've always believed it will be. We have also finally now begun mobilizing the resources for the construction of the acid plant in Moa. This is a project we've talked about in the past as well but it’s important in that it has the ability to significantly lower our cost give greater flexibility in the operation there.
It will lower our cost that we'll no longer be dependent on sulfur imports. It also reduces our reliance on fuel oil as one of the benefits of the additional asset plan or the additional theme for the operation as well. We think we can now cut this $0.80 or $0.90 or maybe a dollar, or pound out of our costs once we have that up and running because we will also have the flexibility to throw more assets at any given level of production and increase our extractions little bit as well.
Liquidity; we have taken a number of steps to improve our liquidity. One, our continued focus on cost control has eliminated about $23 million of G&A in 2013. Reductions occurred across the company, included reductions in headcount, elimination of consulting and contractors, office space and reductions in travel. Based on those reductions we are targeting $33 million of savings in 2013.
We’ve also managed capital spending. In response to market conditions we are constantly reviewing our spending plans. As a result in 2013 we eliminated about $20 million in planned capital spending and deferred an additional $40 million. Some of the eliminations were minor projects, expansions of maintenance sheds, that type of things that we can make without and discounted commodity price environment. That’s what we have historically done and what we continue to do.
In addition we’ve notified our partner that we will no longer be pursuing our own interest in the nickel project. We've got no more further funding or obligations going forward. That decision saved us about $70 million in additional spending in the earn agreement between now and 2017.
Lastly, you’ll have no doubt noticed that we have announced our reduction in our quarterly dividend today. We reduced the dividend to a penny a share, down from about $0.042 to $0.043. We made the decision, it was a difficult decision, but in light of the cash generating capacity of our businesses at these current commodity prices and the persistently challenging nickel market, we felt it was the prudent thing to do for our company and our balance sheet.
Just to touch on our other operations, I talked about Ambatovy and Moa. Despite reduced availability of mixed sulfide due to some issues with mining equipment earlier in the year and a failure that we had in the thickener in the fourth quarter, Moa joint-venture overall delivered nickel production that was largely in line with our guidance, and despite the challenging nickel price environment we’re still seeing a positive cash margin there.
Oil and gas; again a very strong year from our oil and gas business; production above guidance, and above expectations. Strong pricing continues with oil price continuing to hold up well and the benefits of our well established and self-contained infrastructure on the ground in Cuba continues to deliver a solid, steady production at low cost and we’re confident in our ability to continue to do with that going forward.
Power, the highlight was the completion of our Phase 8 project. That is the 150 MW combined cycle facility that is now up and running. Early part of this year we commissioned and tied that into the grid. It is now operating. Right now it’s running at about 50% capacity based on gas availability, but that explains the significant uptick in our guidance for power production this year.
Markets; just to touch on the nickel market, the oil markets we mentioned were strong and continue to be strong for us. And nickel market obviously was a very challenging year. I think the spot price from start to finish of the year was down about 20%. Average price over the course of the year was off 14% or 15%. We however are still very optimistic on nickel prices on medium to long-term. A number of factors are driving that. We are seeing greater differentiation in the different segments and the nickel demand continues to be strong but the demand is particularly strong for Class I nickel or LME grade nickel as we produced. The Indonesian ore band has been implemented. I think the market continues to wait and see what the full impact of that will be.
We have seen the modest strength in nickel price so far this year. The impact of the nickel band remains to be seen as there has been some significant stock piling taking place in China in the weeks and months leading up to the ore band. Whatever the impact of that turns out to be, I think the reality is that still 40% and 50% of nickel production in the world right now is under water, even on a cash margin basis and we don’t think that’s a sustainable situation for the nickel market to be. And so whenever the correction comes we think that at some point there is going to have to be some movement, whether it’s a result of ore bands or supply-side responses; as long as nickel demand continues to grow as it has, we think at some point in time we’re going to see a turn here.
Lastly going forward, as we talked about our coal transaction, it obviously adds significantly to our financial capacity and our liquidity. A number of priorities will flow from that. The first in our top priority will be debt reduction; likely the terms for indenture requires to use any proceeds from the sale of the coal [indiscernible] redeployed within 360 days to make an offer for all the bonds. We have to make that offer across all three series of bonds pro-rata. We would like to be bit more proactive in that, actually trying to use a portion of the proceeds now to reduce our debt levels now. Might also like to try and deal with that disproportionally with the 2015 series of bonds. We have I think about 275 million of debentures maturing in the fourth quarter of 2015 and despite the pro-rata requirements across three series of bonds -- as part of paying down some debt now rather than waiting the 360 days trying to deal with that refinancing risk in 2015.
