Sherritt posts $17.3 million Q4 net loss, adjusted earnings miss estimates

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The corporate logo for Sherritt International Corporation (TSX:S) is shown. THE CANADIAN PRESS/HO

TORONTO - Sherritt International Corp. is focused on ramping up production at its Ambatovy project in Madagascar this year as the nickel mine heads toward commercial production.

"While the exact timing is difficult to predict because of the natural and uncertain nature of ramp-ups, at this point we are highly confident of our ability to get the project up to nameplate capacity and hopefully beyond," Sherritt chief executive David Pathe told a conference call with analysts.

The ramp-up comes after the company reported a $17.2-million loss in its latest quarter as it wrote down the value of two coal-related projects in Western Canada due to economic conditions.

The mining and power company reported the loss amounted to six cents per share for the quarter, compared with a profit of $28.1 million or 10 cents per share a year ago.

Construction of the $5.5-billion Ambatovy project has been plagued with delays and increased costs that have driven its price tag hundreds of millions of dollars higher than originally estimated.

Ambatovy is designed for annual production of 60,000 tonnes of nickel, 5,600 tonnes of cobalt and 200,000 tonnes of ammonium sulphate, with an estimated life of 30 years.

Sherritt, which holds a 40 per cent stake in Ambatovy, cited a litany of problems during construction, including poor performance by contractors and inaccurate estimates on the project in the island country off the east coast of Africa.

However, Pathe told analysts Wednesday that certainty on Ambatovy's completion helped allow it to increase its quarterly dividend earlier this week.

"The range of potential outcomes from a capital perspective are now narrow enough that we can see the project through to cash flow neutrality without further jeopardizing our balance sheet," Pathe said.

On Tuesday, Sherritt increased its quarterly dividend to 4.3 cents per share from 3.8 cents.

During its most recent quarter, Sherritt wrote off $10.9 million in development costs at its Dodds-Roundhill coal gasification project and $5.6 million related to its investment on its Bow City Power project.

After adjusting for the writedowns and other non-cash items, Sherritt (TSX:S) said net earnings were $6.2 million or three cents per share.

Analysts had estimated 11 cents per share of net income and six cents per share of adjusted earnings.

Sherritt's revenue was down from last year as it received lower prices for the commodities it produces, but came in slightly above analyst estimates.

Its revenue fell to $467.9 million — about $11 million above the consensus estimate — from $536.8 million in the fourth quarter of 2011.

During the quarter, the company sold 9.7 million pounds of nickel, one million pounds of cobalt, 9.1 million tonnes of thermal coal, one million barrels of oil and 162 GWh of electricity.

The Dodds-Roundhill project has proposed to produce synthesis gas that can be used for fuel, as a petrochemical feedstock or further processed into high purity hydrogen that could be used by bitumen upgraders in Alberta.

However, North American natural gas prices have been depressed by a glut of supply as advanced drilling techniques have unlocked huge volumes from shale formations across the continent.

In its outlook for 2013, the company said it expected nickel production to be about 78,000 tonnes as Ambatovy continues its ramp-up, while the total tonnage of coal mined is expected to be about 10 million tonnes lower due to the transfer of mining operations at the Highvale mine to the mine's owner.

Oil production in Cuba for 2013 is expected to be approximately 18,000 barrels per day, about 11 per cent lower than 2012, due to natural reservoir declines.

RBC Capital Markets analyst Robin Kozar remained positive on the company and noted that weakness in the shares could be seen as a buying opportunity.

"Despite lower than expected fourth-quarter 2012 earnings per share and lower 2013 coal and oil production guidance than we had been anticipating, Sherritt guided for another solid year of production from its Moa nickel operation and the Ambatovy project is beginning to contribute to total metal output," Kozar wrote in a report.

"Ultimately, we believe Sherritt will succeed in ramping up the Ambatovy project, which could result in a re-rating of the shares in 2013."

In addition to Ambatovy, Sherritt has operations in Canada, Cuba and Indonesia.

The company is also the largest producer of thermal coal in Canada and the largest independent energy producer in Cuba, with extensive oil and power operations across the Caribbean island.

Shares in the company were down 35 cents at $5.35 Wednesday afternoon on the Toronto Stock Exchange.