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Sherritt International Corporation CEO Discusses Q4 2010 Results – Earnings Call Transcript

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Your first question today comes from Onno Rutten of UBS Securities. Please go ahead.

Onno Rutten – UBS Securities

Yeah, good day everyone. First of all few quick questions for Dean. On Moa other operating expenses were not as high during the quarter, I think in Q4 was there anything particular? Cash cost were great in line, but then there was another OpEx that was abnormal?

Dean R. Chambers

No, I don’t. The number of things that go into the other category, I’m not aware of any one particular item that had an impact in the quarter.

Onno Rutten – UBS Securities

Okay, good, okay. And then on CapEx, as you highlight in coal, quite a pickup in sustaining CapEx. Going forward 2012 onwards what would you expect similar levels or is this just the timing issue and do you expect a reduction?

Dean R. Chambers

I would expect some reduction probably going forward. There is, as I said it is the timing to certain equipment. How long this long lead time issue will continue in the marketplace is another question but it is related to the need to replace certain equipment in the coming year.

Onno Rutten – UBS Securities

But the long lead time shouldn’t CapEx, because you just ordered it?

Dean R. Chambers

Well, we make commitments and we do spend, we do, we conclude those commitments that are capital spending or a portion of that.

Onno Rutten – UBS Securities

Okay, okay and then on, about the Q3 the actual project progress was 85% was spend is of course in this type of progress line but only the actual project could you give an updated number?

Dean R. Chambers

It’s probably closer to 90% but that’s just a pretty rough number to be honest.

Onno Rutten – UBS Securities

Okay. And Ian, Sulawesi you’ve always been talking about, getting another growth project in the base level coupe. Should we see Sulawesi as that very project or do you see it as a long term option that’s interesting and let’s start working on it but meanwhile still have an agenda to look for other growth options?

Ian W. Delaney

It’s the latter. It’s a marvelous, at first blush the Sulawesi project is a marvelous resource but we have not made a commitment to build it out. We have the fairly modest option cost of $110 million over five years. We’d like to remove the question mark earlier rather than later. So we are trying to accelerate. The thing is that you would want to look at before you made any commitment to such project. But in any event it’s seven years out before you could get a shovel on the ground. And so it’s one half several things we are looking at.

Onno Rutten – UBS Securities

Are you still as active in looking at other opportunities right now?

Ian W. Delaney

Absolutely.

Onno Rutten – UBS Securities

Okay. Thank you.

Operator

Your next question comes from Robin Kozar of RBC Capital Markets. Please go ahead.

Robin Kozar – RBC Capital Markets

Thanks and good afternoon everyone. I just wanted to, there’s two details I just wanted to touch upon, perhaps get some more thoughts. You had mentioned in the call here, in the release, you talked about the Phase II expansion at Moa. That was suspended a while back when things were falling apart in the global economy. But can you just provide some thoughts in terms of timing of that and perhaps when we could see an announcement for that or the rest timelines that are being considered?

Ian W. Delaney

Well we don’t have the timeline at the Robin. It’s Ian speaking. That’s a 50/50 joint venture as you know. We’re ready to do that whenever our partners, they are in a position to finance their 50%, which I don’t think they’re yet and from the time you sort of take.

Robin Kozar – RBC Capital Markets

Okay. So…

Ian W. Delaney

We would do that as fast as we could and if we can get agreements that are friendly.

Robin Kozar – RBC Capital Markets

Okay. They want to proceed as well but they need a better time to get their finances in check I guess and…

Ian W. Delaney

Correct.

Robin Kozar – RBC Capital Markets

Get their natural balance sheet in order. In terms of, I guess the second question I had was with Ambatovy. You mentioned in the call here, 39% of the systems have been turned over to commissioning teams. You guys are concentrating on ramping up this project, big task at hand. Can you provide us with some broad key factors to look for here over the course of the next few months or of the year in terms of goal posts, you know something we can benchmark in terms of your progress, whether its commissioning or specific elements if the project or anything of that sort?

Ian W. Delaney

Well, internally we have about 50 benchmarks and while, maybe I can get it by telling you what I lose sleep over.

Robin Kozar – RBC Capital Markets

That’s fair enough. Yeah

Ian W. Delaney

So number one is weather, we are currently spending about $90 million a month, $3 million a day. You can do the math. You lose two days, $6 million. So today we have been blessed with good weather and we are really been making great, we really have been taking advantage of it.

