SHERRITT 2017 ANNUAL REPORT
2017 Operational Highlights(1)
Sherritt ended 2017 with a significantly strengthened balance sheet and a much improved
outlook as a result of a number of key developments over the course of the year. Most
notably, Sherritt completed the restructuring of the Ambatovy Joint Venture, achieved its
nickel and cobalt production as well as its unit cost targets at the Moa Joint Venture, and
benefitted from higher realized prices for each of the primary commodities that the
Corporation produces. Production totals for each of the commodities Sherritt produced in
2017 were:
Moa JV (tonnes)
Ambatovy JV (tonnes)
16,464
15,762
16,842
13,618
1,847
1,801
1,309
1,173
2016
2017
2016
2017
Finished nickel
Finished cobalt
Finished nickel
Finished cobalt
Oil (total NWI, boepd)
Power (Gwh)
9,483
7,856
894
848
2016
2017
2016
2017
(1) All amounts are based on Sherritt’s share. Moa JV = 50%. Ambatovy JV = 40% to December 10, 2017 and 12% thereafter.
Power = 33 1/3 %. Oil and Gas =100%
MESSAGE FROM THE PRESIDENT & CEO
2017 was marked by celebrations to recognize Sherritt’s 90th anniversary. Over our 90-
year history, Sherritt has demonstrated its ability to adapt to change and reinvent itself to
survive and thrive in a world where the pace of change continues to accelerate. In years to
come, 2017 will be remembered for the balance sheet transformation that we completed
and the start of a recovery for nickel and cobalt prices driven largely by the favorable
outlook for the electric vehicle market. Both of these developments have been years in the
making and speak to our ability to withstand the volatility of the past several years.
There can be no doubt that Sherritt has endured a difficult time over the last few years. We
have been through a prolonged period of low nickel prices. Nickel is the worst performing
of all the base metals since the financial crisis. We have also been burdened by our commitments to Ambatovy and
the historically high debt levels that Sherritt incurred as a result of that project. Our shareholders have witnessed the
effects of these conditions first hand.
In the face of these difficult conditions, we have not been idle. We have proactively executed on a comprehensive
strategy to address the existential threat these conditions presented.
This strategy centered on strengthening our balance sheet through a three-pronged approach aimed at selling non-
core assets, extending the maturities of our debentures and restructuring our Ambatovy joint venture to better reflect
our economic interest.
Our efforts have been reflected in a number of key milestones:
(cid:120)
(cid:120)
(cid:120)
In 2014, we completed the sale of our coal assets for $946 million and used the proceeds to repay $425
million of debentures.
In 2015, we achieved Financial Completion at Ambatovy, which eliminated the burden of a US$840 million
loan guarantee for the Ambatovy project financing from our balance sheet.
In 2016, we completed a plan of arrangement to extend the maturities of our three outstanding debentures
each by three years. As a result, instead of facing a $250 million refinancing risk in 2018, we have no debt
maturities until the fourth quarter of 2021.
In 2017, our strategy to strengthen our balance sheet culminated in the restructuring of our Ambatovy Joint Venture
with our partners. The restructuring required considerable effort and involved extensive discussions and negotiations
with our partners. In exchange for a transfer of a 28% ownership interest in Ambatovy, we eliminated $1.4 billion debt
from our balance sheet while still retaining a 12% ownership interest.
We sustained this momentum into 2018 by completing our first equity raise in more than 10 years through an
innovative unit offering linked to the cobalt price that generated net proceeds of more than $125 million.
Approximately $110 million of the net proceeds were used to buy back $120 million of outstanding debentures, further
reducing our leverage.
The effectiveness of our balance sheet initiatives and the hard work required to complete them are evident when we
point to the more than $2 billion of debt that we have eliminated over the past four years.
Continued on Page 2
Continued from page 1
With the outlook for nickel and cobalt prices the most positive in years, we are particularly encouraged by our
prospects for 2018 and beyond.
This favorable outlook is being driven by a couple of inter-related developments, both of which Sherritt is well
positioned to capitalize on.
The emergence of the electric vehicle market, in particular, is generating strong demand for cobalt from battery
makers looking for security of supply. As one of the world’s largest and oldest producers of high quality cobalt,
Sherritt stands to benefit from this trend in several ways. First, our cobalt is largely produced in the form of a
briquette, a product type that battery makers find more amenable for their manufacturing processes than alternatives.
Second, since the majority of the world’s cobalt supply comes from the Democratic Republic of Congo, we offer
battery makers an alternative source of secure supply given that our production emanates for Cuba and Madagascar.
Finally, we have long-standing relationships with a number of battery makers around the world, and this allows us to
better understand and respond to any changes in market demand.
We also stand to benefit from the growth of the electric vehicle market as a nickel producer. Class 1 nickel, the purest
form of nickel, is, in fact, a key metal also used in the production of electric vehicle batteries. As a low-cost, high
purity producer of Class 1 nickel, Sherritt is poised to take advantage of growing demand from battery makers, which
is also expected to contribute to a supply deficit over the next several years.
This supply deficit will only grow since battery makers have already started to explore ways to reduce their reliance
on cobalt given its limited supply and higher prices in the offing. Class 1 nickel has emerged as the most viable
alternative due to its superior energy density.
The success we enjoyed with our strategic initiatives was mirrored by a number of financial and operational metrics
that we achieved in 2017. Most notably, our share of nickel and cobalt production at the Moa JV was 15,762 tonnes
and 1,801 tonnes, respectively. These totals, which were in line with our guidance for the year, benefited from a
nickel realized price rising by 8% and a cobalt realized price rising by 116% compared to results in 2016. The higher
realized price for cobalt was a contributing factor in us achieving a net direct cash cost of $2.35 per pound of nickel at
Moa, an improvement of 21% when compared to 2016. Our net direct cash cost of $1.80 per pound in the fourth
quarter of 2017 was the lowest we have seen since 2004.
Higher nickel and cobalt prices as well as higher oil prices contributed to Adjusted EBITDA gains of almost $110
million in 2017 from 2016. Sherritt has always had a high sensitivity to nickel and cobalt prices. Based on production
results at Moa in 2017, a US$1 increase in the price of nickel per pound generates approximately $40 million of
additional cash flow to Sherritt while each US$1 increase in the price of cobalt generates approximately $4 million of
additional cash flow to Sherritt.
Although Sherritt’s prospects are better today than they have been in a number of years, we are not satisfied. Our
focus in 2018 will continue to centre on efforts to strengthen our balance sheet, maintain our leadership position in
the production of nickel and cobalt from lateritic ores, and derive long term value from opportunities in our Cuban
energy business, including completion of our Block 10 drilling program. Our continued focus on safety, employee
engagement and diversity will be key to our success. I am very proud of the hard work that our employees have done
to make Sherritt a stronger, more agile company. I would like to thank our Board of Directors, our partners, and you,
our shareholders, for your support during some challenging times. Our recent progress paves the way for continued
momentum in the years ahead.
David V. Pathe
President and Chief Executive Officer
Sherritt International Corporation
MANAGEMENT'S DISCUSSION
AND ANALYSIS
For the year ended December 31, 2017
This Management’s Discussion and Analysis (MD&A) is intended to help the reader understand Sherritt International
Corporation’s operations, financial performance and the present and future business environment. This MD&A,
which has been prepared as of February 12, 2018, should be read in conjunction with Sherritt’s audited consolidated
financial statements for the year ended December 31, 2017. Additional information related to the Corporation,
including the Corporation’s Annual Information Form, is available on SEDAR at www.sedar.com or on the
Corporation’s website at www.sherritt.com.
References to “Sherritt” or the “Corporation” refer to Sherritt International Corporation and its share of consolidated
subsidiaries and joint ventures, unless the context indicates otherwise. All amounts are in Canadian dollars, unless
otherwise indicated. References to “US$” are to United States dollars.
Securities regulators encourage companies to disclose forward-looking information to help investors understand a
company’s future prospects. This discussion contains statements about Sherritt’s future financial condition, results
of operations and business. See the end of this report for more information on forward-looking statements.
Overview of the business
Strategic Priorities
Highlights
Financial results
Consolidated financial position
Outlook
Significant factors influencing operations
Review of operations
Metals
Oil and Gas
Power
Ambatovy Joint Venture restructuring
Liquidity and capital resources
Managing risk
Critical accounting estimates and judgments
Accounting pronouncements
Three-year trend analysis
Summary of quarterly results
Off-balance sheet arrangements
Transactions with related parties
Controls and procedures
Supplementary information
Sensitivity analysis
Non-GAAP measures
Forward-looking statements
4
7
9
11
14
16
17
18
18
24
27
29
30
35
43
46
49
50
51
51
52
53
53
53
64
Sherritt International Corporation
3
Management’s discussion and analysis
Overview of the business
Sherritt is a leader in the mining and refining of nickel and cobalt from lateritic ores with projects and operations in Canada,
Cuba and Madagascar. The Corporation is also the largest independent energy producer in Cuba, with extensive oil and power
operations on the island. Sherritt licenses its proprietary technologies and provides metallurgical services to mining and refining
operations worldwide. The common shares of the Corporation are listed on the Toronto Stock Exchange, trading under the
symbol “S”.
METALS
Sherritt is an industry leader in the mining, processing and refining of nickel and cobalt from lateritic ore bodies. Sherritt has a
50/50 partnership with General Nickel Company S.A. (GNC) of Cuba (the Moa Joint Venture) and a 12% interest in Ambatovy
Minerals S.A. (AMSA) and Dynatec Madagascar S.A. (DMSA). Together AMSA and DMSA form the Ambatovy Joint Venture
which owns a significant nickel operation in Madagascar. In addition, Sherritt has a wholly-owned fertilizer, sulphuric acid,
utilities and storage facilities in Fort Saskatchewan, Alberta, Canada (Fort Site) that provides additional sources of income.
