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Analysis on Sherritt International Corporation (TSX: S)

November 12, 2012

By Gulshan Malhotra

Overview

Sherritt International Corporation (S) (hereafter “Sherritt”) is a leader in the mining and refining of nickel from lateritic ores with operations in Canada, Cuba, Indonesia and Madagascar. The company, in Canada, is the largest coal producer and, in Cuba, is the largest independent energy producer, with extensive oil and power operations across the island. Sherritt licenses its proprietary technologies and provides metallurgical services to mining and refining operations in all over the world.

The closing price for the stock of Sherritt as on Nov 12, 2012 is $4.79. In this analysis, we are not considering just 52 Weeks’s history, but 5 year’s history as well. The purpose to consider 5 year’s history is to accommodate the lows and highs of the business cycle.

Stock Exchange Info

Sherritt is listed on Toronto Stock Exchange (TSX) with ticker “S”. It falls under sector Basic Material and industry Mining & Metals – Speciality.

Historical Analysis

Chart 1 : 5 Years Analysis

Chart 2 : 52 Weeks Analysis

If we look at the 52 week’s pricing trend, low is $4.17 and high is $6.69.The current price is towards the lower side based on 52 week’s price range. If we look at the 5 years pricing trend, the low is $1.85 and the high is $17.35, the current price is again towards the lower side based on 5 years price trend. This indicates that it is a good entry point. (See chart 1 and 2)

Table 1: High / Low Prices

Reason for fall / spike in the price of stock

  • Ambatovy Project – Overview

The Ambatovy Project is the largest nickel and cobalt project located in Madagascar. The project is planned to be mined for 29 years. The Ambatovy Project is expected to be one of the worlds biggest in lateritic nickel mining, processing and refining operations.

Sherritt is the operator of this project (with 40% interest) with the following as its partners. Sumitomo Corporation (with 27.5% interest), Korea esources Corporation (with 27.5% interest) and SNC Lavalin Inc. (with 5% interest) (collectively referred to as the Ambatovy Partners). The deposits from the ore will be delivered through pipeline to a processing plant and refinery. The Ambatovy Project has reserves of 169.9 million tons of grading 0.95% nickel and 0.08% cobalt. Forecast for Annual production capacity is at 60,000 tons (100% basis) of nickel and 5,600 tons (100% basis) of cobalt.

  • Ambatovy Project – Status

Project estimated cost is $5.5 billion (Sherritt share 40% * $5.5B = $2.2B). Out of the total $5.5billions, $5.3 is already spent.

  • Ambatovy Project is at risk

The Ambatovy Project is facing political risks and is under Scrutiny from the government of Madagascar. The government of Madagascar has announced the audit of economic and environment impact of the mining sector. The project has received six-month Operating Permit to commercially operate the processing plant in Toamasina and Madagascar which will be converted automatically to life of mine Operating Permit at the end of the six month.

  • Ambatovy Project – Analysis

Table 2: Impact of Ambatovy Project

Sherritt’s maximum expected loss from the project is $7.4 per share ($2.2B ÷ 296.9M shares). Its book value is $12.59 per share. So, if we remove Ambatovy Investment from its book value, still the remaining book value is $5.19 ($12.59 – $7.40). Its market price is $4.77 which is lower than its book value without Ambatovy. Risk associated with Ambatovy Project is already reflected in the price.

Further, Sherritt’s earning is low due to lower nickel spot price and volume and lower export thermal coal volumes, which are transient in my opinion.

Volume analysis

Average daily volume is 1.1M shares, which is equivalent to $5.2M based on the current price. This means that the deals that are equivalent to average $5.2M, complete in one day. The maximum level of $52k is suggested for the investment to keep the liquidity high.

Options Price Analysis

N/A

Valuation of the stock

Table 3: Valuation of stock

Sherritt’s liquidation value and book value is $12.78. Its Net Present Value (Based on Net Income) is 2.31 and Net Present Value (Based on Free Cash Flow) is $1.83.

Risk / Opportunity

Risk vs. Opportunity ratio may be defined as the comparison between the strength of the opportunity and the risk involved in the investment. For Sherritt, the opportunity is 3x of the risk based on 52 week’s analysis and 4x based on 5 year’s analysis. (See chart 1 & 2)

Price Earnings Ratio

Price Earnings Ratio for Sherritt is lower than the Mining & Metals – Specialty industry. This shows that there is a potential to grow in Sherritt to align with industry.

Dividend Yield

Dividend yield is yet another factor which an investor needs to know before investing. Generally, a dividend paying company is considered to be a mature company in their business as it does not have any investment opportunities to grow and earn more than their capital cost. These companies are consistently making profit. Since these companies make consistent profit and they do not have any opportunity to invest further, they distribute dividend to their shareholders. Big returns cannot be expected by investing in these companies, but we are at the least risk in investing in the same.

Sherritt (S) is a having a dividend yield of 3.4%.

Conclusion

Based on the above analysis, it is worth investing in Sherritt International Corporation (S). The value of the investment is less risky than the opportunity available.

Related Links

http://www.ambatovy.com

http://www.miningwatch.ca/article/another-mining-horror-story-sherritt-international-corporation-s-ambatovy-project-madagascar

http://www.sherritt.com/Operations/Metals/Ambatovy-Joint-Venture

http://tripwow.tripadvisor.com/tripwow/ta-00d6-7bfa-bee9

http://www.youtube.com%2Fwatch%3Fv%3DGrQxCtAMt7E&ei=hVygUJ7OF8XTyAHSl4GYAw&usg=AFQjCNGD_xbuRO5bHZiniGwmGU406wcw2A&sig2=UtnEW4uNzO8bfIAVs621aw

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