If we can do that, that will significantly strengthen our balance sheet and give us a little more financial flexibility. But that’s going to take some discussions with some of our bondholders and should be looking to engage in the coming weeks. Beyond, that we have a number of opportunities within our existing asset base to optimize, extend the life, or lower the cost profile of those assets. Certainly ramping up and continuing to get Ambatovy up to full capacity is a priority. The asset plant is also another good example of that where we can significantly improve the economics of an existing stable operation.
We’re also continuing to pursue an extension of one of our old blocks and some new blocks in adjacent areas and if we can get that sorted out, that will give us the ability to extend the life of what the last couple of years has been our strongest cash flowing business.
Lastly, and depending how that plays out and how the nickel price plays out in our overall liquidity position, we’ll look for other additional ways to enhance our asset base, either within our existing assets or by adding assets, but we’ll do that prudently and anything we look at will have to significantly add to our cash flow even at these kind of commodity prices and be seeing that play better than just to bank down additional debt constraint further strengthening our balance sheet. So that’s where our focus is going to be. We’ll continue to work on that as we progress towards closing our coal transaction, hopefully by the end of this quarter and that will be our -- where our focus is for this year.
To go through a little more detail now on some of the various items in the financial statements I’ll ask Dean to say a few words and then we’ll take your questions.
Thanks David, and good afternoon. I’m sure as you looked at our fourth quarter and yearend results that we released this morning, you recognized a number of items that have impacted both the presentation of our results and our actual earnings result for the quarter and for the year and I would like to walk through some of the key items that have had an impact in those results.
First of all in terms of presentation, as expected our coal business has now been reclassified as a discontinued operation. So when you look at our income statement balance sheet cash flow statement, you will see it split between continuing operations and discontinued operations, discontinued operations being essentially our coal business. And many of my comments today will really be directed towards our continuing operations going forward.
As Dave mentioned, there were a large number of adjustments to our earnings for the quarter and for the year. In fact almost $636 million of adjustments in the fourth quarter. The majority of that amount was related to the coal transaction and most of the remainder reflects an assessment of carrying values on our financial statements.
First let me talk about the adjustments related to the coal business. In our December call, when we announced the coal transaction we referenced that there would be an impairment on our yearend statements, as those assets are reclassified. We had estimated at that time that it would be about approximately $460 million and we came pretty close, as this has come out at $467 million. Just a reminder that of that amount, there’s $308 million of goodwill related to the 2009 acquisition of Prairie and royalties.
David did mention the Obed Containment pond release and there are associated costs of response to that. Our estimated total is about $52 million, $11 million of which has already been spent and we have recognized a provision within the discontinued operations for that amount. As long as the program costs are within that amount, there’ll be no further charges to earnings going forward.
In metals we reviewed the Phase 2 extension project to determine that further expansion at the refinery in Fort Saskatchewan was not going to proceed in the near term. A result in impairment of extension related assets was taken, $30 million of the refinery, our 50% share and $7 million at the Fort site utility assets that support the refinery, resulting in an impairment of $29.5 million after tax.
In Power we had two yearend adjustments. First as we completed the Boca expansion, we reviewed the estimated cost, charged the project, versus the actual cost, a downward adjustment of 8.5 million of the allocation of overhead and capital and interest was taken as a result.
Second in Power, the carrying value of the Boca expansion was reviewed. In light of the capital cost and lower gas availability, a $22 million impairment was taken. And finally in Corporate, Sherritt had deferred tax assets of approximately $50 million, primarily related to the cumulative loss carry forwards.
Our tax planning had involved utilizing those assets in relation to future earnings in our coal business. With the divestment of the coal assets and also with the withdrawal from Sulawesi, we really don’t have a plan to use those assets. As such continued recognition of this assets wasn’t supportable and as a result we wrote off the tax asset.
Looking forward into 2014, while we look every reporting period at triggers for impairment or revaluation of assets, I don’t see anything significant on the horizon. There is the possibility of a minor gain on close of the coal transaction. The amount of that will depend on closing adjustments.
