Sherritt International's (SHERF) CEO David Pathe on Q4 2015 Results - Earnings Call Transcript

| About: Sherritt International (SHERF)

Sherritt International Corp. (OTCPK:SHERF) Q4 2015 Earnings Conference Call February 11, 2016 11:00 AM ET


Flora Wood - Director, IR

David Pathe - President and CEO

Dean Chambers - EVP and CFO

Steve Wood - EVP and COO


Orest Wowkodaw - Scotia Bank

Greg Barnes - TD Securities

Sasha Bukacheva - BMO Capital Markets


Good morning, ladies and gentlemen. Thank you for standing-by. Welcome to the Sherritt International Corporation Fourth Quarter 2015 Results Release Conference Call and Webcast. 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, Thursday, February 11, 2016 at 10:00 AM Eastern Time.

I will now turn the conference over to Ms. Flora Wood, Director, Investor Relations. Please go ahead.

Flora Wood

Thank you, Angelique, and thank you, everybody for dialing into our fourth quarter and yearend call.

With me in the room, I have David Pathe, President and CEO; Dean Chambers, CFO, and Steve Wood, COO all of whom will be speaking. The presentation, MD&A and financials are available on our website with the MD&A and financials to be on SEDAR shortly. We do have forward-looking statements that apply and they are on the presentation on the slide two.

And with that, I'll turn over to Dave Pathe.

David Pathe

All right. Thank you, Flora, and good morning, everyone. Interesting times in our industry.

Before we take your questions this morning, as we've done in the last few quarters, I am going to ask Steve Wood to comments for a few moments on some operational highlights and we'll have Dean speak to you about a few financial matters.

Just before we get to that, there are a few things that I wanted to touch on as well. Starting into our slides there on page four, I guess we're up to already. Just few operational highlights off the top. We had good success in both of our nickel operations this year. Both with production up over 2014 and significant progress lowering that direct cash cost. You see that both in our Moa and Ambatovy joint ventures. Q4 numbers 290 in Moa and 407 at Ambatovy are both trending the direction that we have been very pleased with over the last few quarters. That 290 number in particular is a very solid number from our perspective. We did a little bit of tailwind in the fourth quarter from a good seasonal fertilizer credit. But we are still generally pleased with the direction we're going in the cost perspective.

Over the page, in oil and gas, our oil and gas and power businesses continue in a depressed commodity price environment to show strong free cash flow, particularly our power business. We saw significant cash flow out of our power business both in the form of a EBITDA and principal and interest repayments on the finance loans that financed the construction of our most recent phase of development in the power business a couple of years ago.

Most importantly, from our liquidity perspective, we’ve maintained our strong liquidity position. Cash is actually up at year-end over Q3. That is driven primarily by drawing on our credit facilities. However, even normalizing for that our cash position in Q3 was only down by $5 million or $6 million and down about $100 million for the year. Out of that cash, we did fund almost 150 million in capital expenditures over the course of 2015, as well as $106 million worth of - $106 million U.S. of contributions to the Ambatovy joint venture.

I'm going to talk a bit more about Ambatovy in a moment. But just over the page on page six, I did want to just put the progress we've made in the last few quarters in our net direct cash cost, in both our nickel operations and some context for you.

On that slide, you can see our NDCC and our two operations quarter-by-quarter, and the downward trend in both of those numbers is readily apparent from the lines there. The dotted line you see across the middle is the - from Wood Mackenzie, they're 58 percentiles from a net direct cash cost perspective. That is trying to down over the course of the last year as well. I'm certainly aided by cheaper commodities and cheaper fuel oil. But the reductions that we've been able to achieve in our net direct cash cost and both of our nickel operations have significantly outpaced the downward trend in the industry generally.