The Moa Joint Venture mines, processes and refines nickel and cobalt for sale worldwide (except in the United States). The
Moa Joint Venture is a vertically-integrated joint venture that mines lateritic ore by open pit methods and processes them at its
facilities at Moa, Cuba into mixed sulphides containing nickel and cobalt. The mixed sulphides are transported to the refining
facilities in Fort Saskatchewan, Alberta. The resulting nickel and cobalt products are sold to various markets, primarily in
Europe, Japan and China. Pursuant to an expansion agreement signed in March 2005, the Cuban State granted the Moa Joint
Venture resource concessions ensuring 25 years of production post expansion. At current depletion rate, the concessions of the
Moa Joint Venture will reach their limit in 2034.
The Fort Site facilities provide inputs (ammonia, sulphuric acid and utilities) for the Moa Joint Venture metals refinery produce
agriculture fertilizer for sale in Western Canada and provide storage facilities. The metals refinery facilities in Fort Saskatchewan
have an annual production capacity of approximately 35,000 (100% basis) tonnes of nickel and approximately 3,800 (100%
basis) tonnes of cobalt.
The Ambatovy Joint Venture is one of the world’s largest, vertically integrated, nickel mining, processing and refining operations
utilizing lateritic ore. Sherritt is the operator of the mine and refining facilities and has as its principal partners Sumitomo
Corporation (Sumitomo) and Korea Resources Corporation (KORES) (collectively, the Ambatovy Partners). The Ambatovy Joint
Venture has two nickel deposits located near Moramanga (eastern-central Madagascar) which are planned to be mined over an
18-year period. Additionally, reclamation of low-grade ore stockpiles is expected to extend the project life by 11 years.
4
Sherritt International Corporation
OIL AND GAS
Sherritt’s Oil and Gas division explores for and produces oil and gas primarily from reservoirs located offshore, but in close
proximity to the coastline along the north coast of Cuba. Specialized long reach directional drilling methods are being used to
economically exploit these reserves from land-based drilling locations.
Under the terms of its production-sharing contracts (PSCs), Sherritt’s net production is made up of an allocation from gross
working-interest production (cost-recovery oil) to allow recovery of all approved costs in addition to a negotiated percentage of
the remaining production (profit oil). The pricing for oil produced by Sherritt in Cuba is based on a discount to Gulf Coast Fuel
Oil 6 (GCF06) reference prices.
Sherritt currently has an interest in four PSCs, one PSC which is developed and at the production stage and the remaining three
PSCs in the exploration phase.
In addition, Sherritt holds working-interests in several oil fields and the related production platform located in the Gulf of Valencia
in Spain and a working interest in a natural gas field in Pakistan.
POWER
Sherritt’s primary power generating assets are located in Cuba at Varadero, Boca de Jaruco and Puerto Escondido. These
assets are held by Sherritt through its one-third interest in Energas S.A. (Energas), which is a Cuban joint arrangement
established to process raw natural gas and generate electricity for sale to the Cuban national electrical grid. Cuban government
agencies Unién Eléctrica (UNE) and Unión Cubapetróleo (CUPET) hold the remaining two-thirds interest in Energas.
Raw natural gas is supplied to Energas by CUPET free of charge. The processing of raw natural gas produces clean natural
gas, used to generate electricity, as well as by-products such as condensate and liquefied petroleum gas. All of Energas’
electrical generation is purchased by UNE under long-term fixed-price contracts while the by-products are purchased by CUPET
or a Cuban entity providing natural gas to the City of Havana at market based prices. Sherritt provides the financing for the
construction of the Energas facilities and is repaid from the cash flows generated by the facilities.
The Energas facilities, which are comprised of the two combined cycle plants at Varadero and Boca de Jaruco, produce
electricity using steam generated from the waste heat captured from the gas turbines. Energas’ electrical generating capacity is
506 MW.
CORPORATE AND OTHER
Commercial and Technologies
In November 2016, Sherritt Technologies was merged with Sherritt’s Global Marketing and Logistics group to form the
Commercial and Technologies group (Commercial and Technologies). Commercial and Technologies provides technical
support, marketing and bulk commodity procurement services to Sherritt’s operating divisions and identifies opportunities for the
Corporation as a result of its international activities and research and development activities. Its activities include evaluating,
developing and commercializing process technologies for natural resource based
the
hydrometallurgical recovery of non-ferrous metals, marketing Sherritt’s refined nickel and cobalt finished products and securing
critical raw materials and feedstocks for the hydrometallurgical operations.
industries, in particular for
Sherritt International Corporation
5
Management’s discussion and analysis
ACCOUNTING PRESENTATION
Sherritt manages its nickel, oil, gas and power operations through different legal structures including 100% owned
subsidiaries, joint arrangements, an associate and production sharing contracts. With the exception of the Moa Joint Venture,
which Sherritt operates jointly with its partner, Sherritt is the operator of these assets. The relationship for accounting purposes
that Sherritt has with these operations and the economic interest recognized in the Corporation’s financial statements are as
follows:
Metals
Moa Joint Venture
Ambatovy Joint Venture(1)
Oil and Gas
Power
Relationship for
accounting purposes
Interest
Basis of
accounting
Joint venture
50%
Equity method
Associate
Subsidiary
Joint operation
40%, 12%
Equity method
100%
33⅓%
Consolidation
Share of assets, liabilities
revenues and expenses
Commercial and Technologies
Subsidiary
100%
Consolidation
(1) On December 11, 2017, the Corporation reduced its interest in Ambatovy from 40% to 12%
The Financial results and Review of operations sections in this MD&A present amounts by reporting segment, based on the
Corporation’s economic interest. For financial statement purposes, the Moa Joint Venture and Ambatovy Joint Venture are
accounted for using the equity method of accounting which recognizes the Corporation’s share of earnings (loss) from the joint
venture and associate, respectively. Metal’s operating results include the Corporation’s 50% interest in the Moa Joint
Venture,100% interest in the utility and fertilizer operations at Fort Site, 40%/12% interest in Ambatovy, and 100% interests in
wholly-owned subsidiaries established to buy, market and sell certain Ambatovy and Moa Joint Venture nickel and cobalt
production. The Financial results and Review of operations sections in this MD&A include the Corporation’s 100% interest in
its Oil and Gas business, 33⅓% interest in its Power businesses and 100% interest in the Commercial and Technologies
business.
In December 2017, the Corporation concluded an agreement with its Ambatovy Joint Venture partners to reduce its interest in
the joint venture from 40% to 12% (the Ambatovy restructuring). Operating results for Ambatovy to December 10, 2017 are
presented on a 40% basis; operating results thereafter are presented on a 12% basis. Any balance sheet amounts in this
MD&A at December 31, 2017 include the Corporation’s interest in Ambatovy at 12% while the prior years ended December 31
are based on the Corporation’s 40% interest.
Amounts presented in this MD&A can be reconciled to note 4 of the audited consolidated financial statements for the year
ended December 31, 2017.
6
Sherritt International Corporation
Strategic priorities
The table below summarizes how the Corporation performed against its strategic priorities for 2017.
Strategic Priorities
2017 Actions
Status
PRESERVE LIQUIDITY AND
BUILD BALANCE SHEET
STRENGTH
Finalize long-term Ambatovy equity and
funding structure
Optimize working capital and receivables
collection
Operate Metals and Power businesses to
be free cash flow neutral or better
OPTIMIZE OPPORTUNITIES IN
CUBAN ENERGY BUSINESS
Determine future capital allocation based
on results from first two wells drilled on
Block 10
UPHOLD GLOBAL
OPERATIONAL LEADERSHIP IN
FINISHED NICKEL LATERITE
PRODUCTION
Further reduce NDCC at Moa and
Ambatovy towards the goal of achieving
or remaining in the lowest quartile of
global nickel cash costs
Increase Ambatovy production and
predictability over 2016
Achieve peer leading performance in
environmental, health, safety and
sustainability
Restructuring of the Ambatovy Joint Venture
was completed on December 11, 2017 and
resulted in the elimination of $1.4 billion of debt
and reduction of Sherritt’s ownership interest to
12% from 40%.
Management continues to take action to
expedite Cuban energy receipts. Outstanding
receivables at year end were US$132.6 million.
The year-over-year growth was due to Cuba’s
reduced liquidity, including the impact of
Hurricane Irma and resulting recovery costs
had on the country’s economy.
The Oil and Gas and Power divisions
generated positive free cash flow in 2017. The
Moa JV generated sufficient operating cash
flow to repay $31.7 million on its working capital
facility.
The results from the first well have provided
constructive data to optimize the drilling of the
second well, again targeting the Lower Veloz
formation. Drilling on the second well at Block
10 has been temporarily suspended to
determine the best option to reach the target
reservoir. Drilling results from the second well
are expected in Q3 2018.
Q4 NDCC of US$1.80/lb at the Moa JV is the
lowest since Q3 2004. Moa’s NDCC ranked it
within the lowest cost quartile for the third
consecutive quarter. Ambatovy’s NDCC of
US$3.83/lb for 2017 marked an improvement
from last year, but was below expectations due
to lower production and higher maintenance
costs.
Ambatovy production in 2017 experienced a
number of unanticipated challenges and
resulted in several unplanned maintenance
activities. Initiatives, such as replacing certain
equipment, are being implemented to improve
asset reliability.
In 2017, Sherritt joined the Mining Association
of Canada (MAC) and began implementing
MAC’s Towards Sustainable Mining program,
an internationally recognized sustainability
standard. In safety, Sherritt met its recordable
incident frequency target, but exceeded its
injury frequency target for the year. No
significant environmental or community-related
incidents were recorded in 2017. The company
received five distinct honours for leadership in
sustainability management and reporting during
the year.
Sherritt International Corporation
7
Management’s discussion and analysis
The table below lists Sherritt’s Strategic Priorities for 2018. As we execute on our 2018 Strategic Priorities, protecting the health and
safety of our employees, contractors and communities will continue to be our top priority. Sherritt’s purpose is to be a leader in the
low-cost production of finished nickel and cobalt that creates sustainable prosperity for our employees, investors and
communities.