One thing I want to highlight, if you look at our Corporate segment, and at a couple of the items within the Corporate segment, you look at cost of sales in the Corporate segment which was $23 million in 2013 compared to $13 million in the prior year; that 23 million of cost to sales includes $18 million of our funding for Sulawesi. So we have been expensing funding for Sulawesi as incurred during the development of the project for the last few years, and as Dave has mentioned with the withdrawal from the project, we spent a small amount in January though going forward from February on we're no longer spending any money on the Sulawesi project.
Also if you look at admin expenses, in the Corporate segment in 2013, there also includes about $12 million of transaction costs related to the coal transaction. If you take those two things out, they you would have seen the cost of sales and admin expenses in the Corporate segment would have been significantly lower in 2013 and in 2012.
Now I want to turn to what I think is the most important financial statement and that’s the cash flow statement. Operating cash flow provided by continuing operations for the year was $100 million, which compares favorably with $112 million in 2012. This shows our ability to improve our operating cost structure in our metals and oil business in the face of continued pressure on commodity prices. You also see in that statement we used approximately $250 million of cash to support our continuing operation. $220 million of that represents our investment in Ambatovy during the year.
Turning to adjusted EBITDA on a continuing operation, in the fourth quarter it was about $43 million, which is about half of what it was in the same period in the prior year, and for the full year of 2013, $217 million versus $342 million in 2012. This largely reflects the reduction in EBITDA in our metals business, which is largely due to decline in nickel and cobalt prices.
Looking at our effective tax rate on continuing operations, for the year it was negative 83% and this was what you get with a calculation when you have a positive income tax over negative earnings before tax. The tax situation was significantly impacted by a number of the impairments that were not deductible for tax purpose and reversal of tax assets that had been previously recognized.
I think going forward, we need to look at tax in sort of three main categories, because we have an equity account for Ambatovy and Moa, earnings and loss from those two operations come into our income statements in a single line, that is already after tax. So essentially the income tax line on our income statement reflects primarily the income tax on our oil and gas business, with a tax rate of 30%. And then if you look at Sherritt International, the corporate parent, typically we'll have significant losses because most of the financing expense is contained with very little offsetting income. One other thing to note on taxes is that there will be no capital gains or other adverse tax consequences on the sale of our coal business.
With respect to accounting changes in 2014, the biggest one is with respect to Ambatovy. As Dave has mentioned, we achieved commercial production in January, which means beginning February 1st, the impact of Ambatovy will be included in our income statement. This essentially -- our accounting for Ambatovy essentially mirrors how we have been reporting the Moa joint venture for the last year. So you will start to see a share of earnings or loss of an associate on our income statement.
During these early stages, you would expect to see losses, significant losses in terms of Ambatovy. Given the current nickel price and the fact that our costs are still declining during ramp up and the fact that there will be significant deprecation due to the large capital investment, you can expect losses. In fact probably losses are likely even when we have turned cash flow positive.
What I’d like to do at last is walk through our cash and liquidly position; where we are in now, where we will be post the closing of coal transaction and through 2014. At December 31st we had cash and short term investments of $652 million. We also had $365 million borrowed on our various credit facilities. We have ordered a significant amount on our credit facilities during the year as we took a very conservative approach to optimizing our liquidity, given the uncertainty that we were facing, both in terms of the market environment and also our accounting. We have reached the funded indebtedness to total assets test contained in the indenture for our outstanding debentures. This is not in event of default but does restrict our ability to incur additional debt.
Now when the close occurs for the sales of coal business, we will receive cash proceeds of almost $800 million. Obviously at the same time our coal credit facility will no longer exit and will be terminated and we will repay $300 million on that facility that is currently drawn. At that time we will return to compliance on our financial covenants in our credit facility and in our debentures.
Now as Dave has mentioned, there are limitations on use of proceeds from the sale of the coal business contained in the indenture for our debentures, essentially that we can pay down debt or acquire other assets. But one thing to keep in mind is, is that, when we pay the whole credit facility, we view that as a repayment from the cash that we have drawn on that coal facility and that does not represent a use of assets from the sale -- a use of proceeds from the sale of the coal business.