Putting our operations in context now on page seven, you can see that's the industry cost curve from top to bottom in terms of the cost to global nickel production. Moa has actually slipped into the top quartile of low cost producers in the fourth quarter and Ambatovy trended down subtly into the second quarter. So, both of our operations are now well below average of the net direct cash cost in our industry. And you can take from that curve as well as that certainly spot nickel prices 50%, 60%, 70% of global nickel production continues to be under water on a cash margin basis, never mind sustaining capital costs or debt servicing costs. We continue to believe that's not a situation that is long-term sustainable when we continue to be focused on moving our operations down and towards that top quartile of low cost producers.

Over on page eight, I want to pause and just talk about a few things on this page. What you see here is not a new chart for us. The number you will recognize this and have seen it before. This visually again maps out the cash flow waterfall, if you want to call it that out of Ambatovy. I wanted to just pause here and talk for a few moments on the capital structure of Ambatovy generally and in the context of our decision this month around this quarter to hold up our funding of future cash cost to Ambatovy at the moment.

Now, this has been so I think saw some misunderstanding of the complexities of the capital structure here as well, and the way those partner’s loans working. So, I wanted to just spend a few moments on this.

There are two rounds of loans that helped us find our share of Ambatovy construction through 2008 through 2012, 2013. The first as you’re all aware was the project financing in Ambatovy. That was a US$2.1 billion project financing. At the time, it was the largest project financing in the world and it was a big part of the funding of the construction of Ambatovy in through ‘07, ‘08, ‘09, ‘10, ‘11.

That project isn’t now - where it’s been into its amortization schedule for some period of time and until we achieve financial completion in the third quarter of last year was subject to parental guarantees from all of the sponsors, for the pro rata share relative to our equity holding, so Sherritt has an $840 million parental guarantee out to cover our share of that indebtedness. It was covered by cross guarantees from our partners, but we were nonetheless on the hook for the parental guarantee as well. With the achievement of financial completion last year, which I think was probably the single greatest milestone we achieved in 2015, those parental guarantees fell away.

In the third quarter, we had significant funding into Ambatovy to fund a debt service reserve account that was part of the conditions of achieving financial completion and that debt service reserve account was swept by the lenders in December, for the December principal and interest repayment. The amortization schedule for that loan now calls for around 240 million, 240 million to 250 million U.S. in principal and interest repayments that come due every June and December. And the reality is that now that sole [indiscernible] for those few principal and interest payments are the companies on the ground in Madagascar, the project at these nickel prices has not yet producing sufficient cash flow to be able to see if that weigh forward to making that June [ph] principal and interest repayment. And as a result of that, having got achieved financial completion and having had the 45-day challenge period expired in the course of the fourth quarter.

We are now into a process of negotiation with the senior lenders under the Ambatovy financing, regarding some potential observations that amortization schedule given that Ambatovy this year will not have the cash flow to meet and the amortization schedule is currently construed.

For the last couple of years, the biggest demand in our balance sheet and from the sponsors generally contributions to Ambatovy has been that that amortization schedule, but now with the achievement of financial completion, as I said, those financial guarantees falling away. It does open up the opportunity for compensation with the lenders and that’s why financial completion was a such great significance to us last year.

So that will unfold in the months ahead. The lenders have appointed the financial advisor. There have been some meetings already. And there are more scheduled in the next couple of months ahead. And that’s really I think you can look towards that June principal and interest payment as really what it will create the urgency as the weeks unfold here towards getting some solution on that round of discussions.

Moving further down the capital structure from there and you also have some familiarity with what we prefer to as our Ambatovy partner loans. Back in 2009, in the wake of the financial crisis and already get construction back on track, our partners agreed to lend us money on a non-recourse basis to fund our share of equity contributions to the project to fund the construction of Ambatovy. The deal at the time which worked very well for Sherritt in the circumstances after the financial crisis was that they would advance us the money. Those loans would have no recourse to the share of top company balance sheet and would be repayable solely from our future share of distributions from Ambatovy once it was up and running.

