Sherritt International's (SHERF) CEO David Pathe on Q2 2014 Results - Earnings Call Transcript

Jul.30.14 | About: Sherritt International (SHERF)

Sherritt International Corporation (OTCPK:SHERF) Q2 2014 Earnings Conference Call July 30, 2014 2:00 PM ET

Executives

Sean McCaughan - Vice President, Investor Relations and Communications

David Pathe - President and Chief Executive Officer

Dean Chambers - Executive Vice President and Chief Financial Officer

Analysts

Orest Wowkodaw - Scotiabank

Matt Murphy – UBS Securities

Greg Barnes – TD Securities

Cliff Hale-Sanders – Cormark Securities

Alec Kodatsky – CIBC

Operator

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Sherritt International Corporation’s Second Quarter 2014 Results Call. At this time, all participants are in a 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, July 30, 2014 at 2 PM Eastern Time.

I will now turn the conference over to Mr. Sean McCaughan, Vice President of Investor Relations and Communications. Please go ahead, sir.

Sean McCaughan - Vice President, Investor Relations and Communications

Thank you. Good afternoon, everyone. Welcome to the Sherritt International Corporation’s second quarter 2014 results conference call. Our results were released earlier this morning and a copy of the press release along with the MD&A and full financial statements, are available on our website at www.sherritt.com. Also available on the website is an accompanying presentation on the quarterly results that will be referred to during this call. 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 clicking on the webcast link. A replay of the webcast will be available on our website 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 our press release and to the risk factors described in our SEDAR filings.

On the call today is David Pathe, our President and Chief Executive Officer and Dean Chambers, our Executive Vice President and Chief Financial Officer. We will begin with a review of the results for the quarter and then move into a Q&A session to address any questions you might have.

And with that, I will now turn the call over to David.

David Pathe - President and Chief Executive Officer

Alright, thank you very much, Sean and thanks to all of you for taking the time to join us this afternoon. It’s been an eventful first half of 2014. We continue to make progress on our stated objectives with our focus on our metals business and our Cuban oil business. I am going to highlight a few events from the quarter and look at operational performance in our businesses before Dean speaks to a few financial highlights. As Sean mentioned for the first time, we are using a presentation along with these comments. And so, I am going to sort of pick it up from the Page 3 of the presentation here and my comments will track the first few pages of the presentation.

To touch on a few highlights, in oil and gas, we completed an extension of the Puerto Escondido, Yumuri production sharing contract for an additional 10 years beyond its original expiry date in March 2018. This extension is the first step in extending the life of our oil and gas business in Cuba over the longer term, which has been one of our objectives this year.

In our metals business, the ramp up at Ambatovy resulted in positive EBITDA for the first time as both production and realized pricing improved over the first quarter. Our revenue and EBITDA was enhanced across our metals businesses as we began to see the benefit of continued strengthening in the prices for our primary metal products. Nickel and cobalt prices are up 35% and 13% respectively year-to-date.

Lastly, we completed a significant step forward in narrowing our focus towards our core metals business and our unique Cuban energy assets by completing the sale of our non-core coal assets. That resulted in $814 million in net cash proceeds and the completion of this transaction greatly enhances our liquidity and strengthens our balance sheet.

So, to take a look at each of our businesses, beginning in metals, we reported an increase in our adjusted EBITDA of 28% during the quarter compared to the same period last year based on both higher production and stronger pricing. Production volumes in our Moa operation were similar to last year. During the quarter, we addressed the production challenges at the Moa site we saw when we moved into a new mining area as well as the Autoclave repair that we discussed in Q1. As a result, we are seeing production levels return to expectations. Mixed sulfide production recovered in the second quarter, but had not by the end of the quarter flowed through to finish nickel and cobalt production. We are seeing that now. Finished nickel production was also affected in part by our annual scheduled maintenance shutdown at our refinery in Fort Saskatchewan which was completed in June.