Strategic Priorities
2018 Actions
PRESERVE LIQUIDITY AND BUILD
BALANCE SHEET STRENGTH
Continue to emphasize de-leveraging of the balance sheet
Optimize working capital and maximize receivables collection
Operate Metals businesses to maintain a leadership position as a low-cost
producer of finished nickel and cobalt while maximizing Free Cash Flow
OPTIMIZE OPPORTUNITIES IN
CUBAN ENERGY BUSINESS
Successfully execute Block 10 drilling program
Review opportunities to leverage Oil and Gas experience and relationships
Continue to maintain strong relationships in Cuba
UPHOLD GLOBAL OPERATIONAL
LEADERSHIP IN FINISHED NICKEL
PRODUCTION FROM LATERITES
Protect the health and safety of all employees in all operations
Achieve peer-leading performance in environmental, health, safety and
sustainability
Maximize production of finished nickel and cobalt and improve predictability
over 2017 results
Continue to maintain strong relationships with battery manufacturers
Further reduce NDCC towards the goal of being consistently in the lowest cost
quartile
Leverage technical innovation for the purposes of reducing operating costs and
identifying new market opportunities
8
Sherritt International Corporation
Highlights
UNIT ISSUANCE AND LAUNCH OF DEBT DUTCH AUCTION
In January 2018 the Corporation closed a unit offering financing transaction that generated gross proceeds of $132.0 million.
Net proceeds will be used to reduce Sherritt’s outstanding indebtedness, for general corporate purposes and to fund future
growth initiatives. In addition, the Corporation launched a modified Dutch Auction tender offer to repurchase up to $75.0 million
of outstanding unsecured debentures. The tender offer is expected to close on or about February 16, 2017.
AMBATOVY JOINT VENTURE RESTRUCTURING
On December 11, 2017, the Corporation closed the transaction to restructure its ownership interest in the Ambatovy Joint
Venture from 40% to 12%. As part of the restructuring, the Corporation transferred a 28% interest in the Ambatovy Joint Venture
and pre-completion shareholder subordinated loans receivable and derecognized $1.4 billion in Ambatovy Joint Venture
additional partner loans from its balance sheet. The Corporation retains a 12% equity interest and 12% of all shareholder
subordinated loans receivable post restructuring of the Ambatovy Joint Venture. Sherritt made payments totaling $71.5 million
related to the Ambatovy restructuring, $12.0 million dollars of which was placed in escrow as restricted cash.
OIL AND GAS UPDATE
In January 2018, the Corporation executed a three-year extension of the Puerto Escondido/Yumuri production sharing contract
to 2021.
On Block 10, the results from the first well provided constructive data to optimize the drilling of the second well, again targeting
the Lower Veloz formation. Drilling on the second well at Block 10 has been temporarily suspended to determine the best option
to reach the target reservoir. Drilling results from the second well are expected in the third quarter of 2018.
OPERATIONS UPDATE
The Metals operations produced 7,245 tonnes of finished nickel (Sherritt’s share) in the fourth quarter of 2017 and 29,380
tonnes during the year ended December 31, 2017.
In the fourth quarter of 2017, finished nickel production at Moa Joint Venture was higher than in the same period in the prior
year and reasonably consistent with the third quarter of 2017. Despite the impact of unusually high rainfall in November and
December 2017, production of mixed sulphides was higher than in the prior year period primarily because of the impact of
Hurricane Matthew and subsequent damage to bridge infrastructure in the fourth quarter of 2016. For the year ended December
31, 2017, in addition to the above, nickel and cobalt production was lower than the prior year, impacted by mixed sulphides
availability in the first quarter of 2017 as a result of lower production in the fourth quarter of 2016 following Hurricane Matthew.
Finished nickel production was also impacted by higher cobalt to nickel ratio in the mixed sulphides, causing a limitation on
nickel production when the cobalt plant was operating near capacity periodically during the year.
Beginning on December 11, 2017, Sherritt’s share of production for the quarter and year ended December 31, 2017 reflects its
12% interest in the joint venture resulting in a 570 tonne reduction in its share of production in each period. In the fourth quarter
of 2017, irrespective of the change in interest, finished nickel production at the Ambatovy Joint Venture was lower than in the
same period in the prior year, but higher compared to the third quarter of 2017 as the operation continues to see reliability
issues in its systems which are negatively affecting production. For the year ended December 31, 2017, in addition to the
above, production issues during the year included restricted acid production due to failures in the acid plant and sulphur melting
area, poor reliability of the pressure acid leach (PAL) circuit, an unplanned shutdown to address hydrogen sulphide emissions
from the sulphide precipitation circuits and lower recovery rates in the second and third quarters related to various planned and
unplanned maintenance shutdowns.
Metals operation’s weighted average net direct cash cost (NDCC) for nickel of US$2.37/lb and US$3.04/lb in the three months
and year ended December 31, 2017, respectively, was lower compared to the same periods in the prior year as the benefit of
significantly higher cobalt by-product credits offset higher maintenance costs.
Sherritt International Corporation
9
Management’s discussion and analysis
CYCLONE AT AMBATOVY
Although facilities at the Ambatovy Joint Venture in Madagascar were impacted by Tropical Cyclone Ava, a Category 2
hurricane equivalent storm, all personnel were unhurt and safely accounted for. Damage to equipment and the acid production
facilities resulted in a temporary halt in production. Repairs have since been completed and partial production has resumed. A
ramp up in production is expected through the end of Q2 2018.
WORKING CAPITAL UPDATE
Cash, cash equivalents and short-term investments at December 31, 2017 were $203.0 million, a decrease of $87.3 million from
September 30, 2017 and $105.6 million from December 31, 2016. This decrease is primarily due to the $71.5 million in
payments in December related to the Ambatovy restructuring, $18.8 million and $57.2 million in interest payments on
debentures for the fourth quarter and year ended December 31, 2017, respectively, and lower Cuban energy receipts during the
year partly offset by the receipt of payments from Moa Joint Venture on it revolving term loan.
During the quarter, US$7.5 million of Cuban energy payments was received compared to US$32.6 million in the third quarter of
2017 for a total received for the year of US$106.5 million compared to US$129.6 million in the prior year. Total Cuban overdue
receivables were US$132.6 million at December 31, 2017 compared to US$100.5 million at September 30, 2017 and US$74.6
million at December 31, 2016.
10
Sherritt International Corporation
Financial results(1)
$ millions, except as otherwise noted
December 31 December 31 Change December 31 December 31 Change
For the three months ended
2016
2017
For the years ended
2017
2016
FINANCIAL HIGHLIGHTS
Revenue
Combined revenue(2)
Earnings (loss) from operations, associate and joint venture
Earnings(loss) from continuing operations
(Loss) earnings from discontinued operations, net of tax
Net earnings (loss) for the period
Adjusted loss from continuing operations(2)
Adjusted EBITDA(2)
$
Earnings (loss) per share (basic)($ per share)
Net earnings (loss) from continuing operations
Net earnings (loss) for the period
Earnings (loss) per share (diluted)($ per share)
Net earnings (loss) from continuing operations
Net earnings (loss) for the period
CASH
Cash, cash equivalents and short-term investments
Cash provided (used) by continuing operating activities
Combined free cash flow(2)
Combined adjusted operating cash flow(2)
OPERATIONAL DATA
$
54.8
223.8
606.5
552.9
(15.1)
537.8
(50.2)
49.6
1.85
1.80
1.80
1.75
(22%) $
70.5
240.3
(7%)
(52.2) 1,262%
604%
(621%)
604%
38%
33%
(109.6)
2.9
(106.7)
(81.3)
37.4
$
267.3
917.5
440.8
308.9
(15.1)
293.8
(317.1)
149.8
(0.37)
(0.36)
(0.37)
(0.36)
600%
600%
586%
586%
1.04
0.99
1.02
0.97
262.3
820.2
(320.8)
(381.8)
2.9
(378.9)
(427.9)
40.0
(1.30)
(1.29)
(1.30)
(1.29)
2%
12%
237%
181%
(621%)
178%
26%
275%
180%
177%
178%
175%
$
$
203.0
(33.9)
(41.2)
15.7
308.6
(22.6)
(45.5)
8.2
(34%) $
(50%)
9%
91%
$
203.0
(9.6)
(62.1)
50.7
308.6
1.6
(111.9)
(46.8)
(34%)
(700%)
45%
208%
SPENDING ON CAPITAL AND INTANGIBLE ASSETS(3)
$
25.0
$
30.3
(17%) $
86.0
$
93.0
(8%)
PRODUCTION VOLUMES
Finished nickel (tonnes)(Sherritt's share)
Finished cobalt (tonnes)(Sherritt's share)
Oil (boepd, NWI production)(4)
Electricity (gigawatt hours) (33⅓% basis)
AVERAGE EXCHANGE RATE (CAD/USD)
AVERAGE-REALIZED PRICES(2)
Nickel ($ per pound)
Cobalt ($ per pound)
Oil ($ per boe, NWI)(4)
Electricity ($ per megawatt hour)
UNIT OPERATING COSTS(2)
Nickel (US$ per pound)(NDCC)
Oil ($ per boe, GWI)(4)
Electricity ($ per megawatt hour)
7,245
710
6,101
201
1.271
6.66
38.86
47.48
54.01
2.37
12.95
23.43
$
$
8,893
786
8,163
224
1.334
6.45
17.68
38.98
56.24
3.41
11.68
24.73
(19%)
(10%)
(25%)
(10%)
(5%)
3% $
120%
22%
(4%)
(30%) $
11%
(5%)
29,380
2,974
7,856
848
1.299
6.10
33.13
42.90
55.15
3.04
10.52
19.29
33,306
3,156
9,483
894
(12%)
(6%)
(17%)
(5%)
1.325
(2%)
$
$
5.65
15.33
29.98
56.10
3.85
10.58
22.94
8%
116%
43%
(2%)
(21%)
(1%)
(16%)
$
$
(1)
(2)
Sherritt’s share of financial and operating results for the Ambatovy Joint Venture reflects its interest at 40% to December 10, 2017 and 12% thereafter.
For additional information see the Non-GAAP measures section.
Spending on capital and intangible assets includes accruals and does not include spending on service concession arrangements.