This is where I think there has still been some confusion given the last few weeks, so I'm suggesting that the cash could come off our balance sheet to fund some of the principal and interest on those loans. The reality is that that can happen by their terms, they’re repayable only from future distributions from the project. We’ve never paid any principal or interest on those loans and won’t until the Ambatovy starts to have cash available for distribution to its shareholders. And under the terms of those loans, if Ambatovy never produces sufficient cash to repay those loans in their entirety, then they won’t be repaid and the only recourse is to the residual interest in the project at the end of the project life.

So, as loans, however now that really have the greatest impact on our decision not to fund Ambatovy at the moment. Certainly our focus has been on liquidity and the potential cash trends [ph] of Ambatovy in 2016 was a significant factor, particularly in the absence of any clarity yet and what the arrangement would be with the senior lenders. However, those Ambatovy loans as they have now safe and now interest has accrued on those in the last few years, now create a significant disincentive for us to fund even if we had ample liquidity available.

The arrangements on those loans in terms of the sharing of our partner distributions, our future distribution of sales require us to send 70% of the future distributions from Ambatovy to the partners against principal and interest on those loans with the remaining 30% coming to us.

With the loans now at the balance of the hour and interest continuing to accrue on them and the low nickel price period that we've been enduring now for some period of time. The reality is that over the life of the project, we now need a nickel price significantly higher than where we are today to see those loans repaid in any meaningful time period. So, as we look at it from a present value perspective. Today, the cash flow that we're going to see in any meaningful timeframe, out of Ambatovy is really limited to 30% of our distributions. And so 30% of our 40%, we're only really going to see 12% of the cash flow out of Ambatovy, despite being a 40% shareholder. And that is really what's behind our decision not to continue funding at a 40% rate. That as we've worked through this issue with our partners in the last month or two subsequent to financial completion has really been what we've dubbed here our 40 for 12 issue.

Regardless of where we are from a liquidity perspective, continuing to fund Ambatovy at a 40% basis to really only see 12% of the returns, on any reasonable timeframe given where nickel prices are at the moment, it doesn’t make sense from any rational capital allocation model.

In the time of tight capital, at least if we - $0.50 invested in our Moa joint venture gets us as we return on $0.50, $1 spent in our oil business gets a return on a dollar. Right now, an incremental $0.40 and Ambatovy gets us the return on $0.12 and that simply doesn't create a significant disincentive to us. And it's a prohibitive disincentive really from further funding and on the capital structure as it's currently construed.

So that is a second round of conversation that is now taking place between us and our partners and it is complicated because of its interconnectedness with the previous discussion that we've talked about with the lenders in terms of knowing what level of funding and they'd still be required from the shareholders post some arrangement with Ambatovy lenders, and so I think this is going to be an interim [ph] process over the weeks and months ahead here, as we work through that and try to come back after some arrangement that more accurately reflects our true economic interest in Ambatovy. For the moment in the time being, the basis of our financial position today and our desire to maintain a strong liquidity position, and that significant disincentive that the capital structure creates towards further funding at the time being, it has lead us to the conclusion that we are no longer funding Ambatovy in the present circumstances.

I do want to reinforce briefly that it takes nothing away from our view on the quality of the asset. As an organization, we're tremendously proud of what we achieved at Ambatovy in 2015 and the team are on the ground and our team and technologies have done a tremendous job in my view. I think it's no sense - I don't have to say that Ambatovy is the most successful ramp up of an [indiscernible] nickel facility in the world. I think in 2015, we have proven from a technical and an economic perspective that is the long life low cost asset that we've long claimed it can be and we would certainly be keen to continue to be involved in it from many years to come, because it is right and as we see it in our wheelhouse [ph]. But it clearly has to work for us from a financial perspective and having spent 2015 by derisking and improving Ambatovy from an operational perspective, a big task in 2016 is going to be fixing Ambatovy from a capital structure perspective.

There may well be more questions on that and I am happy to take those, but I did want to - that's really the bulk of what I wanted to cover here for you this morning. Just to explain the rationale behind our decision to see funding at Ambatovy at the time being and make sure that that relatively complicated Ambatovy capital structure is understood in terms of the incentives that creates for us, particularly in this low nickel price environment.