In terms of guidance, we are a little behind the pace based on our first quarter issues. But we are running well now and we think we can make much of that up on that basis we are leaving our full year guidance where it is. On the cost side we reported C1 cash costs that were down from Q1, but higher than our Q2 of last year. The difference in Q2 2013 was primarily due to lower fertilizer prices in Western Canada and lower sales volumes as in the quarter as a result of higher first quarter sales. The key part of our C1 costs which is our mining processing and refining cost saw an improvement compared to the prior period. Lower prices for sulphuric acid and sulphur were the main contributing factors of this improvement.

At Ambatovy, as I said this was our first recorder with the operation reporting positive EBITDA. Production for the quarter was higher than our Q1 production though it was less than we were looking for in the quarter. We continue to see that upward soft pattern in our ramp up curve. Q2 production was impacted particularly in May by unanticipated mechanical failures issues include failures in areas such as valves, piping and boiler tubes as well thicken our performance in the CCD and neutralization circuits. More recently in June and July we have seen greater stability in power. We have been working to optimize performance and maximize recoveries in the circuits that are downstream from the autoclaves. As a result we find periods where the autoclaves have been running at lower rates or on standby as we work to maintain stability downstream with the higher volumetric flow as we are seeing with it – with the greater autoclave availability.

Now that we are a couple of years into the ramp up, we can see the evolution of this process. In the early months we were working on getting our utility stable. Those of you who have been listening to these calls for a few years will remember discussions on our power plants and other issues. As we solved these issues we moved on to power, we focused on ore throughput and reliability of the autoclaves. Now that we have achieved commercial production, our focus is moving from ore throughput to finished nickel. With that we are more focused on downstream recoveries, process control and optimization of the process.

On costs, we saw our net direct cash costs coming in within our expectations for the facility when operating at this level of capacity. We have reported gas cost of $7.19 per pound, which was slightly up from Q1 2014. We expect the impact of the NGCC to continue to drop as production increases and we are still comfortable with our estimate for C1 costs in the range of $3 to $5 per pound once the facility is up full capacity.

Looking at our guidance for production volumes in 2014, you will see that we have revised our outlook for mix sulfides nickel and cobalt. These changes are largely driven by lower than anticipated production in the first half of the year. We are also positioning the plant as best as possible for achieving the 90% for 90 days test under our financing in 2015. While I will take a quick look at a couple of comments in the metals market and during the quarter as we said we began to see the benefit of higher prices for nickel and cobalt and we remain bullish on nickel prices for 2014 and 2015. There are a number of reasons for this.

We continue to see healthy demand for nickel driven in part by strength for stainless steel, the Indonesian ore band continues to hold and Chinese NPI production is down significantly in 2014 and is expected to continue to decline as ore stocks in China are consumed. We have seen some softness in recent weeks from the highs of earlier this year. This was not unexpected as the summer is typically a seasonally soft time for nickel pricing as various steel mills take summer shutdowns. Based on that, we would expect to see some strength between now and the end as the year as the market comes more or less into the balance with the potential for further strength in next year as the market moves into deficit.

Looking at oil and gas business, we continue to see very strong operational and financial performance from our oil business. Cuban production was slightly affected by a casing collapse in one well as well as natural reservoir declines. We expect their affected well to return to production during the third quarter. On costs, we saw the impact of higher work-over maintenance costs that we referred to in the first quarter, higher work over costs and a weaker Canadian dollar resulted in increase of little more $1.50 a barrel. However, margins increased with an increase in realized pricing of more than $5 a barrel, again largely due to the weaker Canadian dollar against the U.S. dollar.

With our success at extending the Yumuri-Puerto Escondido production sharing contract, we are investing more capital into the business this year. The $21 million in additional capital in our guidance is to support additional drilling under this arrangement, startup of our second rig and the purchasing of support equipment. In our power operations, we saw the impact of the new 150 megawatt plant at Boca de Jaruco. We translate into higher production and higher EBITDA.

Overall, in our power business, we have seen greater strength as a result of, but not just of the – that we saw greater improvement on our cost structures as a result of not just the increased production, but the fact we didn’t have any significant maintenance turnarounds as well in the quarter. And we have also seen some strong production coming out at the midway point of the year, where we have 400 gigawatt hours as a result of some strong production in our new facility there.

