Sherritt International (OTCPK:SHERF) is a world leader in the mining and refining of nickel from lateritic ores. The company has operations in Canada, Madagascar and Cuba. The firm is also the largest independent energy producer in Cuba. The nickel division is composed of the Moa Joint Venture located in Cuba and of the Ambatovy Joint Venture located in Madagascar. Furthermore, its oil and gas operations are mainly located in Cuba.
Globally, I see three major catalysts for a stock price recovery in 2015 and beyond. These catalysts will impact mainly the metal operations.
Actually, the metal business represents 55% of the Sherritt's revenue in 2013. It is clearly the main business of the firm. Consequently, the nickel price has important consequences on the financial performance of the company.
The first catalyst is the positive outlook for the nickel price. In fact, the export ban in Indonesia was definitely the key event for the nickel market in 2015. According to many analysts, the export ban of ore in Indonesia will lead to a supply deficit in 2015. It is important to mention that Indonesia was the world's biggest producer of the metal. Due to this export ban, Citigroup expects a global deficit of 62,400 tons in 2015 and a deficit of 103,600 tons in 2016.
Inventories of nickel in all its various forms have fallen in China, with supply now falling as well in the form of a seasonal decline in Filipino exports. Optimism remains strong toward nickel prices for 2015.
The following table represents clearly the supply and demand story. It is also possible to see the future supply deficit.
Not surprisingly, a rally in the nickel price will expand the margin per pound. Subsequently, it is possible to expect stronger earnings and a bullish environment for the stock price.
The second positive catalyst for Sherritt in 2015 is the ramp-up of the Ambatovy Joint Venture in Madagascar. The corporation is currently working to reach a production rate equivalent to approximately 90% of the designed capacity. Sherritt expects to achieve this milestone in mid-2015. The cash cost per ton is expected to decline drastically as the ramp-up continue. Currently, the average cash cost per pound is between 6$ and 8$. With a production rate of 90%, the cash cost per ton is expected to decline between 4$ and 6$. In brief, Ambatovy will increase the production volume and it will also expend the margin per ton.
Finally, the Moa Joint Venture partners reached agreement to complete a third acid plant. This new plant is expected to reduce the net direct cash cost by approximately 20%. It will also enhance the efficiency of operations by providing sufficient acid production capacity to eliminate all sulfuric acid purchases. Moreover, the third acid plant will reduce fuel oil consumption as it will generate steam to be used in the process. The construction will begin in the first quarter of 2015.
In conclusion, there are three catalysts for Sherritt in 2015. An increase in the nickel price will automatically expend the margin per pound for its metal division. Furthermore, the Ambatovy Joint Venture will increase the production volume and it will also reduce the overall cash cost per pound. Finally, the new acid plant will reduce the cash cost by approximately 20% at the Moa Joint Venture. I also wrote about the impact of the positive diplomatic relations between the U.S and Cuba on Sherritt. Despite these many positive aspects, the stock remains volatile. Therefore, it is important to do your own due diligence before buying the stock.
Disclaimer: The company's common shares are mainly listed on the Toronto Exchange, but also on the OTC in the U.S. It does not trade on a major exchange in the United States. Please be aware of the risks associated with this factor.
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Disclosure: The author is long SHERF.
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