Just over the page and just on nickel markets generally. It goes about saying that 2015 was a terrible year in the nickel market and commodity world in general has got off to a pretty rough start in 2016. Long-term, this growth shows projected nickel demand and supply in the years ahead. We continue to be long-term believers in nickel particularly as we move our operations down to that bottom quartile or top quartile of low cost producers in the world. I think you're going to continue to see a lot of volatility in 2016 as the world continues to sort itself out here and that's going to take some time. But, we're at the right end of the cost curve and a lot of the industry is suffering significantly right now. That will still take some time to shift and sort out. But I do still believe that we are moving from a period of time and years here of nickel surpluses into potentially a period of time of significant or significant period of time of nickel deficits, but they can degrade volatility and certainty and certainty in the world right now is making it very difficult to understand or getting visibilities to when that is actually going to occur from our perspective, we're in the nickel business for the next 30 years and whether it’s this quarter, next quarter, mid this year, next year is less important to us than having long life low cost operations that we’re confident in our ability to operate and that’s where our focus has continued to be.

For 2016, our priorities in a difficult commodity market really are not dramatically [indiscernible] to what they were in 2015, is to continue to drive down cost and incrementally increase production in our nickel operations and trying to look after the things that we have some control over, we are keen to continue to look to extend the life of our oil business in Cuba and you'll see some capital allocated for drilling on our new block, in block 10 this year and Steve will touch on that a little bit more.

And of paramount important is maintaining the strong balance sheet and a strong liquidity position. We were thinking about it was only 18 months ago that we did a debt deal to take out a series of debentures that were due to mature in 2015, we paid off about 4 million in debt but we maintained a large cash position and the questions we're getting them is why we were hanging on to so much cash? The reality is we hung on to a lot of cash because this is a cyclical business and maintaining strong liquidity position was important to us then and it’s Paramount important to us now and that’s really the motivation behind the discussion that will be taking place in the weeks and months ahead here with our Ambatovy lenders and our Ambatovy partners.

So that’s where we stand at this point in time from my perspective. I’m going ask Steve now to touch on a few operational highlights from the quarter and the year. And then we’ll hear from Dean, and then we’ll come back and take your questions. Steve?

Steve Wood

Thank you, Dave and good morning, everybody on the line. Before I get into the details of what’s been happening in the operations and our outlook, I would like to cover a few points on safety. You’ve heard me speak in previous calls about the importance of safety and we’ve had no fatalities in the fourth quarter. However, we did have three for the entire year, which is completely unacceptable and has caused us to reinvigorate our safety strategy, including adopting some enterprise wide fatality prevention standards.

On slide 11, I've got the Moa JV highlights. Moa had a good year. Although Q4 nickel production was impacted by some power failures from a new national power plant, the refinery compensated by taking on third party feeds, the feeds though were generally cobalt rich compared to the Moa mixed sulfides that are normally feeding the plant.

Our finished cobalt production was up around 19% in Q4 over the prior year same quarter as a result. I would like to say few words about cobalt and the cobalt market outlook also. The quoted price for cobalt dropped from around US$12 to under US$10 between November and December and have since stabilized. A widely read Amnesty International report exposing our artisanal mining of cobalt in the DRC using child labor has sparked concern around the source of cobalt being refined by customers. This should be good for Moa and Ambatovy as we can demonstrate that the cobalt that we’re mining has no source connected to the artisanal mining and child labor.

We've done considerable work to reduce costs and more than offset the upward pressures going forward. We did have good fertilizer credits in Q4, which helped us with their NDCC and we do have the upward pressures due to the seasonal nature of fertilizer credits, expectations of lower cobalt credits and preparation cost for the new asset plant. The new asset plant is coming online in the second half and will considerably help us with our unit cost going forward.

On slide 11, we cover off the Ambatovy JV highlights. Significant progress has been made in terms of reliability and stability around production, you can see that in the second half of the year, production was up over the first half and much more predictable.