On gas availability, we have seen some greater availability in gas than we were forecasting at the beginning of the year. That’s due in part to some higher gas to oil ratios in some of the new wells that we have drilled as well as we are able to start capturing a little gas that was previously being flared. And we are optimistic that we hope we will be able to see that sustain itself through the second half of the year. We have some additional opportunities to capture a little more gas that’s currently being flared towards the end of the year. On the basis of all of that, we haven’t made any changes to our guidance – our production guidance in the first – from the first half, but if we can sustain that, there is the potential for us for our annual production to outpace our current guidance. That’s basically what I wanted to cover from an operational perspective.

I will now let Dean give you a few highlights in the finance side.

Dean Chambers - Executive Vice President and Chief Financial Officer

Thanks, David and good afternoon. I want to focus on the few key financial highlights during the quarter as well as some items I see as I look out over the next six months to the end of the year. Generally, this was a relatively clean quarter from an accounting perspective. The only significant adjustment to earnings is a $13 million gain related to the disposition of the coal business. For those of you who follow our financials on a quarter-by-quarter basis know that we frequently have a number of adjustments to earn. And so, it’s nice that this quarter was actually relatively straightforward.

If you look at Slide 10, we have summarized a number of financial highlights for the quarter comparing this last quarter to the comparable quarter a year ago. If you look at revenue, you can it’s up by 7%, but of course top line revenue on our income statement does not include revenue from our Moa joint venture or Ambatovy. So, if I look at revenue including our share of revenue at Moa and Ambatovy, this is what I guess I will call them adjusted revenue. Then our revenue for the quarter was about $305 million, which is up by 47% from a year ago.

Looking at adjusted EBITDA, we realized a 42% increase this quarter compared to the same quarter a year ago, with the growing contribution from our metals business. It is obviously reflecting higher realized prices for nickel and cobalt and more importantly, our first full quarter of contribution from Ambatovy with a positive EBITDA. So, what you are seeing is including Ambatovy on an adjusted basis is having a significant impact on both revenue and EBITDA.

Sherritt reported a net loss of $30 million for the quarter or $0.10 per share compared to a loss of about $11 million or $0.04 per share in the prior year period. Our $30 million loss was comprised of a loss from continuing operations of $49 million offset by $19 million of earnings from discontinued operations, which does include the $13 million gain on the disposition of the coal business that I mentioned a few minutes ago.

Now, that the coal business sale has been completed, then really it’s the continuing operations that is most important. The loss from continuing operations was principally due to Sherritt share of losses at Ambatovy partially offset by higher adjusted EBITDA. Our share of Ambatovy’s loss was $51 million. Of that loss, that includes approximately $40 million of non-cash depreciation and amortization. So, about 80% of the loss that we brought on into our income statement came from depreciation and amortization. This is the pattern we do expect to continue. We continue to expect depreciation and amortization and interest expense. At Ambatovy, we will keep Sherritt at a net loss for the remainder of the year.

One area that is getting a lot of attention internally these days is administrative expense. So, we would make a couple of comments about this rate of expense. Of course, this is also the first full quarter of Ambatovy results, including administrative expense and you will see that in the segmented data in our financial statements I think it’s no far. And it’s also obviously a part of our share of the losses per share.

But I want to comment that there are number of unusual items this quarter that were included in administrative expense, expenses related to the sale of our coal business, additional expenses related to our Annual General Meeting this year, and the revaluation of stock-based compensation due to the appreciation in our share price. If I exclude those one-time items and Ambatovy, the total administration expense declined by about 17% this year compared to a year ago. This is an area that we will continue to work on as we look at opportunities to reduce structural costs in our operations.

Looking at adjusted operating cash flow from continuing operations, it was $0.01 per share this quarter and lower than the $0.09 per share in the second quarter of 2013. This was almost entirely due to the timing of a cash tax payment in our oil and gas business of about $27 million. Just a reminder that to calculate our adjusted operating cash flow can be calculated from our cash flow statement, but excluding non-cash working capital or changes in non-cash working capital. I have also reminded you when I reported this metric in the past that it also does not include cash flow from the Moa or Ambatovy business unless there is a distribution up to Sherritt. However, if I look at adjusted operating cash flow, including Moa and Ambatovy, it is about $9 million for the quarter or about $0.03 per share. And if I look at that compared to the first quarter of this year, which is really only a relevant comparable because of Ambatovy, I see about $10 million improvement from cash flow at Moa and then offset by that $27 million tax payment I mentioned before.