Looking at major cash uses for 2014, if you look at our outlook we have approximately $180 million of capital. This can largely be funded from cash flow from our businesses as we focus on controlling cost and our structural costs. Also as you know, the asset plans that is in that capital spending is funded by a financing from a Cuban financial institution.
Probably the biggest stable draw on our cash in the year will be the funding of Ambatovy. As I mentioned our 2013 total cash funding was about $220 million. But within that is funding for our share of principle repayments on the senior project debt and in 2013 that was $49 million.
In 2014, at current commodity prices I would expect total cash funding could be in the neighborhood of $200 million. But also as this year there is a step up in the principle payment schedule under the existing amortization schedule in the senior debt and our share within that $200 million of principle repayments on the senior debt is 75 million. So, $125 million to operations and $75 million to repaying of senior debt. So as cash requirements decline from an operational point of view, as ramp up continues, there is a step up in senior debt principle payment this year under the current amortization schedule.
As Dave has already mentioned, probably one of the most attractive uses of our cash proceeds this year is taking an opportunity to improve our financial flexibility, strengthen our balance sheet and preserve liquidity. We do anticipate using significant amount of our cash to repay outstanding indebtedness, extend our maturity profile and by doing that, looking at the 2015 maturity which is our most recent debenture maturity.
That concludes by prepared remarks, and I will turn it over for questions.
Thank you. Ladies and gentlemen, we will now conduct the question-and-answer session. [Operator Instructions] Your first question comes from Matt Murphy with UBS. Please go ahead.
Matt Murphy - UBS
Dean, maybe just continuing on the liquidity discussion, I noticed you mentioned under the debt amortization schedule; is there any ability you have on Ambatovy to potentially restructure the principle payment schedule or is that something your partners would consider? And I guess if not what actions do you think you have open to alleviate pressure from the funded indebtedness limitations you might run into late in 2014?
Certainly the amortization schedule on the Ambatovy senior debt, which was created in 2007 and was based on a sort of a different outcome in terms of the project development, both in terms of timing and obviously even nickel price, we have had discussions with most of the partners about revisiting that amortization schedule. It is still our contractual obligation obviously but we will be having further discussions along those lines.
I think in terms of the funded indebtedness to total assets covenant, I think with the proceeds from the coal transaction, we will be back on side and as David mentioned, we do intend to use a significant amount of those proceeds to repay debt and I think that will keep us back on side. We may also be looking at our covenant package as well.
Matt Murphy - UBS
And then on Ambatovy, just a question about the guidance for 2014. You achieved 70% PAL throughput in January. Can you talk about how that translates to your guidance for 40,000 to 45,000 tons of nickel as I think that implies fairly steady 70% throughout the year. Is that in line with your expectation?
Matt its Dave. We’ll be looking to continue to ramp up over the course of the year. There is always going to be a leg between ore throughput as the HPAL area and for production of mix sulfides and then the refinery. So we came out of the year-end with nickel production at about 50% of capacity and it’s now still catching up and as we get steadier production out of mixed sulfides, that will give us the steady supply to start pushing the refinery further. So we’re not yet at 70% of finished nickel production but we now have the raw material to start pushing the refinery and working up to that. So the 40,000 to 45,000 tons is a rough guide based on where we expect to be now and pushing up towards seeing a throughput up towards full capacity towards the end of the year and it will be into 2015 as we get nickel production up to full capacity.
Matt Murphy - UBS
Okay. And do you see that transition being fairly linear on a quarterly basis? I know it can be [indiscernible] week-to-week but should we be modeling that as a fairly linear thing this year?
It’s never going to be perfectly linear and certainly as you get up closer to full capacity, the incremental increases will be smaller. So you will still see a somewhat parabolic ramp up I suppose, will be more likely if I remember my geometric terms well enough. We are at 70 now and that was a significant step up from where we were in the fourth quarter. At the moment we’re focused on holding that and then we’ll be looking to progress that up in reasonably manageable increments from there on up and the nickel production will come behind that. But certainly as we get close to the full capacity, the increments will be smaller.
Your next question comes from Greg Barnes with TD Securities. Please go ahead.
Greg Barnes - TD Securities
Are there any significant maintenance shutdowns to Ambatovy this year or is it going to be a fairly consistent year, production wise?
