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Sherritt shares jump on 50% bond haircut

David Pathe, CEO, Sherritt International. Image from Sherritt.

Sherritt International (TSX:S) announced Wednesday a proposed transaction designed to improve capital structure and reduce the beleaguered Canadian nickel miner’s debt by half.

The transaction would give investors a 50% haircut and would reduce Sherritt’s total outstanding principal debt obligations by about C$414 million (about $322m) and reduce annual cash interest payments by C$19 million (about $13m). 

Sherritt, which has significant assets in Cuba, is offering to buy back as much as C$443 million of its debt at a big discount to face value. Bondholders will get 53 cents on the dollar plus accrued and unpaid interest if they accept by 5 p.m. New York time on March 27, or 50 cents plus interest if they wait, Bloomberg reported.  The bondholders would get new second-lien notes with an 8.5% coupon. 

Total debt is currently at about C$588 million in debentures, plus another C$145m on a leftover Ambatovy partner loan – resulting in over C$700 million, Sherritt’s CEO David Pathe told MINING.COM.  

“Another element [of] this transaction is that our partners will see us exit [Ambatovy]  altogether, and eliminate the remainder of our Ambatovy- related debt”

David Pathe, Sherritt CEO

Sherritt’s debt almost quadrupled between 2007 and 2008 as the company developed the massive Ambatovy nickel and cobalt project in Madagascar with Sumitomo Corp. and Korea Resources Corp. From the start, the project was plagued with delays and cost overruns, and a political coup that resulted in the suspension of mining licenses. 

Pathe says while Sherritt still retains a 12% equity interest in Ambatovy, the company has been trying to exract itself for years and plans a full exit. 

“It’s something we’ve been working on, looking at different alternatives for months now, we landed on this transaction because we think this is the fairest to all the affected stakeholders across our series of debentures, and treating them all equally,” Pathe said. 

“Another element [of] this transaction is that our partners will see us exit that project altogether, and eliminate the remainder of our Ambatovy- related debt,” Pathe said. 

“It will help preserve our liquidity, which has been our focus,” Pathe said. He added that over past two years Sherritt has eliminated over C$2 billion in debt, and with the completion of Wednesday’s transaction will be closing in $3 billion in debts off the balance sheet. 

“It will extend our maturities out, right now we face maturities on our existing debt in 2021, 23 and 25 – this will push all of those out to 2027,” Pathe said.  

Pathe said Wednesday’s proposal will provide security to bought holders, and treats them equally.  

Adding to Sheritt’s challenges in Cuba and Madagascar, the nickel market has been volatile

For more than a decade, Sherritt has fought to reduce its debt, selling all of its coal assets in 2013 as commodity prices languished. A spike in cobalt prices in 2017 helped the company post its first annual profit since 2012 but it fell back into the red the following year, Bloomberg reported.  

Meanwhile, a tightening of US sanctions against Cuba has resulted in the island nation being unable to pay Sherritt for the energy it produces in foreign currency. Sherritt said its Cuban partners have committed to increasing its $2.5 million monthly payments to the miner. 

 “Debenture holders also get the benefit of a cash sweep, beginning in 2021, that will further demonstrate our commitment to ongoing debt reduction, and we think, to where the bonds are trading now, this gives them a piece of paper that is of real value to them and puts us in a position where we’ll be able to repay that debt in full,” Pathe said. 

Adding to Sherritt’s challenges in Cuba and Madagascar, the nickel market has been volatile. Nickel price was up last summer, but fell back after the Indonesian ore ban lifted and fears on tariffs on global trade, and now coronavirus.  

Pathe said he expects more volatility in the coming months, but remains confident in the nickel market, as he said current global supply is not sufficient to meet demand.

By market close in Toronto Wednesday, Sherritt’s stock was up by over 16% on the TSX. The day’s trading volume reached over 1.2 million, more than double the daily average. The company has a C$71.5 million market capitalization.  

(With files from Bloomberg)