(3)
(4) Net working-interest (NWI); gross working-interest (GWI); barrels of oil equivalent per day (boepd); barrels of oil equivalent (boe).
Sherritt International Corporation
11
Management’s discussion and analysis
Total combined revenue(1) of $223.8 million and $917.5 million, respectively, for the three months and year ended December
31, 2017 compared to $240.3 million and $820.2 million for the same periods in the prior year. Combined revenue is
composed of the following:
For additional information see the Non-GAAP measures section.
(1)
(2) Corporate and other revenue Q4 2017 - $ 0.1 million, Q4 2016 - $ 0.4 million.
(3) Corporate and other revenue 2017 - $nil, 2016 - $ 0.9 million.
For the three months ended December 31, 2017, the net earnings from continuing operations was $552.9 million, or $1.85 per
share, compared to a loss of $109.6 million, or $0.37 per share in the same period in the prior year. For the year ended
December 31, 2017, the net earnings from continuing operations was $308.9 million, or $1.04 per share, compared to a loss of
$381.8 million, or $1.30 per share in the prior year.
For the three months ended December 31, 2017, the Corporation recognized an adjusted net loss from continuing operations
of $50.2 million, or $0.17 per share, and $317.1 million, or $1.07 per share for the year ended December 31, 2017. The most
significant adjustment to net earnings was the gain recognized on the Ambatovy restructuring.
For the three months ended December 31, 2017, net earnings were $537.8 million, or $1.80 per share, compared to a loss of
$106.7 million, or $0.36 per share in the same period in the prior year. For the year ended December 31, 2017, net earnings
were $293.8 million, or $0.99 per share, compared to a loss of $378.9 million, or $1.29 per share in the prior year.
The change in net earnings (loss) from continuing operations is detailed below:
12
Sherritt International Corporation
Combined revenue was lower for the three months ended December 31, 2017 and higher for full year period compared to the
same periods in the prior year. Average reference prices for nickel, cobalt and Gulf Coast Fuel Oil #6 were all higher for the
respective three months and year ended December 31, 2017 compared to the prior year. Nickel was 7% and 8% higher; cobalt
was 134% and 125% higher; and Gulf Coast Fuel Oil #6 was 28% and 46% higher.
For the fourth quarter of 2017 revenue was lower as the impact of higher realized metals prices were more than offset by lower
sales volumes at the Ambatovy Joint Venture as a result of lower production compared to the same period in the prior year.
Production reliability issues at the Ambatovy Joint Venture continue to impact production and sales in the current period.
Sherritt’s share of current year production includes the impact of Sherritt’s reduction in interest from 40% to 12% effective
December 11, 2017. For the full year 2017, revenue was higher as the impact of higher realized cobalt prices more than offset
lower sales volumes at both the Moa and Ambatovy joint ventures.
Metal operating costs, including third party feed costs, at the Ambatovy Joint Venture and Moa Joint Venture were higher for the
three months and year ended December 31, 2017 compared to the same periods in the prior year primarily as a result of higher
maintenance and energy input costs.
At Oil and Gas, the impact of higher reference prices was more than offset by lower production volumes and a stronger
Canadian dollar relative to the U.S, dollar for the three months and year ended December 31, 2017 compared to the same
periods in the prior year. Lower production was primarily due to the impact of the expiration of the Varadero West PSC in
November 2017 and natural reservoir declines.
The Corporation recognized unrealized foreign exchange losses of $24.1 million and $7.7 million in the three months and year
ended December 31, 2017, respectively compared to a loss of $25.7 million and gain of $35.9 for the same periods in the prior
year, respectively. Unrealized exchange gains/losses are determined by the change in period-end exchange rates and the
balance of the Corporation’s U.S. dollar denominated net liabilities which was significantly reduced on the completion of the
Ambatovy restructuring.
As a result of the Ambatovy restructuring, the Corporation realized a gain of $629.0 million which, except for transaction costs of
$11.3 million, was non-cash ($0.9 million of which was accrued and will be paid in 2018).
Compared to the same periods in the prior year, combined income tax expense was higher in the three months ended
December 31, 2017 primarily due to higher income at Moa Joint Venture which resulted in one of the Moa Joint Venture entities
being cash taxable whereas in the prior years it had been incurring tax losses which had been derecognized. In addition to the
above, combined income tax expense was higher for the current year period due to higher income at Oil and Gas.
Other primarily includes higher interest and foreign exchange at the Ambatovy Joint Venture, the impact of lower fertilizer
contributions and net costs for the current year associated with Commercial and Technologies of $11.8 million, including $5.2
million of administrative expenses. Other administration costs were higher due to higher stock-based compensation expense as
a result of the higher share price at year end.
Sherritt International Corporation
13
Management’s discussion and analysis
ADJUSTED EBITDA(1)
Total combined Adjusted EBITDA for the year ended December 31, 2017 was $49.6 million and $149.8 million, respectively,
compared to $37.4 million and $40.0 million in the same periods in the prior year. Adjusted EBITDA by business segment is
as follows:
(1)
For additional information see the Non-GAAP measures section.
CONSOLIDATED FINANCIAL POSITION
The following table summarizes the significant items as derived from the consolidated statements of financial position:
$ millions, except as otherwise noted, as at December 31
2017
2016
Change
Current assets
Current liabilities
Working capital
Current ratio
Cash, cash equivalents and short-term investments
Non-current advances, loans receivable and other financial assets
Investment in an associate
Investment in a joint venture
Property, plant and equipment
Total assets
Non-recourse loans and borrowings
Other loans and borrowings
Provisions
Total liabilities
Deficit
Shareholders' equity
$
580.3
$
245.1
335.2
2.37:1
$
203.0
$
713.0
211.9
367.1
228.5
720.9
226.0
494.9
3.19:1
308.6
1,542.7
767.9
336.8
286.4
2,244.8
3,806.9
(20%)
8%
(32%)
(26%)
(34%)
(54%)
(72%)
9%
(20%)
(41%)
-
824.1
110.3
1,188.5
(2,427.7)
1,056.3
1,367.5
(100%)
860.7
114.6
(4%)
(4%)
2,709.0
(56%)
(2,721.5)
1,097.9
11%
(4%)
The Ambatovy restructuring had a significant impact on current assets; non-current advances, loans receivable and other
financial assets; investment in Associate; non-recourse loans and borrowings; deficit and shareholders’ equity. For additional
information, see Ambatovy Joint Venture restructuring on page 29.
14
Sherritt International Corporation
LIQUIDITY
At December 31, 2017 total available liquidity was $211.8 million which is composed of cash, cash equivalents, short-term
investments and $8.8 million of available credit facilities. The total liquidity excludes restricted cash of $13.0 million.
Cash, cash equivalents and short-term investments at December 31, 2017 decreased by $105.6 million from December 31,
2016. The components of this change is shown below:
The change in liquidity is primarily due to:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
positive adjusted operating cash flow at Power and Oil and Gas primarily as a result of higher commodity prices and
lower operating costs at Oil and Gas;
total payments of $71.5 million related to the Ambatovy restructuring, including $49.1 million related to the resumption
of funding for the Corporation’s 12% interest, including accrued interest; $12.0 million placed in escrow as restricted
cash, and $10.4 million in transaction costs.
collections of Cuban energy receivables;
payment of interest on the Corporation’s debentures;
receipt of $31.7 million from the Moa Joint Venture as repayment on its working capital facility; and
repayment of $35.0 million on the Corporation’s syndicated revolving-term loan during the year.
Sherritt International Corporation
15
Management’s discussion and analysis
Outlook
2018 PRODUCTION, OPERATING COST AND CAPITAL SPENDING GUIDANCE
Production volumes, unit operating costs and spending on capital
Production volumes
Nickel, finished (tonnes, 100% basis)
Moa Joint Venture
Ambatovy Joint Venture
Cobalt, finished (tonnes, 100% basis)
Moa Joint Venture
Ambatovy Joint Venture
Oil – Cuba (gross working-interest, bopd)
Oil and Gas – All operations (net working-interest, boepd)
Electricity (GWh, 33⅓% basis)
Unit operating costs
NDCC (US$ per pound)
Moa Joint Venture
Ambatovy Joint Venture
Oil and Gas - Cuba (unit operating costs, $ per barrel)
Electricity (unit operating cost, $ per MWh)
Spending on capital (US$ millions)
Metals – Moa Joint Venture (50% basis), Fort Site (100% basis)(1)
Metals – Ambatovy Joint Venture (40% basis then 12% basis)(2)
Oil and Gas
Power (33⅓% basis)
Spending on capital (excluding Corporate)
Guidance at
2017
Actual
2017
Guidance for
2018
31,500-32,500
36,000-39,000
3,500-3,800
3,300-3,600
13,000-14,000
7,500-8,000
850-900
2.80-3.30
3.10-3.70
11.00-12.00
18.75-19.50
31,524
35,474
3,601
3,053
13,479
7,855
848
2.35
3.83
9.78
19.29
31,500-32,500
40,000-43,000
3,500-3,800
3,900-4,200
4,300-4,800
1,900-2,100
750-800
2.50-3,00
3.00-3.50
22.00-23.50
20.75-21.50
US$28 (CDN$38)
US$45 (CDN$61)
US$35 (CDN$47)
US$1 (CDN$2)
US$109 ($CDN148)
US$17 (CDN$21)
US$35 (CDN$44)
US$15 (CDN$19)
US$1 (CDN$2)
US$68 (CDN$86)
US$41 (CDN$52)
US$13 (CDN$17)
US$39 (CDN$50)
US$1 (CDN$1)
US$94 (CDN$120)
16
Sherritt International Corporation
Significant factors influencing operations
As a commodity-based, geographically diverse company, Sherritt’s operating results are primarily influenced by the price of
nickel and cobalt.
NICKEL
Nickel prices rallied in the second half of 2017 after experiencing considerable volatility in the first six months of the year. The
average nickel reference price in the fourth quarter was US$5.25 per pound, up 7% from US$4.90 for Q4 2016. The average
nickel reference price for the 12-months of 2017 was US$4.72 per pound, up 8% from US$4.36 per pound for 2016.