The other thing I lose sleep over is we still got sort of order magnitude, 13,000 people on site and demobilizing those in an efficient fashion over the next years is something I lose sleep over.

And then the other thing I lose sleep over, well is just purely and simply construction quality, 50 or 60 million bead inches of weld, 15,000 valves, 240 kilometers of pipeline and just when you have, now we have completed couple of the big ones we check off, we have completed the pipeline. It has been tested. So we think it’s in pretty good shape.

You just know that as we start to turn these things on, the thing that I lose sleep over is, I lose no sleep over catastrophic failure. I don’t, I am reasonably comfortable of that and it’s not a sleep over process integrity. I don’t, this is, the process here is something that we think we’ve been working with for a long, long time so I don’t lose any sleep over that. Those are the kind of things that might check off.

Robin Kozar – RBC Capital Markets

Okay, just I guess, to expand further on the processing, I mean do you, in terms of the commissioning that touched on to-date a lot of it’s been more offside. You mentioned the rail, there is a lot of moving parts with this project, where are you in terms of the testing, the process, I mean has that begun at all, in terms of?

Ian W. Delaney

No, not at scale, we have done lots of large scale and private scale stuff, but we haven’t got enough complete circuitry there to actually to be trying to touch that scale.

Robin Kozar – RBC Capital Markets

Of course. So and when do you think roughly could we expect that?

Ian W. Delaney

It’s going to, next month and the months following you really do start to turn these things on, in order to stick to our date of first metal at summary, then of course between here and there, you’ve got about small, at least a month’s range you’ve got to have pretty good understanding of how things are going to move to.

Robin Kozar – RBC Capital Markets

Alright, thank you very much and congratulations from the good results again.

Ian W. Delaney

Thanks Robin.

Operator

Your next question comes from Anoop Prihar of GMP Securities. Please go ahead.

Anoop Prihar – GMP Securities L.P

Good afternoon. Just two quick ones. First on the power, with respect to the guidance for 2011, the production dropping you made reference to the fact that there was an issue with gas availability. I’m just wondering that we should foresee as being permanent or is it a timing issue or just a bit more color on that please?

Ian W. Delaney

Yeah, I mean we’ve obviously had gas availability and concerns for a number of reporting periods now. It’s something that we’re working on with our partners. I mean power is obviously very important in Cuba, and so we expect to find a resolution to that. I do think it will take some time.

Dean R. Chambers

And with respect to the phase eight we have expressed it contractual terms protected ourselves with alternative power supplies, fuel oil alternatives and the like.

Anoop Prihar – GMP Securities L.P

Is the phase eight expansion than in just a different region where the availability isn’t a big issue?

Ian W. Delaney

No, it’s the availability is a concern, but we have in the original proposal that we made for that phase eight, we can’t fight it using our fuel oil alternatives.

Anoop Prihar – GMP Securities L.P

Okay, that’s fine. And then just secondly with respect to the exports the Mountain Operations, I’m wondering what’s your best guess as to your realized coal price for the upcoming year?

Ian W. Delaney

If I give you the right answer, will you pay a lot of money?

Anoop Prihar – GMP Securities L.P

Sure.

Ian W. Delaney

I don’t know, for I think some of our own internal budgeting purposes we use the number, like $105. But we are going to see coal settlement prices here any day now and just look at my colleagues (inaudible) see any significant settlement prices yet.

Dean R. Chambers

Yeah, I think as you know, this typically gets settled in the second and third quarter. The Japanese here sort of April to April or April to March. So we will start to see that probably by the time we report our next results.

Ian W. Delaney

We’ve certainly seen higher spot prices as a result of flooding in Australia and that’s going to take a while to start to top up. Whether that gets reflected in the annual settlement number is not same, but the market it looks pretty robust.

Anoop Prihar – GMP Securities L.P

Okay. And so…

Dean R. Chambers

In other words we can just say we do settle, I think about two thirds of the contracts by April. So…

Anoop Prihar – GMP Securities L.P

You are talking about my other question?

Dean R. Chambers

Yeah. The pricing will be, well no pricing soon.

Anoop Prihar – GMP Securities L.P

Okay, two thirds of the volume rose?

Dean R. Chambers

Yeah.

Anoop Prihar – GMP Securities L.P

Okay.

Dean R. Chambers

Roughly.