I don’t think we’re anticipating any significant maintenance shutdown that’s going to take a whack at production as we have in the Moa joint venture, where there is an annual shutdown that falls either late second quarter or early in the third quarter and has an impact on production. As we do ongoing maintenance on the different autoclave trains, I think we’ll expect -- we’ll be able to manage that -- largely that the impact of those will not be as significant as the impact of the ramp up. So I don’t you’ll notice anything material on that.
Greg Barnes - TD Securities
Okay. The oil production leases that you are extending or new ones you are negotiating with the Cuban government; how quickly -- I guess this is a bit of an unsafe question but how quickly would those turn into production do you think, assuming you get them?
Difficult to say entirely, I suppose with any great degree of specificity. One of the things we’re looking at is an extension in one of the existing blocks and if we can get that for an additional 10 years, that would create some drilling opportunities now that are for geology that’s already well known to us and then that would add production that will be sustainable beyond the existing maturities fairly quickly.
If we do get the adjacent blocks, those are obviously not areas that we’re producing at the moment but we think we know the geology pretty well. We’ll be looking to shoot seismic over the course of this year, do some exploratory drilling in 2015 and then start bringing some production on, I'm going to speculate sort of second half of 2015.
Greg Barnes - TD Securities
And one final question David. Have you had anymore contact with the activist who wrote the letter in late December?
It’s been pretty quiet on that front actually lately. So I don’t have anything to add on that. I suspect that will unfold between now and our meeting in May.
[Operator Instructions] Your next question comes from Anoop Prihar from GMP Securities. Please go ahead.
Anoop Prihar - GMP Securities
In the MD&A, you referenced a $23 million reduction in G&A cost and then you're talking about $33 million potentially being achieved on top of that this year. It's the first time I've really heard about this. Just wondering, can you provide a bit of context, how many people did you let go and the number that you are targeting for ‘14, how do you anticipate achieving that?
So beginning over the course of last year Anoop, we looked at our -- the way we’re organized. Some of the initial savings were in coal, where we did have some headcount reductions. We have had some headcount reductions across the organization. There has been no specific area that’s been targeted and I don’t have raw numbers to hand as a result of that. We have also eliminated some contractors. We gave up some spare premises in Havana and I think in Calgary as well. So we've reduced our footprint in a couple offices and as well as eliminating or reducing reliance on outside contractors in some cases. So that’s where the bulk of the 23 million came from.
Going forward into 2014, the savings achieved in 2013 will be continued into there as a result of some permanent reductions and we think there is more opportunity for us to continue to get better at how we organize how some work gets done between the corporate office and the business units, which can lead to some additional savings. We’ll also be looking at -- and we think there is some opportunity in the way we procure raw materials across our different businesses and some potential for some synergies there, but that would be borne in our production cost rather than the SG&A.
Anoop Prihar - GMP Securities
Okay. And then just with respect to the dividend, the wordings suggest that you're going to be looking at that on a quarterly basis. Is that a fair interpretation?
Well, we have always looked at the dividend on the quarterly basis and will continue to do that. I suspect now having made this change, we'll get through ramp up at Ambatovy and we will see how nickel prices perform. But at this point there is no further determinations on dividends being made beyond the decision we made this week.
Your next question comes from Cliff Hale-Sanders with Cormark Securities. Please go ahead.
Cliff Hale-Sanders - Cormark Securities
Just a bit of a quick question. With the focus that you've put out on paying down debt and getting Ambatovy up and running, by backing out of the Sulawesi option, which at this point it's hard to see whether that’s good or bad; where do you see the Company going from a growth perspective? How are you going to reinvigorate the story going forward, what are your, bit of arm waiving, or a speculative notion of where you want to bring the Company going forward, assuming we can sort of right size the ship this year and get Ambatovy going the way we all hope to move forward?
Longer term, Cliff, I still have great belief in the nickel market and this Company’s capability and potential to play a large part in it. We have a lot of tremendously talented people and I think a pretty good understanding of the processes that we apply in our businesses and how well they can be applied. We made the decision on Sulawesi just based on timeframes and where the nickel price was. I think Sulawesi may well someday be a great project but the reality is where the nickel market is today and the timelines it would take to develop something on scale the Sulawesi, might be that couldn’t make the math work at this time and given the other pressures on our balance sheet and liquidity we concluded that this wasn’t the right time to pursue that option.