Moving on to Slide 11, we have shown you there changes in our balances in cash and short-term investments over the quarter. And this clearly is one of the most significant changes in our financial status during the period largely driven by the fact that we did complete the sale of our coal business and realized net call proceeds of $804 million. This amount is up slightly from what we have reported previously and that’s simply due to the finalization of closing and post-closing adjustments. We did repay $365 million of debt during the quarter, $300 million of that was the repayment on the coal credit facility and we have repaid $65 million on our two corporate credit facilities. You may remember late last year, we did drawdown on a number of our facilities together through the year end liquidity situation. Coming of Ambatovy in the quarter was $79 million and we have funded our share of funding from Ambatovy year-to-date is approximately $120 million. So, the results of all these changes has resulted in a cash balance at the end of June of $966 million and total liquidity of around $1 billion, including available credit line.

Moving on to Slide 12, this really leads us into a discussion about balance sheet, liquidity, use of the coal proceeds and potential refinancing of our outstanding debentures. We talk about liquidity and our balance sheet every period, because it’s so important. But what I would like to talk about today is how we look at liquidity and managing our balance sheet strength. Liquidity for us is largely in the form of cash on our balance sheet. There is a couple reasons for that. One is that we are not able to secure large bank credit facilities. We do have a couple of bank facilities, but given on our credit rating, lack of available securities and the fact that there are limited number of banks who are able to provide credit to Sherritt due to our business activities in Cuba means that really our availability of lease financing is somewhat limited.

The other point here is that by far the deepest and most dependable high-yield debt market is the U.S. market. And that is the market that we do not participate in. And so we have been raising – we have been accessing the Canadian high-yield debt market, which has been a very, very strong market and very good for us, but nonetheless, it is not – it is obviously not the same as raising funds in the U.S. market, which is always dependent on all that’s available. And as a result of those factors, we need to maintain sufficient liquidity on our balance sheet to manage through the commodity cycles and in this case, the uncertainty that will still surround future funding requirements at Ambatovy.

The other point I would like to make here is that now that the coal business has been sold and of course the coal business generated cash flow and the royalty portfolio generated cash flow that was more healthy like than exposed to commodities. And all of that is not part of our overall structure. We do have more sensitivity to commodity price cycles, nickel, cobalt, and oil etcetera. So, that’s how we look at our balance sheet and that leads us into what do we do with the proceeds from the wholesale.

As we have mentioned on prior calls, under the terms of our indentures, the Corporation may use the proceeds from the sale of the coal division, these require other assets or to repay term debt. And the remaining proceeds after 360 days must be used to make an offer to the debenture holders at a price of 101. So, given that the coal transaction closed in April and late April 360 days takes us to April of next year. However, we have said that we would like to pay down some debt and restructure our debt portfolio in the near future and we have a number of objectives in mind in doing so.

First of all, obviously to reduce our overall leverage, we currently have 39% debt to total capitalization, that is not sustainable debt level and we would like to get that down significantly. However, we do need to maintain strong liquidity on our balance sheet in the form of cash as I mentioned before. So, that means we will not use all of our proceeds to pay down debt and probably more likely about half of the proceeds would be used to pay down debt as we look at things now. We do need to satisfy the after sale cost in the indenture that I mentioned above. And of course, we would like to make sure that there is no uncertainty around our liquidity situation and on our debt situation as we move into 2015.