Anoop Prihar – GMP Securities L.P

Thank you.

Operator

(Operator Instructions) Your next question comes from the line of Tony Robson of BMO Capital Markets, please go ahead.

Tony Robson – BMO Capital Markets

Thank you, gentlemen. Thanks for taking my question for metals and coal in particular where do you think cost will be placed in 2011, with the fourth quarter be of reasonable guidance of course we also see recent amount of fluctuations quarter-on-quarter costs, so that would impact the costs.

Ian W. Delaney

I don’t know that we’re going to see much change in the cost in the coming year but as particularly in our metals business we see sulfur prices falling and of course you are seeing energy costs rising on the other side. In order for us to get a complete cost projection we need to have the input prices pretty well pegged and that’s difficult, wouldn’t expect you will see much difference than what we’ve seen in the fourth quarter.

Tony Robson – BMO Capital Markets

Okay, great. Question for Dean if I may. Just going back to IFRS and the changes we’ll see falling for the first quarter, a little bit simplistically but do will we see it as, as you sort of mentioned the debts associated with Ambatovy sort of disappear and then likewise on the asset side of the balance sheet the fixed asset associated with Ambatovy also disappear. So essentially shareholders equity remains the same?

Dean R. Chambers

Yeah, you are essentially correct. We end up with a net investment line and it’s called an investment in associates so yeah you are right. So the asset and the debt that we currently fully consolidate do sort of disappear into a net number.

Tony Robson – BMO Capital Markets

Okay, right. Looking further forward 12 months from now or 18 months from now when Ambatovy is hopefully shaping along and making nice profits, would you be able to give any guidance for the [Ambatovy] in terms of the revenues actually being realized the custom zone or are we going to have to see it as a, as you have mentioned a single equity credit line?

Dean R. Chambers

Well, at that point we’ll provide guidance, by that time. Sure, but not now.

Tony Robson – BMO Capital Markets

Sure.

Ian W. Delaney

Right now about 110% of the energy is going to build.

Dean R. Chambers

One other thing Tony is that it’s both the nature of IFRS and certainly our plan since that note disclosure becomes very important and so IFRS accounting will really a lot of note, footnotes since to provide additional information and certainly with this outcome was specially on things like Ambatovy that we will be expanding the note on Ambatovy will probably blow up that one line for you in our footnotes.

So and as certainly as we go to the early reporting periods were people providing a lot of information to help reconcile that to what you used to. But there will be a lot of note disclosure which I think we’ll provide a lot of help from under IFRS and certainly with the outcomes that we are seeing.

Ian W. Delaney

And then generalize since to I think it is worth noting that IFRS is a long way from a finished product. As this year unfolds and into next year, I think the most of the National Accounting firms will tell you there is going to be dozens and dozens and dozens of exceptions put forth and we just watch those unfold through the year.

Tony Robson – BMO Capital Markets

Okay, great. Thanks.

Operator

Your next question is a follow from Onno Rutten of UBS Securities. Please go ahead.

Onno Rutten – UBS Securities

Yeah, thanks to taking the follow up. One more general question on Ambatovy with regards to the refinery portion of the project, because that was the one that was further behind before the issues with the power plant came to the full. Could you elaborate where did the refinery progress is right now?

Dean R. Chambers

Well, refinery progress is coming along quite well. There are a lot with the contractors there. Obviously if we are going to have first metal in this summer, then refinery will be operational by that time.

Onno Rutten – UBS Securities

Obviously, you just answered my second question. First metal is defined as actually precast and molt as an intermediate.

Dean R. Chambers

Right first metal.

Onno Rutten – UBS Securities

First metal, okay. And then

Ian W. Delaney

One recap

Dean R. Chambers

One recap

Onno Rutten – UBS Securities

One recap

Dean R. Chambers

It has something to do with (Inaudible) or something.

Onno Rutten – UBS Securities

And which summer? Northern or Southern hemisphere?

Ian W. Delaney

We didn’t think you were going to get there.

Onno Rutten – UBS Securities

Anyway, on Sulawesi because based on Ambatovy works of course Sulawesi is interesting. So one more question, the conditions precedent, what are those and are those related to let’s say the ownership title local government interests et cetera. Or are these just simple complexual terms with Rio?

Dean R. Chambers

No, no largely contractual terms, you means conditions precedent to our ownership interest?

Onno Rutten – UBS Securities

Yeah.