But I think Sherritt’s capacity to grow in nickel is significant and I think that’s where we would see our greatest competitive strength and we have the ability to do that. As we ramp up Ambatovy, we have the ability to carry on in Moa and expand Moa incrementally as the economics of that make sense with the nickel price. And overtime I think this Company has the capacity and the potential to potentially be in others markets in nickel and grow into a significant player in the nickel market generally.
Your next question comes from Patrick Morton with RBC. Please go ahead.
Patrick Morton – RBC
This may already have been disclosed but as part of debt repayments, in addition to the pro-rata repayment of the debentures, would you also close out those credit facilities which have covenants that are restricting you?
Our priority will be paying down some indenture debt and as we have said, our priority would be to try and deal perhaps disproportionately with the 2015 maturity and that’s why it’s going to take a bit of discussion with some of our bondholders to work out how we might be able to do that, why we don’t have more specifics for you on that today.
The credit facilities, our largest single facility is the facility that was in place at the coal level that we used primarily for bonding and letters of credit for reclamation in the coal business and that obviously goes away at closing. The other credit facilities are relatively insignificant. We do use them for minor things and I think at this point in time we would recognize -- we would expect to maintain those but not be relying on them significantly.
Patrick Morton - RBC
Okay. And so there are not restricting you really on addition indebtedness. It’s really more about the debentures and the discussions on focusing on repaying the 2015 tranche there, would you also include some discussions about relief under that key covenant or is that untouchable?
I think at this stage if we reduce some debt levels we would be -- we don’t see the 40% ceiling as a tremendous obstacle, particularly because obviously that we will get more space under that as we pay down some debt and it was really just in this transitionary period between announcement of the coal transaction where we book the hit on the carrying value of the assets and still have all the liabilities that go with the coal business when we get the proceeds and the coal business exits from our balance sheet altogether and we deal with some opportunity to repay some debt. I think we can manage that covenant where it is.
Patrick Morton - RBC
Final question on Ambatovy, as far as the carrying value of those assets, you took a few write downs this quarter. At current nickel prices, are you comfortable with the carrying value of those assets, of Ambatovy?
Dean, do you want to talk about the carrying value of Ambatovy?
Yes. We did go through an analysis with our partners as well and we are comfortable with the carrying value at this time but we certainly gave it a full analysis and used both current and forecasted nickel prices to make that determination.
Next we have a follow-up question from Matt Murphy with UBS. Please go ahead.
Matt Murphy – UBS
Just a question on Moa, the ore issues, can you talk a little bit more about what you are seeing and just the confidence you have to address it?
Yes. So we moved into a different mining area late just in the fourth quarter, early this year and we are seeing some slightly different characteristics in the ore body, primarily around settling rates and some of the extraction rates. It's a bit early to say. We had our technology guys down there over the last couple of weeks and they're working on things. I think at this stage we're not expecting it to have a material impact or guidance for the year. It's still consistent with previous years. But that's just something we're working through now. I think this has happened in the past as you move from one area to the other and it's something that we think we can manage but that’s what our technical guys are working on right now.
Your next question comes from Alec Kodatsky with CIBC. Please go ahead.
Alec Kodatsky - CIBC
I just wanted to just get maybe a bit of clarity on the expenditures at Ambatovy. I think Dean in your discussion you mentioned a total cash requirement of $200 million for 2014, of which $75 million was repayment of debt, leaving $125 million as sort of that operating number. In the outlook you also disclosed that expenditures for 2014 of 34 million -- is that incorporated into the net of $125 million or is that incremental too?
That should be incorporated in that number.
Alec Kodatsky - CIBC
Okay. So if I wanted to get some sort of sense of where I guess an operating earnings number might come out in that $90 million or so residual is sort of a number to be looking at?
Yes. So the $34 million of capital should be included in my total rough $200 million of funding overall for the project. And obviously that will depend on nickel price and ramp ups to a great degree.
That assumes spot nickel for the year, I guess.
Ms. Myson, there are no further questions at this time. Please continue.
Thank you, Ron. We look forward to speaking with you again in April with our first quarter 2014 results. Thank you to everyone for participating in the call and please feel free to contact us with any follow up questions.
Ladies and gentlemen, this does conclude the conference call for today. Thank you for participating. You may now disconnect your lines.
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