DavidVY Posted April 16, 2015 Share Posted April 16, 2015 Cuba- US deals have been blanketed the news lately, but its been focused on political agendas and de-thawing Cuba off the terror watch list. As such, I've been on a hunt for good companies to invest in Cuba. The Canadian company Sherritt popped up on my radar. Its been operating in Cuba for 20+ years mostly doing oil and nickel+cobalt. Coincidentally, its one of the largest foreign investments in Cuba. The balance and income sheet is a mess. Too many distractions and (negative) numbers that hide its true earning potential. Its easier to break down each earning division and look at profitability. As such, lets talk a key few interesting figures (Q4 2014): - Oil/Gas: Average realized price of $49.93/bboe, Average Operating Cost of $9.94/bboe <--- This is one of the cheapest operating cost I have seen outside of the Middle East. Most other producer run from $20-40/bboe. Fracking guys are def on the higher range. - Power: They provide power to Cuba. This runs hand in hand w/O+G. The natural gas from these O+G wells is used to power these Cuba power stations. Provides a nominal earnings boost. As Cuba modernizes, electricity will increase. I expect both demand and $ increases in this division of around 6-7%+ yearly. -Metals: Two distinct major mines. Average realized price/LB (Q4/2014). Nickel- $8.29. Todays nickel price $5.55 1) Cuba Moa Bay- Unit Operating Cost/LB - $4.99 2) Ambatovy- Unit Operating Cost/LB - $7.00 The metals division is the tricky part and most vulnerable to a commodity downturn. Cuba Moa Bay is in the process of improving their acid-leach plant and unit operating costs will drop to around $4.50. Ambatovy (multi-billion dollar plant which Sherritt has 40%) is in the process of ramping up and expected costs at 90% operating rate will run at between $4-5. The margin of safety isn't big in the metal division, but good thing is that the market has basically discounted this division to zero. In essence, you are buying the company for the O+G/power division and getting a free lotto ticket w/the metals division (which has a multi-billion sunk cost). Beyond that, you are buying these assets below replacement cost. Sherritt is selling around .2 P/B and combined cash-flow will maintain through a protracted downturn. 2014 Q4 Report- http://www.sherritt.com/getattachment/114c71d5-ce4c-4bca-813c-f0c5ee0e4464/Q4-2014-Quarterly-Report-(news-release) Link to comment Share on other sites More sharing options...
ItsAValueTrap Posted April 20, 2015 Share Posted April 20, 2015 From skimming through this: - Ambatovy is losing money at current spot prices. They should shut it down??? But because management is really, really bad they continue to operate the mine and to inject cash into it via loans??????? - Moa barely makes money at current prices. - They did the royalty deal with Altius and friends. In my opinion, Brian Dalton of Altius is a brilliant guy and the best CEO in mining. I would never want to trade against him. Link to comment Share on other sites More sharing options...
DavidVY Posted April 20, 2015 Author Share Posted April 20, 2015 Thanks for the feedback. Debt for Ambatovy will become separate and non-recourse upon 100% completion of financial certificates. Estimated time is Sept 2015. Sherritt is GP for the Ambatovy project. Others are LP. I don't think its would work out well for Sherritt to just up and close the plant. Sherritt definitively made a mistake doing such a large project during the commodity boom, so there is a red mark on them for that. My belief is that at this price, it makes sense to buy in. Insiders have been buying in at this level. I guess we will find out within 2-3 years... Link to comment Share on other sites More sharing options...
ItsAValueTrap Posted April 20, 2015 Share Posted April 20, 2015 Debt for Ambatovy will become separate and non-recourse upon 100% completion of financial certificates. Estimated time is Sept 2015. Sherritt is GP for the Ambatovy project. Others are LP. I don't think its would work out well for Sherritt to just up and close the plant. If the mine is losing money, they should mothball it / put it on care and maintenance. No reason to throw good money after bad... that would needlessly destroy shareholder capital. I'm not sure if the mine is losing money. Cash costs seem to exclude sustaining capital, which is not right because sustaining capex is a real expense. 2- The thing about the cash costs going down significantly is probably a pipe dream... it rarely happens. Though I haven't looked into it enough. Link to comment Share on other sites More sharing options...
mikazo Posted April 20, 2015 Share Posted April 20, 2015 Clarke Inc. briefly discusses their experience in investing in Sherritt and campaigning for changes in the company: http://www.clarkeinc.com/documents/IN/2014%20Q1%20Quarterly%20Report.pdf (Ctrl+F or Command+F for "Sherritt") Link to comment Share on other sites More sharing options...
DavidVY Posted May 4, 2015 Author Share Posted May 4, 2015 Up about 30% in the last 3 days. I still think Itsavaluetrap is right. This is definetely not somebody you want to hold a long-term investment with. Its a short-term workabout then flip to something else when the market revalues assets. - Ambatovy cash costs are down to around 6 buxs (from 7ish) - Moa bay cash costs are down (lower diesel costs) - Operating cash cost per barrel in Cuba is around 9.50. Still very profitable. PSA will reflect next quarter - Power station in Cuba is starting to get more and more traction. I still think its a double from here. Link to comment Share on other sites More sharing options...
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