The year-over-year price improvements were largely driven by the growing understanding of the important role that Class 1
nickel will play in the burgeoning electric vehicle (EV) market. Class 1 nickel, along with cobalt, are key elements needed to
manufacture EV batteries. Demand for Class 1 nickel and cobalt are expected to grow significantly beginning in 2019 when
China expects to begin production quotas requiring that 10% of all vehicles manufactured be electric.
During Q4, the nickel price was supported by news that nickel pig iron (NPI) producers in China were asked to reduce
production to alleviate pollution with China’s largest NPI-only producer ordered to halve production from November 2017 to
March 2018. Actual and anticipated reductions from existing nickel producers also continued to help underpin the nickel
price, with nickel supply expected to be in a deficit for 2018 and 2019.
Nickel reference price improvements in the second half were also driven by the decline in inventories. Combined LME and
SHFE nickel inventories at year-end declined to 410,828 tonnes (from 464,696 tonnes at the beginning of the year). Any
further decline in visible inventories could give momentum to nickel price increases in the future.
COBALT
Cobalt prices strengthened considerably in 2017. The average reference price in the fourth quarter was US$31.60 per pound
for 2017, up 134% from Q4 2016. The average reference cobalt price for the 12-month period of 2017 was US$26.53, up
125% from US$11.77 per pound for 2016.
The price increase is primarily linked to the growing strong demand emanating from the EV battery market. The double-digit
price growth experienced over the past year was also driven by geopolitical and supply risk concerns given that the
Democratic Republic of Congo is currently the world’s largest source of cobalt.
As cobalt prices have a limited impact on overall battery pack costs, high prices are not expected to cause supply-chain
disruptions or delay EV market growth. As a result, the risk of cobalt substitution in EV battery production in the near term is
relatively low given cobalt’s unique energy transference properties. While battery manufacturers continue to explore
alternatives to cobalt, the likely beneficiary of any substitution is expected to be Class 1 nickel.
Cobalt supply deficits are expected to continue over the next few years. In addition to demand from industrial end users,
speculative investors are also driving up cobalt prices by stockpiling inventory, further exacerbating supply deficit concerns.
Sherritt International Corporation
17
Management’s discussion and analysis
Review of operations
METALS
Financial Review
$ millions, except as otherwise noted, for the three months ended December 31
2017
2016
Moa JV and
Fort Site
Ambatovy
JV(1)
Other
Moa JV and
Fort Site
Total
Ambatovy
JV
Other
Total Change
$
$
FINANCIAL HIGHLIGHTS
Revenue
(Loss) earnings from operations
Adjusted EBITDA(2)
CASH FLOW
Cash provided (used) by operations
Free cash flow(2)
Adjusted operating cash flow(2)
PRODUCTION VOLUMES (tonnes)
Mixed Sulphides
Finished Nickel
Finished Cobalt
Fertilizer
4,090
4,134
465
61,923
3,329
3,111
245
10,011
NICKEL RECOVERY (%)
79%
84%
SALES VOLUMES (tonnes)
Finished Nickel
Finished Cobalt
Fertilizer
4,129
480
51,141
2,602
225
8,114
AVERAGE REFERENCE PRICES (US$ per pound)
Nickel
Cobalt(3)
AVERAGE-REALIZED PRICES(2)
Nickel ($ per pound)
Cobalt ($ per pound)
Fertilizer ($ per tonne)
122.9 $
19.9
32.1
58.1 $
(7.7)
18.1
3.0 $
-
-
184.0 $
12.2
50.2
92.5 $
(7.6)
5.6
88.2 $
(15.0)
24.4
14.9 $
0.2
0.2
195.6
(22.4)
30.2
(6%)
154%
66%
32.5 $
24.9
32.4
(3.4) $
(20.7)
4.7
(0.5) $
(0.5)
0.7
28.6 $
3.7
37.8
(6.1) $
(9.8)
5.9
(0.8) $
(10.6)
8.6
3.3 $
3.3
0.2
(3.6)
(17.1)
14.7
894%
122%
157%
-
-
-
-
-
-
-
7,419
7,245
710
71,934
3,674
3,782
382
61,460
6,036
5,111
404
16,650
85%
87%
6,731
705
59,255
3,975
487
45,698
4,935
360
15,485
-
-
-
-
-
-
-
9,710
8,893
786
78,110
(24%)
(19%)
(10%)
(8%)
8,910
847
61,183
(24%)
(17%)
(3%)
$
5.25
31.60
$
4.90
13.51
7%
134%
$
6.72 $
6.56 $
38.78
348
39.03
173
- $
-
-
6.66 $
6.39 $
6.50 $
38.86
324
16.85
326
18.73
160
- $
-
-
6.45
17.68
284
3%
120%
14%
UNIT OPERATING COSTS(2) (US$ per pound)
Nickel - net direct cash cost
$
1.80 $
3.27 $
- $
2.37 $
3.80 $
3.10 $
- $
3.41
(31%)
SPENDING ON CAPITAL
Sustaining
Expansion
$
$
7.7 $
-
7.7 $
10.0 $
-
10.0 $
- $
-
- $
17.7 $
-
17.7 $
4.7 $
(2.1)
2.6 $
19.0 $
-
19.0 $
- $
-
- $
23.7
(2.1)
21.6
(25%)
100%
(18%)
(1)
(2)
(3)
Sherritt’s share of financial and operating results for the Ambatovy Joint Venture reflects its interest at 40% to December 10, 2017 and 12% thereafter.
For additional information see the Non-GAAP measures section.
Average low-grade cobalt published price per Metals Bulletin.
18
Sherritt International Corporation
$ millions, except as otherwise noted, for the years ended December 31
2017
2016
Moa JV and
Fort Site
Ambatovy
JV(1)
Other
Moa JV and
Fort Site
Total
Ambatovy
JV
Other
Total Change
$
$
FINANCIAL HIGHLIGHTS
Revenue
(Loss) earnings from operations
Adjusted EBITDA(2)
CASH FLOW
Cash provided (used) by operations
Free cash flow(2)
Adjusted operating cash flow(2)
PRODUCTION VOLUMES (tonnes)
Mixed Sulphides
Finished Nickel
Finished Cobalt
Fertilizer
17,297
15,762
1,801
243,682
14,836
13,618
1,173
43,118
NICKEL RECOVERY (%)
85%
85%
SALES VOLUMES (tonnes)
Finished Nickel
Finished Cobalt
Fertilizer
15,679
1,783
178,491
13,694
1,220
42,016
AVERAGE REFERENCE PRICES (US$ per pound)
Nickel
Cobalt(3)
AVERAGE-REALIZED PRICES(2)
Nickel ($ per pound)
Cobalt ($ per pound)
Fertilizer ($ per tonne)
417.0 $
31.3
80.5
279.2 $
(109.5)
26.0
43.1 $
0.9
0.9
739.3 $
(77.3)
107.4
339.3 $
(28.4)
19.6
264.8 $
(150.9)
(7.0)
48.0 $
0.8
0.8
652.1
(178.5)
13.4
58.3 $
37.4
72.9
(26.7) $
(55.6)
(5.9)
3.0 $
3.0
5.1
34.6 $
(15.2)
72.1
(2.7) $
(33.9)
16.2
(34.6) $
(55.9)
(39.2)
3.1 $
3.1
0.8
(34.2)
(86.7)
(22.2)
13%
57%
701%
201%
82%
425%
(9%)
(12%)
(6%)
(8%)
35,194
33,306
3,156
310,720
33,246
3,127
220,007
(12%)
(4%)
-
$
4.36
11.77
8%
125%
-
-
-
-
-
-
-
32,133
29,380
2,974
286,800
16,923
16,464
1,847
256,812
18,271
16,842
1,309
53,908
87%
86%
29,373
3,003
220,507
16,402
1,846
167,525
16,844
1,281
52,482
-
-
-
-
-
-
-
$
4.72
26.53
$
6.14 $
6.05 $
32.98
361
33.35
168
- $
-
-
6.10 $
5.63 $
5.66 $
33.13
325
14.82
377
16.08
164
- $
-
-
5.65
15.33
326
8%
116%
-
UNIT OPERATING COSTS(2) (US$ per pound)
Nickel - net direct cash cost
$
2.35 $
3.83 $
- $
3.04 $
3.42 $
4.27 $
- $
3.85
(21%)
SPENDING ON CAPITAL
Sustaining
Expansion
$
$
20.9 $
-
20.9 $
44.2 $
-
44.2 $
- $
-
- $
65.1 $
-
65.1 $
22.6 $
10.3
32.9 $
33.1 $
-
33.1 $
- $
-
- $
55.7
10.3
66.0
17%
(100%)
(1%)
(1)
(2)
(3)
Sherritt’s share of financial and operating results for the Ambatovy Joint Venture reflects its interest at 40% to December 10, 2017 and 12% thereafter.
For additional information see the Non-GAAP measures section.
Average low-grade cobalt published price per Metals Bulletin.
Sherritt International Corporation
19
Management’s discussion and analysis
Moa Joint Venture and Fort Site
$ millions
REVENUE
Nickel
Cobalt
Fertilizers
Other
COST OF SALES(1)
Mining, processing and refining
Third-party feed costs
Fertilizers
Selling costs
Other
NET DIRECT CASH COST(2) (US$ per pound of nickel)
Mining, processing and refining (MPR) costs
Third-party feed costs
Cobalt by-product credits
Other(3)
For the three months ended
2017
2016
For the years ended
2017
2016
December 31
December 31 Change
December 31
December 31
Change
$
$
$
$
$
$
61.2
41.0
17.8
2.9
122.9
54.1
6.3
14.5
4.4
8.5
87.8
4.89
0.54
(3.54)
(0.09)
1.80
$
$
$
$
$
$
56.0
18.1
14.9
3.5
92.5
56.7
4.9
12.4
4.5
5.5
84.0
9% $
127%
19%
(17%)
33% $
(5%) $
29%
17%
(2%)
55%
5% $
212.4
129.6
64.5
10.5
417.0
210.1
19.3
53.0
16.9
27.8
327.1
4.93
0.42
(1.55)
-
3.80
(1%) $
29%
(128%)
-
(53%) $
4.80
0.43
(2.90)
0.02
2.35
$
$
$
$
$
$
203.5
60.3
63.2
12.3
339.3
221.2
12.9
42.7
16.4
16.3
309.5
4%
115%
2%
(15%)
23%
(5%)
50%
24%
3%
71%
6%
4.63
0.27
(1.26)
(0.22)
3.42
4%
59%
(130%)
109%
(31%)
(1)
(2)
(3)
Excludes depletion, depreciation and amortization
For additional information see the Non-GAAP measures section.
