“I expect we’ll be able to do something that works for all stakeholders,” David Pathe said in an interview at the company’s annual meeting in Toronto. He did acknowledge that the situation is highly dependent on what happens in the nickel market.
Toronto-based Sherritt is a victim of timing. The company and its partners spent a staggering US$5.3 billion to develop the Ambatovy mine in Madagascar over the past several years, and nickel prices plummeted just as production was ramping up. As a result, the mine is not generating the cash its owners expected.
Now Sherritt is saddled with $2.1 billion of debt, versus just $370 million of cash at the end of March. It has an untenable financial situation at Ambatovy that needs to be resolved, and significant public debt repayments that start coming due in 2018.
The most immediate problem is at Ambatovy. Sherritt owns 40 per cent of the mine, but until certain loans are repaid, its effective interest is only 12 per cent. Sherritt decided this scenario makes no sense, so it has simply stopped funding the mine.
Pathe hopes to cut a deal with Sherritt’s joint venture partners (Sumitomo Corp. and Korea Resources Corp.) to improve the company’s position at Ambatovy. But before that can happen, he said a deal likely needs to be reached with Ambatovy’s lenders to defer repayments.
The good news for Sherritt is that it has some leverage in these negotiations. The project lenders are export development agencies that have no desire to own mines. Sherritt is also the operator at Ambatovy, and its partners are counting on the company to run the mine effectively. If Sherritt walks away, they would have to take it over themselves.
“Our role as operator is important to them,” Pathe said.
However, Sherritt also has significant public debt it can’t walk away from. The company has $750 million of unsecured notes coming due between 2018 and 2022.
If nickel prices rebound, the public debt will become much more manageable. But if they don’t, there are concerns the company would have to go through a debt restructuring that would be very painful for shareholders.
“We have always dealt proactively with our debt maturities in the past, and I expect we will do that again,” he said.
Nickel was worth about US$3.95 a pound on Tuesday. While that is above the lows reached in February, the metal traded at more than US$9 as recently as 2014. It peaked at more than US$23 in 2007. High supply and unsteady demand have dragged prices down.