The year’s guidance for 2016 is for a range of 48,000 to 50,000 tons, which is an improvement over last year and takes into account major maintenance required in Q3. The focus on reducing cost this year continues and it's a focused on increased efficiencies as we reduced maintenance downtime and build on our increased knowledge of the ore characteristics and our operating parameters as a result.

On slide 13 covers off the oil and gas highlights. Oil production has been declining on a quarterly basis as a result of a natural reservoir declines and no new drilling as we get closer to the expiry of the original production sharing contracts. The guidance for 2016 is for a drop of more than 20% from where we were at the beginning of last year. However, our new drilling program is focused on Block 10 with the guidance you see in the slide not including any production from Block 10. We have the required permits to start drilling and expect to commence middle of this year.

Slide 14 covers off the power highlights. Dave touched on this a bit. Power generation was up year-over-year with higher gas availability. Our net capacity factor has fluctuated between quarters and was at 70% in Q4 versus the 76% in Q3. And you can see the differences that makes on the chart. The guidance in 2016 is for slightly lower production based on gas availability forecast that we've gotten from the Cubans, while our pipeline is being constructed. Some potential for actual availability to exceed forecast exist as in previous years. Lower production in gas availability also impacts and expected cash flow from interest and principal repayments on the CSA loans, which in 2015 generated approximately $72 million in interest and principal repayments. Going forward, we expect to receive something in the order of $9 million per quarter during 2016 before returning to higher payments in 2017.

Overall, it's a good production year despite the commodity prices with 2016 looking even better in metals production. This year will be an investment year in our energy business with first drilling taking place mid-year and so we've got positive outlooks in terms of operations.

With that, I'll turn it over to Dean.

Dean Chambers

Thanks, Steve and good morning.

I have five slides today to assist in reviewing our financial results for the quarter and for the year. I will cover Ambatovy impairment and how that's reflected in our accounting. Cash flow and liquidity, covenants in our credit facilities and our debentures. A bit more detail on our sensitivities to our key commodities in the Canadian dollar.

Today, we disclosed a net loss for the quarter of $1.8 billion or almost $6 per share. This result was dramatically affected by the impairment of our interest in Ambatovy. Total adjustments in the quarter were $1.6 billion, resulting in an adjusted net loss of $114 million or $0.39 per share, which is reasonably close to our estimate of analyst consensus of $0.36 per share.

So, let's talk a bit more about the Ambatovy impairment on slide 16. It begins in an impairment of US$2.4 billion on a 100% basis at the level of a Malagasy project companies.

Primarily impairment of property plant and equipment, but it also includes impairment of a deferred tax assets and inventory. The two most important management assumptions and the calculations of the recoverable amount of the long-term nickel price and the weighted average cost of capital. The long-term nickel price is the most significant assumption. We use the long-term nickel price assumption of US$8.50 per pound. We've reviewed a variety of long-term forecast as well as historical prices to determine the nickel price assumption and we calculated our weighted average cost of capital of 9%. The impairment taken on Sherritt statements is approximately 1.6 billion Canadian, 1.3 billion is our 40% of Ambatovy's impairment in Canadian dollars. And approximately $300 million is from the impairment of our incremental carrying value, primarily related to minimum rates acquired to the acquisition of Dynatec in 2007.

This slide shows you the impact on the key accounts in our financial statements. Ambatovy has certified under Malagasy mining law for large operations. Under that law, there is a maximum allowed leverage. In order to remain in compliance, Ambatovy needed to convert a certain amount subordinated partner loans to equity, to accommodate the impairment of assets. Our share of this conversion is $840 million. In essence, prior to impairment, our investment in an associate increased by $840 million with a close funding decrease in the subordinated loan receivable.

Taking this conversion into account of $1.6 billion impairment and other adjustments related to the quarter, results in a revised investment and associate balance of 757 million, a reduction of 810 million from the balance at September 30th.

Our subordinated loan receivable balance has also been reduced to approximately $1.2 billion. We've implemented similar debt to equity conversions in the past to remain in compliance with the leverage regulation and to accommodate operating losses.