Includes the Moa Joint Venture and Fort Site refinery fertilizer by-product profit or loss and marketing costs, discounts, and other by-product credits.
The change in earnings (loss) from operations is detailed below:
20
Sherritt International Corporation
The reference price for nickel was higher (7% and 8%, respectively) for the three months and year ended December 31, 2017
compared to the same periods in the prior year while cobalt prices were more than double in the comparable periods. Realized
prices were also higher but were negatively impacted by a stronger Canadian dollar relative to the U.S. dollar in 2017 compared
to the same periods in the prior year.
Finished nickel and cobalt production for the three months ended December 31, 2017 was higher compared to the same period
in the prior year primarily due to the impact of higher mixed sulphides availability. Despite the impact of unusually high rainfall in
November and December 2017, production of mixed sulphides was higher than in the prior year primarily because of the impact
of Hurricane Matthew and subsequent damage to bridge infrastructure in the fourth quarter of 2016.
For the year ended December 31, 2017, lower nickel and cobalt production was impacted by mixed sulphides availability in the
first quarter of 2017 as a result of lower production in the fourth quarter of 2016 following Hurricane Matthew. Finished nickel
production was also impacted by higher cobalt-to-nickel ratio in the mixed sulphides, causing a limitation on nickel production
when the cobalt plant was operating near capacity periodically during the year.
Fertilizer’s contribution to operating earnings for the three months was relatively unchanged and lower for the year ended
December 31, 2017 compared to the same periods in the prior year. For the current year-to-date period, fertilizer contributions
were negatively impacted by higher energy costs, and the impact of the bi-annual Fort Saskatchewan acid plant shutdown in the
second quarter. Realized prices were higher in the fourth quarter of 2017 and lower for the current year-to-date period
compared to the same periods in the prior year which is consistent with market prices. Sales volumes were higher in both the
three months and year ended December 31, 2017 compared to the same periods in the prior year reflecting timing of sales.
Net direct cash cost of nickel (NDCC) for the three months and year ended December 31, 2017 was lower compared to the
same periods in the prior year primarily due to higher cobalt credits which more than offset the impact of higher energy costs,
higher third party feed costs and higher planned maintenance costs. NDCC was also positively impacted by higher metals sales
volumes and net fertilizer by-product credits in the fourth quarter of 2017. The full year 2017 NDCC was negatively impacted by
lower metals sales volumes but benefited from cost savings of approximately US$0.50/lb from the new acid plant at Moa during
the first nine months compared to the prior year. The acid plant was commissioned in October 2016.
For the year-to-date period, other costs includes higher royalties as a result of higher reference prices and lower margin on Fort
Saskatchewan sulphuric acid sales as a result of costs associated with the bi-annual plant shutdown and lower realized prices.
Sustaining capital spending in the three months and year ended December 31, 2017 was lower compared to the same periods
in the prior year due to the timing of expenditures. Expansion spending in 2016 was related to the new acid plant which was
commissioned in October 2016. The Moa Joint Venture is expected to continue to operate and fund capital expenditures
through internally generated joint venture cash flows and/or external loans, without shareholder funding.
Sherritt International Corporation
21
Management’s discussion and analysis
Ambatovy
$ millions
REVENUE(1)
Nickel
Cobalt
Fertilizers
Other
COST OF SALES(1)(2)
Mining, processing and refining
Selling costs
Other
NET DIRECT CASH COST(3) (US$ per pound of nickel)
Mining, processing and refining costs
Cobalt by-product credits
Other(4)
For the three months ended
2017
2016
For the years ended
2017
2016
December 31
December 31 Change
December 31
December 31
Change
$
$
$
$
$
$
37.6
19.0
1.4
0.1
58.1
38.2
2.3
2.6
43.1
5.76
(2.66)
0.16
3.26
$
$
$
$
$
$
70.7
14.9
2.5
0.1
88.2
54.7
3.7
1.4
59.8
(47%) $
28%
(44%)
-
(34%) $
(30%) $
(38%)
86%
(28%) $
182.3
88.9
7.0
1.0
279.2
227.6
11.2
7.3
246.1
3.97
(0.97)
0.10
3.10
45% $
(174%)
60%
5% $
6.01
(2.35)
0.17
3.83
$
$
$
$
$
$
210.1
45.4
8.6
0.7
264.8
236.1
14.2
3.5
253.8
(13%)
96%
(19%)
43%
5%
(4%)
(21%)
109%
(3%)
4.89
(0.82)
0.20
4.27
23%
(187%)
(15%)
(10%)
(1)
(2)
(3)
(4)
Sherritt’s share of financial and operating results for the Ambatovy Joint Venture reflects its interest at 40% to December 10, 2017 and 12% thereafter.
Excludes depletion, depreciation and amortization.
For additional information see the Non-GAAP measures section.
Includes selling costs, discounts and other by-product credits.
The change in loss from operations is detailed below:
22
Sherritt International Corporation
The reference price for nickel was higher (7% and 8%, respectively) for the three months and year ended December 31, 2017
compared to the same periods in the prior year while cobalt prices were more than double in the comparable periods. Realized
prices were also higher but were negatively impacted by a stronger Canadian dollar relative to the U.S. dollar in 2017 compared
to the same periods in the prior year.
At the Ambatovy Joint Venture production of nickel and cobalt was lower in the fourth quarter of 2017 compared to the same
period in the prior year. Beginning on December 11, 2017 Sherritt’s share reflects its 12% interest in the joint venture resulting in
a 570 tonne lower share of production in the fourth quarter related to its change in interest. Ambatovy continues to face
reliability issues on some of the critical equipment which are negatively affecting production.
For the three months ended December 31, 2017, lower production was primarily a result of a failure of an economizer in one of
the acid plants. The economizer could not be repaired during the period and reduced the nickel production capacity by
approximately 50% during November and December.
For the year ended December 31, 2017, in addition to the above, production issues during the year included restricted acid
production due to failures in the acid plant and sulphur melting area, poor reliability of the pressure acid leach (PAL) circuit, an
unplanned shutdown to address hydrogen sulphide emissions from the sulphide precipitation circuits and lower recovery rates in
the second and third quarters related to various unplanned maintenance shutdowns.
Compared to the same periods in the prior year, the percentage decrease in finished cobalt production was lower than that of
finished nickel for the three months and year ended December 31, 2017 reflecting a higher cobalt to nickel ratio in the ore
processed.
Despite the lower sales volumes, net direct cash cost of nickel was relatively unchanged for the three month period and lower
for the year ended December 31, 2017 compared to the same periods in the prior year primarily due to significantly higher
cobalt credits more than offsetting higher operating and maintenance costs.
Spending on sustaining capital was lower for the three months ended December 31, 2017 and higher for the current year-to-
date period compared to the same periods in the prior year reflecting the timing of planned spending. Capital spending is
focused on improving plant reliability and addressing corrosion issues, purchase of mining equipment, mine development works,
tailings management facility construction and process improvement projects.
Although facilities at the Ambatovy Joint Venture in Madagascar were impacted by Tropical Cyclone Ava, a Category 2
hurricane equivalent storm, all personnel were unhurt and safely accounted for. Damage to equipment and the acid production
facilities resulted in a temporary halt in production. Repairs have since been completed and partial production has resumed. A
ramp up in production is expected through the end of Q2 2018.
Sherritt International Corporation
23
Management’s discussion and analysis
OIL AND GAS
Financial review
$ millions, except as otherwise noted
December 31
December 31 Change December 31
December 31 Change
For the three months ended
2017
2016
For the years ended
2017
2016
FINANCIAL HIGHLIGHTS
Revenue
Earnings (loss) from operations
Adjusted EBITDA(1)
CASH FLOW
Cash provided by operations
Free cash flow(1)
Adjusted operating cash flow(1)
PRODUCTION AND SALES(2)
Gross working-interest (GWI) - Cuba
Total net working-interest (NWI)
AVERAGE REFERENCE PRICES (US$ per barrel)
West Texas Intermediate (WTI)
Gulf Coast Fuel Oil No. 6
Brent
AVERAGE-REALIZED PRICES(1) (per NWI)
Cuba ($ per barrel)
Spain ($ per barrel)
Pakistan ($ per boe)(2)
Weighted-average ($ per boe)
UNIT OPERATING COSTS(1)(2)(3) (per GWI)
Cuba
Spain
Pakistan
Weighted-average ($ per boepd)
SPENDING ON CAPITAL
Development, facilities and other
Exploration
$
$
$
$
$
$
$
$
27.7
7.9
10.5
30.6
2.8
11.6
(9%) $
182%
(9%)
(2.3) $
(9.9)
10.2
11.4
3.3
11.5
(120%) $
(400%)
(11%)
127.0
33.6
61.9
30.8
8.9
49.9
10,378
6,101
14,470
8,163
(28%)
(25%)
13,479
7,856
$
$
$
55.19
52.81
61.77
48.82
78.91
10.11
47.48
12.24
44.78
6.95
12.95
49.21
41.12
48.53
39.75
63.27
10.99
38.98
10.95
60.75
4.81
11.68
12% $
28%
27%
50.78
47.02
54.18
23% $
25%
(8%)
22%
12% $
(26%)
44%
11%
43.81
69.89
10.34
42.90
9.78
47.17
6.92
10.52
$
$
$
$
$
108.6
(16.3)
35.6
17%
306%
74%
76.4
50.4
31.6
(60%)
(82%)
58%
15,452
9,483
(13%)
(17%)
43.37
32.13
43.31
29.93
56.33
10.71
29.98
9.75
54.51
7.26
10.58
17%
46%
25%
46%
24%
(3%)
43%
-
(13%)
(5%)
(1%)
(1.4) $
8.6
7.2
$
0.4
7.8
8.2
(450%) $
10%
(12%) $
(1.7) $
21.1
19.4
$
8.9
17.0
25.9
(119%)
24%
(25%)
For additional information see the Non-GAAP measures section.