We would like to refinance our 2015 maturity. It matures on October 2015 and we always like to look at our next maturity and opportunities to refinance that maturity to close this refinancing risk and we do typically refinance those maturities well in advance. But probably, even more importantly, we would like to extend our overall maturity profile, in other words, have maturities further out into the future. And we would like to reduce the balance of the 2018 and 2020 maturities. Our 2018 maturity is $400 million and our 2020 maturity is $500 million. And so to have $900 million to be refinanced in a relatively short window represents a bit of a challenge. And I think to reduce those – the size of those outstandings would mitigate that risk significantly. So, if I look at all that, I would – in a perfect scenario, I would like to see an extended maturity profile out into future with principal maturities at each time more likely in the $250 million to $300 million range.

Over the last several months, we have been in detailed discussions with our advisors on a variety of strategies and terms that may achieve some or all of these objectives and our pros and cons to a number of different paths that we can take. However, I would expect that we would be in a position to begin a refinancing of our debenture portfolio in the early fall.

That ends my comments. And I would like to turn the call back to David to talk about some of our priorities as we move forward.

David Pathe - President and Chief Executive Officer

Thanks, Dean. Just to take another moment here before we take your questions, I didn’t want to just highlight and update what we have – where we are now as a company having completed the sale of our coal business and some of the priorities that we have been talking about now for the last couple of quarters. First, we are now with the sale of our coal business completed focused on leveraging our core metallurgical and technical expertise to more focused nickel company in the base metal sector. This is where our competitive advantage lies and we still have the coal assets to focus on nickel for that reason. And in addition, we are focusing on oil and gas and power businesses in Cuba. We have a unique platform there that we think we can continue to extend the life of and we are focused on extending that platform in the life of that business.

Based on our focus now on nickel, we continue to ramp up our operations in Ambatovy and are targeting higher production levels of 90% of nameplate capacity in the first half of 2015. We remain confident this asset will be the long-life, low-cost asset that we have always believed it will be. As I say in our oil and gas business, we have a unique self-contained business, where for the past two decades Sherritt has had much success producing oil from our well-developed understanding of the geology. We have obtained an extension to one of our production sharing contracts and continue to seek exploration blocks to further extend the life of this business.

As Dean discussed, we have also placed a priority on de-leveraging our balance sheet and plan to use a significant amount of our coal proceeds to reduce debt. This will allow us to take advantage of profitable growth opportunities over the medium to long-term. Dean also spoke of cost reductions. We will continue to pursue cost reductions. We have realized cost savings in 2014 and will continue to improve operating efficiency. As we move forward, we are focused on improving efficiency as we focus our strategy and grow the more effective organization.

Finally, we are implementing measures to further enhance our communication with employees, shareholders and other stakeholders. Hopefully, you have seen some of that today in our approach to the press release and this conference call. In addition, we have been out in several Canadian cities since our Annual General Meeting to meet with current and prospective shareholders and we will be looking to get out to a few more cities in the fall.

That is what we wanted to update you on today. And with that, operator, we are happy to take any questions that people may have.

Question-and-Answer Session

Operator

Sure, thank you. (Operator Instructions) Your first question today will come from Orest Wowkodaw with Scotiabank. Please go ahead.

Orest Wowkodaw - Scotiabank

Hi, good afternoon. I was hoping you could give us a bit of an update on how Ambatovy is doing post quarter end? We are there on site. I guess the indication was that you expected to have the fifth Autoclave up and running kind of exiting Q2 through Q3. I am just curious if that’s currently the case and any operating metrics you could give us say for the – on throughput maybe through the month of July would be very helpful? Thank you.

David Pathe

As I mentioned, we are now seeing greater reliability in our autoclaves. And so although throughput was down a bit for the quarter, that was largely due to a relatively poor May, where we I think our ore throughput for the quarter dropped a little bit below 50%. In June, we saw stronger performance and July has been our strongest month for ore throughput. I think July will probably come in around 73% give or take and we are actually on a pretty good run at the moment, but I think for the last 7 days or so we are running in the low 80s. But more important now what we are focusing on is now that we are seeing greater reliability in the autoclaves, we had couple of people who have picked up already today on the fact that we had higher autoclave hours, but lower throughput in the second quarter. And that’s because towards the end of the quarter and into July, we have been actually moderating the flow rates to the autoclave since we work on getting greater stability downstream.