The reduction in the carrying value of Ambatovy's property, plant and equipment will result in reduced depreciation going forward. We estimate our depreciation will be reduced by about US$55 million per year, which of course will improve our share of earnings of an associate.

Slide 17 shows the change in the combined adjusted operating cash flow for the fourth quarter compared to the third quarter. Adjusted operating cash flow captures cash provided by continuing operations. Adjusted by the net change in non-cash working capital, to eliminate the timing differences and volatility associated with changes in working capital.

You'll see a big difference between our two metal [ph] operations. Moa benefited from strong fertilizer sales in the quarter, due to the seasonality of that business. Ambatovy's cash flow from operations was negatively affected by lower production and lower realized prices, compared to the third quarter, and a big interest on the senior debt in December.

Oil and gas and power both had lower adjusted operating cash flows with higher unit operating cost in both segments. And cash interest paid on the outstanding debentures is always highest in the second and the first quarters.

The next slide, slide number 18, goes into some detail on the items impacting our cash and short-term investment balance from Q3 to Q4. We drew down $65 million on our credit facilities in the quarter as described earlier. These facilities are essentially fully drawn. We had not drawn on the facilities our quarter end cash balance would have been approximately $370 million. Only $5 million less in the balance at the end of the third quarter.

We benefited from a positive working capital change. We collected US$36 million in oil and gas receivables. Although overdue receivables are still almost US$50 million compared to US $54 million at the end of the third quarter. We had expected to collect more of the overdue receivables by year end and we continue to work with the Cubans on a repayment schedule that brings the receivables to current by year-end 2016.

The cash paid for remediation at Obed and coal valley of $12 million is higher in the quarter relatively full year payments of $16 million. It relates to cost accumulated over the course of the year, that's roughly paid in the fourth quarter. There is a provision for additional payments of up to $19 million for such remediation. And of course in the quarter there was no funding of Ambatovy.

Slide 19 provides a summary of the financial covenants in our bank credit facilities and our public debentures. We have two bank credit facilities. The syndicated revolving term credit facility as a maximum availability of $115 million and it is secured by receivables and inventory. The line of credit is an unsecured facility with a maximum availability of $35 million. Both of these facilities have the same three covenants, a net financial debt to EBITDA covenant, a financial debt to equity covenant and an EBITDA to interest covenant.

I would note that these covenants cannot be directly calculated from our financial disclosure, as there are specific definitions and exclusions in the credit. Just as an example, for the calculation of financial debt, the additional partner loans are excluded, but LCs and guarantees are included.

As a result of the Ambatovy impairment, we’ve breached the financial debt-to-equity covenant at year-end and we have received waivers from the lenders for that breach. Going forward, this current commodity of prices persists, it is likely that we will breach other covenants. We will be working with our lenders to amend the terms of these facilities to deal with the current economic environment.

I am optimistic that revised terms can be negotiated with the lenders of the secure revolving term facility. But new terms maybe more difficult to negotiate in the case of the unsecured line of credit. With respect to our public debentures, there are few financial ratios, which can restrict the company’s ability to make certain restricted payments or to incur additional indebtedness.

We can make restricted payments if the total leverage ratio, which is total indebtedness divided by EBITDA is below 3:1 or if there is room in one of our restricted payment baskets. Currently, the total leverage ratio is above 3:1. So any restricted payments would be based on one room in any of those baskets. Examples of restricted payments are dividends and investments in joint ventures.

Company may incur additional indebtedness as long as the consolidated coverage ratio remains in excess of 2:1. The consolidated coverage ratio is calculated as consolidated EBITDA divided by consolidated interest expense. Even if the coverage ratio falls below 2:1, the company can use room in substantial baskets to incur additional debt. Again these financial ratios are very specific definitions contained in the indenture. None of these ratios have created a limitation on our business activities to-date.