(1)
(2) Oil production is stated in barrels of oil per day (bopd). Natural gas production is stated in barrels of oil equivalent per day (boepd), which is converted at 6,000 cubic
feet per barrel. Collectively, oil and natural gas production are stated in barrels of oil equivalent per day (boepd).
2016 excludes the impact of impairment of property, plant and equipment
(3)
24
Sherritt International Corporation
$ millions
REVENUE
Cuba
Spain
Pakistan
Processing
For the three months ended
2016
2017
December 31
2017
December 31 Change December 31
For the years ended
2016
December 31 Change
$
$
23.9
2.3
0.4
1.1
27.7
$
$
27.2
1.5
0.5
1.4
30.6
(12%) $
53%
(20%)
(21%)
(9%) $
113.3
8.0
1.7
4.0
127.0
$
$
96.6
5.9
1.5
4.6
108.6
17%
36%
13%
(13%)
17%
DAILY PRODUCTION AND SALES VOLUMES (boepd)(1)(2)
Gross working-interest oil production in Cuba(3)
10,378
14,470
(28%)
13,479
15,452
(13%)
Net working-interest oil production(4)
Cuba (heavy oil)
Cost recovery
Profit oil
Total
Spain (light oil)
Pakistan (natural gas)
1,208
4,127
5,335
312
454
6,101
1,710
5,742
7,452
271
440
8,163
(29%)
(28%)
(28%)
15%
3%
(25%)
1,857
5,230
7,087
313
456
7,856
3,381
5,443
8,824
289
370
9,483
(45%)
(4%)
(20%)
8%
23%
(17%)
(1) Oil production is stated in barrels of oil per day (bopd). Natural gas production is stated in barrels of oil equivalent per day (boepd), which is converted at 6,000 cubic
feet per barrel. Collectively, oil and natural gas production are referred to as boepd.
In Cuba, Oil and Gas delivered all of its gross working-interest oil production to CUPET at the time of production.
(2)
(3) Gross working-interest oil production is allocated between Oil and Gas and CUPET in accordance with production-sharing contracts. The Corporation’s share,
referred to as net working-interest production, includes (i) cost recovery oil (based upon the recoverable capital and operating costs incurred by Oil and Gas under
each production-sharing contract) and (ii) a percentage of profit oil (gross working-interest production remaining after cost recovery oil is allocated to Oil and Gas).
Cost recovery pools for each production-sharing contract include cumulative recoverable costs, subject to certification by CUPET, less cumulative proceeds from
cost recovery oil allocated to Oil and Gas. Cost recovery revenue equals capital and operating costs eligible for recovery under the production-sharing contracts.
(4) Net working-interest production (equivalent to net sales volume) represents the Corporation’s share of gross working-interest production.
The change in earnings (loss) from operations is detailed below:
Sherritt International Corporation
25
Management’s discussion and analysis
Realized prices for oil in the three months and year ended December 31, 2017 were higher than in the same periods in the prior
year reflecting higher market prices partly offset by a stronger Canadian dollar relative to the U.S. dollar in each of the current
year periods.
Gross working-interest oil production in Cuba was lower for the three months and year ended December 31, 2017 compared to
the same periods in the prior year primarily due to the expiry of the Varadero West PSC in November 2017, natural reservoir
declines, and the absence of new development drilling. In addition, Hurricane Irma temporarily curtailed production due to
standard storm preparation and shutdown procedures in the third quarter, impacting production for the current year.
Cost-recovery oil production in Cuba for the three months and year ended December 31, 2017 was lower compared to the same
periods in the prior year as a result of lower cost-recovery spending and the impact of higher oil prices in the current year
periods. Profit oil production, which represents Sherritt’s share of production after cost recovery volumes are deducted from
GWI volumes, was lower in the three months and year ended December 31, 2017 as a result of lower GWI. Both cost-recovery
and profit oil volumes were impacted by reduction in costs and volumes associated with the termination of the Varadero West
PSC.
Unit operating costs were higher in Cuba in the fourth quarter and unchanged in the year ended December 31, 2017 compared
to the same periods in the prior year as lower labour and treatment and transportation costs were offset the impact of lower
production. Costs were positively impacted by a strengthening of the Canadian dollar relative to the U.S. dollar in the current
year periods compared to the same periods in the prior year.
In 2016, the Corporation recognized an impairment of $8.5 million ($6.6 million net of tax) for the write-down of the Puerto
Escondido/Yumuri extension in the Oil and Gas segment to its recoverable amount. There were no impairments recognized in
the current year.
Spending continues to focus on Block 10. Drilling of the second development well began in August. Year-to-date spending
primarily reflects spending related to the first two Block 10 wells. Negative capital spending for development, facilities and other
reflects the reversal of accruals.
In January 2018, the Corporation executed a three-year extension of the Puerto Escondido/Yumuri production sharing contract
to 2021.
On Block 10, the results from the first well provided constructive data to optimize the drilling of the second well, again targeting
the Lower Veloz formation. Drilling on the second well at Block 10 has been temporarily suspended to determine the best option
to reach the target reservoir. Drilling results from the second well are expected in the third quarter of 2018.
26
Sherritt International Corporation
POWER
Financial review
$ millions (331/3% basis), except as otherwise noted
FINANCIAL HIGHLIGHTS
Revenue
Earnings (loss) from operations
Adjusted EBITDA(1)
CASH FLOW
Cash provided by operations
Free cash flow(1)
Adjusted operating cash flow(1)
PRODUCTION AND SALES
Electricity (GWh(2))
AVERAGE-REALIZED PRICES(1)
Electricity (per MWh(2))
UNIT OPERATING COSTS(1)(per MWh)
Base
Non-base(3)
For the three months ended
2017
December 31
2016
December 31
Change
2017
December 31
For the years ended
2016
December 31
Change
$
$
$
$
$
$
12.0
(0.6)
5.5
5.4
5.3
6.4
13.7
(1.3)
7.4
(12%) $
54%
(26%)
(3.3)
(3.7)
7.2
264% $
243%
(11%)
$
$
51.2
5.2
30.1
44.5
43.0
30.9
58.6
(5.3)
29.5
(13%)
198%
2%
8.0
7.0
28.4
456%
514%
9%
201
224
(10%)
848
894
(5%)
54.01
$
56.24
(4%) $
55.15
$
56.10
(2%)
$
20.66
2.77
23.43
22.39
2.34
24.73
(8%) $
18%
(5%)
$
16.48
2.81
19.29
17.70
5.24
22.94
(7%)
(46%)
(16%)
SPENDING ON CAPITAL AND SERVICE CONCESSION ARRANGEMENTS
Sustaining
Service concession arrangements
$
0.1
-
0.1
$
0.4
0.1
0.5
(75%) $
(100%)
(80%) $
1.5
-
1.5
$
$
1.0
4.6
5.6
50%
(100%)
(73%)
For additional information see the Non-GAAP measures section.
(1)
(2) Gigawatt hours (GWh), Megawatt hours (MWh).
(3) Costs incurred at the Boca de Jaruco and Puerto Escondido facilities that otherwise would have been capitalized if these facilities were not accounted for as service
concession arrangements.
Sherritt International Corporation
27
Management’s discussion and analysis
Power revenue is composed of the following:
$ millions (331/3% basis)
Electricity sales
By-products and other
Construction activity(1)
For the three months ended
2017
2016
For the years ended
2017
2016
December 31
December 31
December 31
Change
December 31
$
$
10.9
1.1
-
12.0
$
$
12.6
1.0
0.1
13.7
(13%) $
10%
(100%)
(12%) $
46.8
4.4
-
51.2
$
$
50.2
3.8
4.6
58.6
Change
(7%)
16%
(100%)
(13%)
(1)
Value of construction, enhancement or upgrading activity of the Boca de Jaruco and Puerto Escondido facilities. The contractual arrangements related to the
activities of these facilities are treated as service concession arrangements for accounting purposes. Construction activity revenue is offset equally by construction
activity expenses recorded in cost of goods sold.
The change in earnings (loss) from operations is detailed below:
28
Sherritt International Corporation
Production and sales volumes were lower for the three months and year ended December 31, 2017 compared to the same
periods in the prior year primarily as a result of lower gas supply. Production for the twelve months ended December 31, 2017
was also impacted by Hurricane Irma in September. The change in average-realized price of electricity in the quarter and year-
to-date periods was due to the stronger Canadian dollar relative to the U.S. dollar.
Unit operating cost was lower in the three months and year ended December 31, 2017 compared to the same periods in the
prior year primarily due to reduced maintenance activities at the Boca and Puerto Escondido facilities in the current-year
periods.
Depreciation was lower for the three months and year ended December 31, 2017 compared to the same periods in the prior
year as a result of the extension of the Varadero contract term in December 2016 from 2018 to 2023.
Total capital spending was lower for the three months and year ended December 31, 2017 compared to the same periods in the
prior year primarily due to the absence of service concession spending in 2017.
Ambatovy Joint Venture restructuring
On December 11, 2017, the Corporation and its joint venture partners, Sumitomo Corporation and Korea Resources
Corporation, completed the restructuring of the Ambatovy Joint Venture which resulted in the transfer by Sherritt of a 28%
interest in the Ambatovy Joint Venture. Following the restructuring, The Corporation retains a 12% equity interest and 12% of
all shareholder subordinated loans receivable post restructuring of the Ambatovy Joint Venture. As a result, Sherritt
derecognized approximately $1.4 billion in Ambatovy Joint Venture additional partner loans from its balance sheet. Sherritt
recognized a gain for accounting purposes of $629.0 million which, except for transaction costs of $11.3 million, was non-cash.
