Tesla Inc. CEO Elon Musk pulled his latest stunt at an annual event called Battery Day in late September. He staged the gathering in a California parking lot and invited 200 Tesla shareholders to watch from their electric cars and honk if they liked what they heard.
There was a lot of honking. The sound was music to the ears of Sherritt International chief executive David Pathe, whose Toronto-based company mines the nickel and cobalt that make electric car batteries possible.
“Battery Day was a big event for us," said Mr. Pathe, who spent the past eight years running a debt-heavy miner that had few big events to celebrate. “We expect to see significant growth as all the automakers roll out their electric strategies.”
The honking at Tesla came three weeks after Sherritt won court approval for a contentious restructuring that cut $305-million of debt. One group of lenders pushed it to replace its executive team and board, a suggestion that was nixed. Creditors eventually agreed to take a haircut to keep the company afloat and are now owed $433-million. Loans that were scheduled to start coming due next year now don’t mature until 2026.
Sherritt is emerging from an overhaul similar to the boardroom dramas that are expected to play out across North America in the next two years, as CEOs struggle to pay down prepandemic debts while sales are slumping amid the economic downturn.
For Mr. Pathe, a former Osler, Hoskin & Harcourt LLP lawyer, getting the court’s blessing marks the end of a six-year diet that saw Sherritt shed $2.3-billion of debt. Most of its borrowing was tied to a poorly timed acquisition of the Ambatovy mine in Madagascar. Sherritt bought the mine for $1.6-billion in 2007, just as nickel prices hit all-time highs.
Mr. Pathe joined Sherritt the following year as general counsel and was named CEO in 2012. On his watch, nickel has consistently sold for a third of peak prices. Sherritt finished cutting ties to the Ambatovy project this summer; Korean and Japanese conglomerates now own the mine.
“We’re at a turning point,” said Mr. Pathe, 49. “We got smaller and we are now positioned to start growing, focused on our Cuban properties and on our technology and ability to innovate."
It will be a sharp turn if the bombastic Mr. Musk has the dynamics of the nickel market right. During his presentation last month, he said Tesla’s appetite for batteries would soon eat up half of all the nickel currently produced each year.
“In order to scale, we really need to make sure that we’re not constrained by total nickel availability," said Mr. Musk at the Battery Day event. "I actually spoke with the CEOs of the biggest mining companies in the world and said, ‘Please make more nickel, it’s very important.’ ”
Mr. Musk had called CEOs at Brazil’s Vale and Russia’s Norilsk Nickel, the world’s largest producers. He didn’t phone Mr. Pathe last month, although the Sherritt CEO says the company has a good relationship with Tesla and strong ties to Asian automakers. Sherritt’s output of metals is only 10 per cent of what Vale and Norilsk crank out, but the Canadian company is a leader in extracting nickel from laterite deposits, the rich red clays found in tropical locations such as Cuba.
The world currently consumes 2.3 million tonnes of nickel annually. Data from U.K. consulting firm Wood McKenzie shows that 70 per cent is used to make stainless steel. Only 5 per cent goes toward electric vehicle batteries. Wood McKenzie projects that within 20 years batteries will account for 35 per cent of nickel production, a forecast that is central to Sherritt’s growth strategy. The move to electric vehicles is a fundamental change in an industry where fortunes are made and lost as demand for commodities rises and falls.
Going forward, Mr. Pathe says, Sherritt plans to scale up production from its properties in Cuba. He also expects to see increasing demand for the company’s technology. Sherritt has done proprietary work developing pressure hydrometallurgy, a process that separates metals from ore. Its systems are now licensed to 40 plants around the world. Mr. Pathe describes the technology as a hidden jewel within Sherritt.
Not everyone buys into Mr. Musk’s vision of an electric car in every driveway and soaring demand for nickel. On Bay Street, analysts continue to wonder if Sherritt has shed enough debt and can overcome the political issues that come with doing business in Cuba. These concerns are reflected in the stock price. Sherritt shares closed Friday at 20 cents on the Toronto Stock Exchange; they were trading at $15 when the company bought the Ambatovy mine.
“Although the near-term balance sheet stress has been relieved and the company has finally exited Ambatovy, we note that several issues continue to overhang the shares,” said analyst Orest Wowkodaw at Scotia Capital Inc. in a recent report. He pointed to relatively high debt levels, even after the restructuring, and concerns about Sherritt’s ability to keep getting cash out of its Cuba operations as the U.S. government hikes sanctions. The Cuban government co-owns the nickel mines and at the end of the last quarter held $159-million that belongs to Sherritt. The cash can only leave the country in increments due to government restrictions on the withdrawal of foreign currencies.
Mr. Pathe said the latest round of U.S. sanctions – President Donald Trump restricted imports of rum and cigars last month – “are making life more difficult for ordinary Cubans.” However, he added, Washington’s moves are seen as business as usual in the Cuban government and have no impact on Sherritt’s operations.
Sherritt is also continuing to cut costs. Mr. Pathe said the pandemic inspired a new approach to maintaining mines that increased productivity. In the past, Sherritt shut down operations for the entire month of June to do maintenance, with teams of contractors working shoulder to shoulder on equipment. New safety rules forbid such close contact, so Sherritt spaced out maintenance work. As a result, its mines halted production for just six days this summer.
Looking back over Sherritt’s restructuring, Mr. Pathe offered two hard-earned lessons for CEOs who face balance-sheet issues. First, start early on negotiations with creditors: “Banks never react well to a surprise.” Sherritt was two years away from the first maturities on its loans when it hired legal and financial advisers – law firm Goodmans LLP and National Bank Financial – and began talks with lenders.
Secondly, he said, it’s critical to decide what the company should look like when it emerges from restructuring before going into the wrenching process. “There were plenty of diversions on our journey, but we always knew where we wanted to end up”: a low-cost, high-tech nickel producer that gets Tesla horns honking.
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