The last slide 20 summarizes our net earnings sensitivity to our key commodities and the Canadian dollar exchange rate compared to 2014. Our sensitivity changes in nickel price in U.S. dollars has increased compared to last year, due to increased nickel production and a weaker Canadian dollar, our sensitivity changes in the oil price in U.S. dollars increased due to the weaker Canadian dollar and lower Cuban tax rates.

During 2015, the Canadian dollar weakened from a rate of 1.10 to purchase in U.S. dollar to a rate of 1.28. In our earnings sensitivity changes in the Canadian dollar exchange rates is somewhat complicated. These commodity prices are quoted in U.S. dollars, operating earnings are generally positively impacted by a weaker Canadian dollar since the positive impact on revenue more than offsets the negative impact on U.S. dollar denominated expenses. However, during a period of operating losses where a U.S. dollar denominated expenses exceeds U.S. dollar denominated revenue the foreign exchange impact is negative, which was as the case in 2015. The weaker Canadian dollar had a negative impact on operating earnings of approximately $90 million.

In addition, many of our accounts receivables, accounts payable, loans receivable and loans payable are denominated in U.S. dollars. Our U.S. dollar denominated liabilities exceed our U.S. based assets, resulting in a translation loss for the year of approximately $45 million. In summary, the weaker Canadian dollar had a negative impact on our earnings of approximately a $135 million in 2015.

That concludes my formal remarks. I will turn the call over towards the operator to open the line for questions.

Question-and-Answer Session


Thank you. [Operator Instructions] And your first question will come from the line of Orest Wowkodaw of Scotia Bank. Please go ahead.

Orest Wowkodaw

Hi, good morning. I guess I just like to start by congratulating on making that hard decision in terms of funding sufficing the funding for Ambatovy I know like it couldn’t have been easy. My question is around that specifically or I just wanted if you could please confirm my understanding if there is, if you’re unable to reach a resolution with the partners around the asset. Could you just confirm what your residual liability would be around that asset? I believe it's just $130 million of recourse partner loans and everything else would effectively drop away. But could you please confirm that understanding?

David Pathe

Hi Orest, it's Dave. Thanks. Dean can add to this as well, but to your understanding is essentially correct. There are two branches to those partner loans, one of the original loans that were in place from the time that the partnership was formed. And then second set of partner loans that with the loans I was referring to that were done in 2009. The original partner loans are also only payable from future cash flow and distributions from the project. However, Sherritt is ultimately on the hook for those with full recourse at maturity in 2023. And the total balance of those is $130 million. Even if those loans are accelerated in some circumstances, the acceleration is not a true acceleration, that would be remain payable in 2023, but Sherritt is - there is ultimate recourse to the Sherritt balance sheet for those loans. And we do ultimately have the ability to repay them in cash or equity. Other than that, the Ambatovy partner loans as they were in the 2009 that are now up to about $1.3 billion or $1.4 billion. Those are the full limited recourse to our interest in the project.

Orest Wowkodaw

Okay, perfect. And in terms of the balance sheet management, can you help me understand, so you - I guess fully drew your line of credit? Is that your intention to just sit on that cash or could we see you either repay that line of credit or actually buy your - say your 2018 bonds in the market at a pretty big discount. So, curious what the intention is to deal with that cash balance now.

David Pathe

Over the course of the year, we'll manage that actively based on maintaining a strong cash position and how we fair against some of the covenants that Dean will take you through there. But our goal with our credit facility is to maintain and maximize our liquidity position. There isn't any present intention to use any of that liquidity to be buying back bonds.

Orest Wowkodaw

Okay. Thank you.


And your next question will come from the line of Greg Barnes of TD Securities. Please go ahead.

Greg Barnes

Is there a mechanism where you can convert the funded loans to equities and dilute down to 12% for our economic interest matches your actual share interest?