What we have been doing is as our ore throughput rates go up and the volumetric flows then into CCDs and the various circuits downstream to separate out the tailings from the liquid that contains the metal is that our recovery rates go off or decline a bit to where we get more contaminants in those liquids as we increased the volumetric flow. So, now that we have got greater stability in the autoclaves, we are actually moderating the flow through those as we try and manage their recoveries and the clarities downstream. So, to answer your specific question, we are having a good month in July with solid throughput and we are on a particularly good run at the moment, but we are now shifting our focus a bit downstream on optimizing the recoveries in the process downstream from the autoclaves as we get a little bit more reliability at the – in the power circuit.

Orest Wowkodaw - Scotiabank

And are you still expecting, I mean, are there any maintenance shutdowns expected at the autoclaves for the rest of this year or do you anticipate that you have full availability?

David Pathe

We’ve got pretty good availability right now. I think beginning in September and then through the fourth quarter, we have a couple of that I think 4 of the 5 autoclaves between September and the end of the year each can have a maintenance turnaround part of that is scheduled and part of that we are doing to then position us in 2015 when some of the other projects we have underway like the second (indiscernible) you saw when you are down there. To give us as best chance as possible at that 90% for 90 days test under our completion test for the financing.

Orest Wowkodaw - Scotiabank

Okay. And then just finally can you give us the sense of how much recoveries improved say Q2 versus Q1 in your operating or throughput levels, but still pretty more nickel?

David Pathe

Yes. So we would definitely step away – definitely seeing last nickel go through tailings now than we were before. I don’t have a number or percentage for you. I can say if we can get something for you on that. Part of that is also just a timing of processing of mix sulfides into finished nickel and part of it is definitely higher recoveries, but I don’t have the quantified in front of me here.

Orest Wowkodaw - Scotiabank

Okay. Thank you very much.

Operator

Your next question will come from Matt Murphy with UBS Securities Canada. Please go ahead.

Matt Murphy – UBS Securities

Good afternoon. The Moa guidance you mentioned you are leaving where it was it implies a pretty good pick up in the second half, I saw recoveries the discussions at recoveries have picked up, what do you see picking up from here, is it throughput is it grade or is it recovery is getting even better to deliver that stronger second half?

Dean Chambers

Yes. In Moa in June and July the Moa we’ve been running well there now we were – we are probably 100 tons ahead of budget in July for finished nickel at the refinery. I think you are right as you just kind of look at to run your math. It is going to take a strong second half for us to fit that guidance fully. But now with the challenges of the Q1 behind us and the time right now and we have taken up in terms of getting the increase mix sulfide production once we got or so up into the ’14 and then running. We are feeling pretty good about where we are at the moment so it is going to take a strong second half performance to get us up close to that 38,000 number. But what we are seeing at the moment really makes that at least a good possibility so it reflect the guidance where it is. But you are right that we have got some work to do there now based on where we put ourselves after the first quarter.

Matt Murphy – UBS Securities

Sure. Okay, thanks. And then just on the extension to the production sharing contract, can you expanded at all and what the investment profile might look like there into 2015?

David Pathe

I don’t have a capital number for you into 2015 and what the incremental change in capital will be. A couple things that I think is – we are going to drill three additional wells there this year. And I think our commitment under the extension is still to drill seven all together. We are hopeful we will be drilling that or more depending on the results of those wells so we will see probably a similar uptick for the drilling budget for 2015. The other possibility is we are anticipating final approval on the four additional blocks that we have approved that’s already negotiated. Those are pretty much informed, now we are waiting for some approvals still to come through ‘15, but if they come through there will be some work to be done some seismic and then interpreting that then doing (indiscernible) hence there will couple of millions of dollars as well.

Matt Murphy – UBS Securities

Got it. Thanks.

Operator

(Operator Instructions) Your next question will come from Greg Barnes with TD Securities. Please go ahead.

Greg Barnes – TD Securities

Okay. Couple questions for Dean on the accounting side. On the DD&A at Ambatovy in you comments Dean you did mention it’s going to remain at a pretty high level is $400 million annualized as 100% basis the number we should using going forward?