Dean R. Chambers

Yeah, No it’s simply for example to get the shares in this first space, we have to spend $30 million we have to provide certain reports. We have to agree we are going to spend more money that sort of thing but it’s primarily contractual.

Onno Rutten – UBS Securities

So the ownership structure right now is understood to be between you and Rio with the understanding that the government could earn in 20%.

Dean R. Chambers

No, no we have agreements with local interests including the prudential governments and the regional governments for the 20%.

Onno Rutten – UBS Securities

Are those already in place?

Dean R. Chambers

Yes.

Onno Rutten – UBS Securities

And they would be triggered how and when?

Dean R. Chambers

We know we have memorandums of understanding with all of those and will be finalizing legal documentation over the next period of time.

Onno Rutten – UBS Securities

Okay, okay very good. Have you done any process test work, quick audit placed test to see how the material responds?

Dean R. Chambers

We have not yet.

Onno Rutten – UBS Securities

Okay.

Dean R. Chambers

But every indication is this is very high quality, high-grade ore body of very large size probably…

Ian W. Delaney

You’re talking about large scale pile, Onny.

Onno Rutten – UBS Securities

Yeah I think they just test a material.

Ian W. Delaney

We’re we sell on it, we would no and no is the answer. We have done some testing but it’s too rude to mandate a comment on.

Onno Rutten – UBS Securities

To comment on. Okay. Okay, good. Good luck.

Ian W. Delaney

Thank you.

Operator

Your next question comes from John Hughes of Desjardins Securities. Please go ahead.

John F. Hughes – Desjardins Securities Inc

Thanks operator. Just two quick ones. Being just again back to the IFRS just so I can get my head around it. As you produce your first quarter of 2011 financials, will you be restating the balance sheet for the end of the fourth quarter or will you be showing all the adjustment like keep the balance sheet same and show all the adjustments for IFRS to get your new balance sheet for Q1?

Dean R. Chambers

Yeah we’ll show you the adjustments to get from one to the other.

John F. Hughes – Desjardins Securities Inc

Okay so you what we see in the balance sheet today for December 31 will be the same at the end of the first quarter?

Dean R. Chambers

No, we will have a different balance sheet under IFRS at the end of the first quarter if I understand your question properly but we will show you the adjustments to this reconciled docs to a Canadian GAAP balance sheet.

Ian W. Delaney

We’ll be able to reconstruct the GAAP balance sheet for you.

John F. Hughes – Desjardins Securities Inc

You know for those of us have all these flowing financial statements in everything is for us is going to create a bit of a challenge depending on the company.

Ian W. Delaney

Yeah.

John F. Hughes – Desjardins Securities Inc

And I know that I am not exactly presenting new news but in the 13 million and so easy dollars to be spent, what are you spending 30 million on?

Dean R. Chambers

It’s going to be drilling, probably some baselines studies, environmental baseline studies, social baseline studies, also we can get some drilling, you can do some test work that would be great.

Ian W. Delaney.

If conditions permit, we would spend more.

Dean R. Chambers

We would spend more. We’re going to accelerate that project, obviously as quickly as we can. But it sounds easy early drilling and feasibility type work that we will spend the money on.

John F. Hughes – Desjardins Securities Inc

Okay. And is that the total amount for both partners to spend or is that your share?

Dean R. Chambers

We’re spending all the money at this point.

Ian W. Delaney

We have to spend all the money to earn in.

John F. Hughes – Desjardins Securities Inc

13 million on drilling on your account?

Ian W. Delaney

Well, our commitment is to spend $110 million over five years.

Dean R. Chambers

And during that time, we will be spending the money and we will since not be. We will be earning in as we spend that money.

John F. Hughes – Desjardins Securities Inc

So depending on what you are allowed to do and the drilling results did the 13 million change?

Ian W. Delaney

We hope it would.

Dean R. Chambers

It’s the one budget I hope to exceed.

John F. Hughes – Desjardins Securities Inc

Okay, great news. Thank you very much gentlemen.

Operator

Ms. Myson, there are no further questions at this time. Please continue.

Paula Myson

Thanks Luke. As always, we’re available if you have any further questions. We will talk to you again at the end of April with our Q1 results. Thank you for joining us and have a good afternoon.

Operator

Thank you. Ladies and gentlemen, this concludes the conference call for today. Thank you for your participation. And you may now disconnect your lines.

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