David Pathe

There is, Greg, there is no mechanism in the loan documentation as it's drafted. There is no sort of convert to equity proportions or provisions for the loan. I mean that is certainly something that we would see as a desirable outcome. And setting aside the partner loans and all the interest that is accrued in the partner loans and if you just look at the capital structure of Ambatovy and where all the cash came from, 28% of the total amount of equity in the project came off of our balance sheet. And right now we've only got effectively a 12% economic interest. And obviously you've seen to this quarter and the write-down that we and our partners have taken on the equity. And frankly those loans and how the partner loans we look at them is effectively being 28% of the equity at the moment given the payment provisions on them. And so that as you think and you're doing, I think gives you some sense of the potential tone of the conversations with the partners in the months ahead.

Greg Barnes

Right. And just going to Orest's question, it's not a similar view turning your back and walking away from these partner’s loans, and say we're not going to pay them and that's it. I'm sure there must be repercussions if you try to do that.

David Pathe

Well ultimately, we would be the - we have a legal liability for that $129 million. And we would have that liability if regardless of what we do our residual 12% doesn't produce sufficient cash flow to pay those loans off of the 70% of any distributions we get to those loans doesn't cover them between now and 2023 regardless of how this plays out. And we'll see how that plays out. At the moment, the partnership is still a very constructive partnership and the arrangements we put in place to see cash go into the project are at least sufficient to keep the project going to allow time for them negotiations with the lenders to advance. The partners have waved any consequence of us, or any suggestion of us being a default in shareholder under the shareholder's agreement. And right now the partners are all working together towards a solution to this, both of the Ambatovy lender level and the Ambatovy partner level.

Greg Barnes

Okay. And Dean you said in your comments despite the fact that you have trip some of the covenants it is that there are no limitations on business activities at this point. Do you see a situation where there could be some limitations on your activities if nickel price stays at these levels?

Dean Chambers

Well my comments reflected the ratios of the debentures first of all and they haven't restricted our ability to do anything. I think it could be that there are restrictions on our restricted payments, but I don't see that have any significant impact on us in the coming year or so. And we have the ability to incur additional indebtedness, but I quite frankly don't intend to do so. I don't think at this moment. So, I don’t see any real negative implications for the ratios and the debentures. With respect to the credit facilities, a breach of the covenant does give the right to lenders to accelerate and that's why we're continuing to work with our lenders on waivers and new terms.

Greg Barnes

So the restricted payments under the notes debentures, does that include any payments you might have to make to Moa for example if that.

Dean Chambers

It does include payments to Moa, but not necessarily under the loan arrangements between Moa and Sherritt.

Greg Barnes

Okay. Thank you.


[Operator Instructions] And your next question will come from the line of Sasha Bukacheva of BMO Capital markets. Please go ahead.

Sasha Bukacheva

Thank you, operator. Dean just wanted to follow-up. Is there any risk that fund Ambatovy would trigger cost default on your corporate borrowings? And if so, what would be the timeframe of that?

Dean Chambers

While becoming a defaulting shareholder, and of course our partners have waived that at this moment and could create ultimately cross default to our main credit facility. But we've received a waiver for that cross default.

Sasha Bukacheva

And there would be no issue with the clause on your bond instruments that might go for an accelerated repayment?

Dean Chambers

If there is, if again if we become a defaulting shareholder under the shareholder's agreement. And the cross defaults to Ambatovy partner loans not the additional partner loans as the smaller one. And if those lenders accelerate, and again that really is a true accelerant, there isn’t any real payment triggered by that because they can only be serviced by distributions from Ambatovy. If it could look out to cross default under the indenture obviously the remedy would be to repay that loan which obviously wouldn't be an interest as the bondholder so. I don't see that as a likely outcome.

Sasha Bukacheva

Okay. Thank you.


And ladies and gentlemen, there are no further questions at this time. I'd like to hand it back over to Ms. Wood for closing remarks.

Flora Wood

Okay. Thanks a lot, Angelique and thanks a lot to everyone who joined us. I know it’s a busy day, a lot of reporting issuers today, and we'll be talking to you soon on our Q1 results.


Ladies and gentlemen, this concludes the conference call for today. We thank you for your participation. You may now disconnect your lines and have a great day.

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