Dean Chambers

It’s a good question. I think it will be relatively constant over the next sort of while I mean obviously this is the high capital spending of the total and the running. This is the first full quarter we got $100 million on a 100% basis. So I think roughly around that rate should continue. But certainly we will be looking – I will look to update that as we – especially as we look forward into our 2015 budget. But I think it’s a good run rate to use at this moment.

Greg Barnes – TD Securities

Okay. Also Ambatovy, you’ve got a $15 million tax recovery again on a 100% basis, when are we going to be taxable or when do you think you actually have to pay cash taxes or how is that going to evolve as far as you can tell at this point?

David Pathe

Yes, obviously that doesn’t depend on how we ramp up in nickel price, but I think because of the depreciation and some other tax benefits we have I think it’s two or three years before the cash tax payable.

Greg Barnes – TD Securities

Okay. And taxes at Moa, when you break them out in the segmented information I guess for the operation, the earnings before tax of $13 million in the quarter and tax expense of $11 million just trying to understand what’s going on there?

David Pathe

Yes, I am not quite slightly sure why that’s so high relative to the earnings maybe we will have to get back to you on some more detail on tax stuff there.

Greg Barnes – TD Securities

Okay, thanks. How is it?

David Pathe

Good.

Operator

Your next question will come from Cliff Hale-Sanders with Cormark Securities. Please go ahead.

Cliff Hale-Sanders – Cormark Securities

Hi, good afternoon everyone, just a quick question on Ambatovy, given that the production was higher than you would expect given your throughput in Q2 and you had a drawdown of I guess the storage capacity and the mix sulfide inventory for the quarter to meet your production, with the expected maintenance in September in Q4, do you have enough time to rebuild that inventory to make that production guidance for the year?

David Pathe

Yes, based on a revised numbers we do, I don’t think there was a big drawdown in the inventories in the mix sulfides at the end of the quarter there, it’s more just timing concerns. We are still going to have – we will always have at least four autoclaves available and the run we are at right now as I said for the last few days at 80 some odd percent is off of – for autoclaves with one part. So the capacity is there to do it to the – our success or failure achieving that will turn on to the good extent which we have again unanticipated to mechanical challenges and then some success to maintain the recovery rates and the clarity is in our circuits downstream as we move up into these higher volumetric flows.

Cliff Hale-Sanders – Cormark Securities

Just a follow-on from that, are you willing just kind of say what you are budgeting throughput rate for the remainder of the year is to meet your guidance around 75% to 80% would that be fair?

David Pathe

I don’t have that number in front of me, but I would guess what you are talking about there is about right. It’s about 70% at the low end and up to do a bit at a high 70s probably at the high end of the guidance.

Cliff Hale-Sanders – Cormark Securities

Okay, great. Thank you.

Operator

Your next question will come from Alec Kodatsky with CIBC. Please go ahead.

Alec Kodatsky – CIBC

Yes. Thanks. Good afternoon everyone. I just had a quick question again to get back to Ambatovy, the issues that you had with the piping and the valves was this a new issue, is it a situation where things are wearing more quickly than anticipated and were there any sort of subsequent changes either in the materials being applied or the approach?

David Pathe

There was no one specific event that really stood out above any of the others, frankly we did have a leak in the pipe to the tailings which took the plant down for couple of days in May and when you have a couple of days at June it does kick into your monthly number a bit. It’s – the process that we have been going through, we have had as you know we have been battling piping and valves in flanged areas for valve now and so there is an ongoing process there where we are trying different types of valves and different types of flanges over the course of the last two or three quarters. We have changed out a lot of rubber line pipe for alloy pipe and so that should puts some of – some tanks that have failed in the past, they were previously rubber lined have now been a line with alloy. So we’ve not – some of that stuff off the – and so I don’t think it’s symptomatic of any real significant changes from expectations, I think it’s just part of the learning or ramping up the facility.

Alec Kodatsky – CIBC

Okay, that’s great. And maybe a question for Dean, I think so probably we come back to Greg’s question, but with the coal division now out of the mix I guess the effective tax rates are going to be somewhat unusual and that you probably won’t have the same degree of shielding that you might for the offshore assets. So, I am just trying to get a sense is Q1 fairly representative of what we should expect from a cash tax perspective going forward or is there still a reasonable degree of noise in there associated with the divestiture?

Dean Chambers

Well, I think there will still be a fair amount of noise in our effective tax rate. And in fact, that’s partly why I have almost decided not to talk so much about it on this call. So, the effective the tax rate that you are seeing on our statements of course is all of them are primarily related to our oil and gas and power business, because earnings from Ambatovy and Moa already coming in to our earnings statement on an after tax basis. So, to really calculate an effective tax rate, you have got to look at the notes to I think low 6 and 7 for investment and associated investment in the joint venture. So, you really need to think of several buckets of taxes in a way. And I think we talked about the last time you have got corporate will generate losses, because we have financing expense here without compensating income and then you will have earnings in the various businesses with their various tax rates. And so it will depend on the mix of earnings in the various jurisdictions in which we operate, but the effective tax rate write-off of our income statement will continue to have a lot of noise. I don’t know if that helps. We can talk more about that offline if you would like.

Alec Kodatsky - CIBC

Sure. We can talk forever on it.

Dean Chambers

I think that’s right, but it’s – yes, I don’t know if that helps, but just to remember that the one on our income statement is obviously mostly oil and gas and power. And then the earnings from the joint venture and associated on our income statement are already on an after tax basis.

Alec Kodatsky - CIBC

Okay, that answer is probably as well as it can be. Thanks Dean.

Dean Chambers

Okay, thanks.

Operator

Your next question comes from Orest Wowkodaw with Scotiabank. Please go ahead.

Orest Wowkodaw - Scotiabank

Hi, thanks for taking my follow up. The comments in the release about the Cubans reviewing some of the contracts for the asset plant and therefore you are deferring some of the capital, should we assume that, that could result in a delay to the construction in the startup than of that asset plant?

David Pathe

Yes. I think the short answer to that is quite potentially then I guess when you talk previously about the asset plant kind of being up and running by the end of 2015 as the issue we are dealing with at the moment is approval and getting final contracts for a couple of the larger service providers with that of just taking a bit longer to get sign off on down there. And so we are not as far ahead on procurement for some of the more significant components of the asset plant than we were hoping to be at this stage and we don’t want to go into full mobilization at the construction workforce until some of that stuff is onsite, so that we don’t try construction out for any longer than we have to. So, that’s what led to the disclosure that we have got there today. The total construction time from when construction starts is 12 months to 15 months give or take. And depending on how quickly we can get going here on some of the procurement stuff as that slips into the first quarter of 2015 is we are forecasting today that it may and then that would see us into the probably first half of 2016 before that plant is up and running.

Orest Wowkodaw - Scotiabank

Okay, thank you. And just turning to corporate strategy again, there in terms of your stated focus M&A is not listed there anymore, I am just curious what your thoughts might be on nickel M&A these days and whether that’s even a priority anymore?

David Pathe

Certainly, in nickel is the area we will be looking to grow as a company and we certainly intend to grow this company. Our immediate focus is what those priorities were at the end of the presentation and we focus we are kind of see ourselves in 2014 here if we think there are immediate opportunities in our business to continue to prove up Ambatovy and get our balance sheet in order and get our cost in order to be – come out of this as a more focused company. I think ultimately as I have said in the past, there is still opportunities to grow a nickel company. I think that’s an attractive place to be. And I still think in this world that probably makes more sense through acquisition than it does through multi-billion dollar Greenfield projects, but it is not what our immediate focus is on at the moment.

Orest Wowkodaw - Scotiabank

Okay, thank for that.

Operator

We have no further questions at this time. I will turn the call back over to management for any closing comments.

Sean McCaughan - Vice President, Investor Relations and Communications

Thank you. We look forward to speaking to you again in October with the release of our third quarter 2014 results. And thanks to everyone again for participating in the call. Please feel free contact us with any follow-up questions.

Operator

Ladies and gentlemen, that does conclude the conference for today. We thank you for your participation. You may now disconnect your lines. And have a great day.

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