The Corporation also:
(cid:120) Resumed funding for its 12% interest retroactive to the end of 2015 resulting in a payment, including accrued interest,
of US$38.2 million ($49.1 million).
(cid:120) Made an additional payment of US$9.6 million ($12.0 million) into an escrow account (restricted cash) to cover
potential future funding requirements of the Ambatovy Joint Venture.
(cid:120) Paid transaction and other closing costs, including financial and legal advisory fees, applicable taxes and corporate
restructuring costs incurring total fees of $11.3 million, $0.9 million of which was accrued and will be paid in 2018.
(cid:120) Waived 50% of accrued and unpaid operator fees outstanding to the Corporation up to and including February 16,
2017 of US$8.1 million ($10.5 million).
(cid:120) Agreed the outstanding partner loans can be repaid in cash at any time through to maturity in August 2023. At maturity,
Sherritt can: elect to (i) repay the loans in cash, (ii) repay the loans in shares or a combination of cash and shares at
105% of the amount then due, or (iii) repay in 10 equal semi-annual principal installments (plus interest) commencing
in December 2024, at an interest rate of LIBOR +5% applied from the original August 2023 maturity date.
(cid:120) Committed to remaining as Operator until at least 2024; however, as a result of the reduction in its ownership interest,
Sherritt’s ability to direct local decision-making at Ambatovy has diminished.
(cid:120) Regained voting rights and certain other rights that were suspended when it ceased funding.
For more information, see note 6 of the audited consolidated financial statements for the year ended December 31, 2017.
Sherritt International Corporation
29
Management’s discussion and analysis
Liquidity and capital resources
Total available liquidity at December 31, 2017 was $211.8 million which is composed of available cash, cash equivalents, short
term investments and $8.8 million available on the syndicated revolving-term credit facility
CASH AND SHORT-TERM INVESTMENTS
The Corporation’s cash balances are deposited with major financial institutions rated A- or higher by Standard & Poor’s, except
for institutions located in Madagascar and Cuba that are not rated.
Cash equivalents
and
short-term
Cash
investments
Total
$
$
76.1 $
46.0
5.7
127.8 $
75.2 $
-
-
75.2 $
151.3
46.0
5.7
203.0
19.7
6.8
26.5
$ millions, as at December 31, 2017
Canada
Cuba
Other
Sherritt's share of cash in the Moa Joint Venture and Ambatovy Joint Venture, not included in the above balances:
Moa Joint Venture
Ambatovy Joint Venture
$
$
30
Sherritt International Corporation
SOURCES AND USES OF CASH
The Corporation’s cash flows from operating, investing and financing activities are summarized in the following table as
derived from Sherritt’s consolidated statements of cash flow.
$ millions
Cash provided (used) by operating activities
Oil and Gas operating cash flow
Power operating cash flow
(excluding interest received on Energas CSA loan)
Fort Site operating cash flow
Interest received on the Moa Joint Venture loans
Interest received on Energas CSA loan
Interest paid on debentures
Ambatovy restructuring costs
Corporate, Metals Other, and other operating cash flow
Cash provided by continuing operations
Cash used by discontinued operations(1)
Cash provided (used) by investing and financing activities
Property, plant, equipment and intangible expenditures
Receipts of advances, loans receivable and other
financial assets
Increase in advances, loans receivable and other financial
assets
Repayment of other loans and borrowings
Loans to the Ambatovy Joint Venture
Increase in restricted cash
Issuance of common shares
Fees paid on debenture extension
Other
Cash, cash equivalents and short-term investments:
Beginning of the period
End of the period
$
$
$
$
For the three months ended
For the years ended
2017
December 31
2016
2017
December 31 Change December 31
2016
December 31 Change
$
(2.3) $
11.4
(120%) $
30.8
$
76.4
(60%)
5.4
3.9
0.6
-
(18.8)
(10.4)
(12.3)
(33.9)
0.8
(33.1) $
(3.3)
(6.0)
0.6
-
(19.0)
-
(6.3)
(22.6)
(0.6)
(23.2)
264%
165%
-
-
1%
-
(95%)
(50%)
233%
(43%) $
44.5
11.0
2.7
-
(57.2)
(10.4)
(31.0)
(9.6)
(5.2)
(14.8) $
985%
4.1
414%
(3.5)
-
2.7
(100%)
3.9
4%
(59.8)
-
-
(40%)
(22.2)
(700%)
1.6
(7.4)
30%
(5.8) (155%)
(10.4) $
(10.8)
4% $
(30.6) $
(40.2)
24%
19.9
(10.5)
(8.0)
(38.6)
(12.0)
4.9
-
0.5
(54.2) $
(87.3)
-
-
31.7
1.3 2338%
-
(2.0)
-
-
0.2
(0.2)
0.4
(12.4)
(35.6)
-
(300%)
-
-
2350%
100%
25%
(337%) $
(145%)
(10.5)
(35.0)
(38.6)
(12.0)
5.6
-
(1.4)
(90.8) $
(105.6)
-
(65.7)
-
-
-
47%
-
-
0.2 2700%
100%
(75%)
24%
16%
(14.8)
(0.8)
(120.0)
(125.8)
290.3
203.0
$
344.2
308.6
(16%)
(34%) $
308.6
203.0
$
434.4
308.6
(29%)
(34%)
(1) Cash used by discontinued operations relates to payments made in respect of a provision on Obed tailing pond breach retained by the Corporation following the
sale of its Coal operations in 2014.
The following significant items affected the sources and uses of cash:
Cash from continuing operations was lower in three months and year ended December 31, 2017 compared to the prior-year
periods, respectively, primarily as a result of the following:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
cash from operating activities at Oil and Gas was lower in the current year periods primarily due to lower receipts on
Cuban receivables in both current year periods, partly offset by the impact of higher oil prices in the current periods;
cash from operating activities at Power was higher in the current year period primarily due to higher receipts on Cuban
receivables and other working capital changes in the current year, however, total overdue receivables increased as no
interest or principal was received on the Energas conditional sales agreement (CSA) in the year. A total of US$39.4
million of Energas receivables was received in 2017 compared to $32.4 million in the prior year;
the change in cash from operating activities at Fort Site was primarily due to the timing of collections and realization of
fertilizer sales;
the payment of Ambatovy restructuring costs; and
cash used by Corporate, Metals Other and other operating activities were lower primarily due to timing of working
capital payments.
Sherritt International Corporation
31
Management’s discussion and analysis
Included in investing and financing activities:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
expenditures on property, plant and equipment and intangibles primarily related to Block 10. All other spending was
limited to sustaining activities;
the Corporation made payments of $61.1 million related to the Ambatovy restructuring;
the Corporation repaid $8.0 million on its syndicated revolving-term credit facility in the fourth quarter; total repayments
in the current year were $35.0 million;
the Corporation received $19.9 million from the Moa Joint Venture as repayment on its working capital facility in the
fourth quarter of 2017 for a total of $31.7 million in the current year; and
The Corporation received $4.9 million and $5.6 million in the three months and year ended December 31, 2017,
respectively, on the exercise of warrants issued as part of its 2016 debenture extension (Common Share Warrants).
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
The following table provides a summary of consolidated significant liquidity and capital commitments based on existing
commitments and debt obligations (including accrued interest):
Canadian $ millions, as at December 31, 2017
Total
Falling
due within
1 year
Falling
due
between
1-2 years
Falling
due
between
2-3 years
Falling
due
between
3-4 years
Falling
due
between
4-5 years
Falling
due in
more than
5 years
Trade accounts payable and
accrued liabilities
Income taxes payable
Senior unsecured debentures
Ambatovy Joint Venture Partner loans(1)
Syndicated revolving-term credit facility
Provisions
Operating leases
Capital commitments
Other
Total
$
182.3 $
11.8
182.3 $
11.8
- $
-
- $
-
- $
-
- $
-
1,060.2
153.3
8.0
158.5
14.1
22.1
0.6
1,610.9 $
$
56.0
-
8.0
20.8
3.0
22.1
-
304.0 $
56.0
-
-
1.0
3.0
-
56.0
10.2
-
-
3.0
-
276.0
-
-
-
1.0
-
38.4
-
-
0.4
1.0
-
-
60.0 $
0.2
69.4 $
0.2
277.2 $
0.2
40.0 $
-
-
577.8
143.1
-
136.3
3.1
-
-
860.3
(1) Ambatovy Joint Venture partner loans are loans provided by the Ambatovy Joint Venture partners to finance Sherritt’s portion of the funding requirements of the Joint
Venture, bearing interest of LIBOR plus a margin of 1.125%. The partner loans are to be repaid from the Corporation’s share of cash distributions from the Ambatovy
Joint Venture. The amounts above are based on management’s best estimate of future cash flows including estimating assumptions such as commodity prices,
production levels, cash costs of production, capital and reclamation costs. The maturity analysis table includes an estimate of interest repayments.
Ambatovy Joint Venture Partner Loans
In 2008, the Ambatovy Joint Venture partners finalized agreements to provide Sherritt with loans of up to US$236.0 million to
be used to fund Sherritt’s contributions for the project. The loans are provided at an interest rate based on a six-month LIBOR
plus 1.125% with a 15-year term.
The partner loans continue to be secured by Sherritt’s 12% interest following the Ambatovy Joint Venture restructuring on
December 11, 2017. The partner loans can be repaid in cash at any time through to maturity in August 2023. At maturity,
Sherritt can elect to: (i) repay the loans in cash, (ii) repay the loans in shares or a combination of cash and shares at 105% of
the amount then due, or (iii) repay in 10 equal semi-annual principal installments (plus interest) commencing in December 2024,
at an interest rate of LIBOR +5% applied from the original August 2023 maturity date.
The principal amount outstanding under this facility at December 31, 2017 was $127.8 million, including accrued interest
(December 31, 2016 - $133.3 million). This amount is net of financing costs of $0.4 million at December 31, 2017 (December
31, 2016 - $0.5 million). The Corporation’s ability to draw additional amounts on the facility expired on August 22, 2014.
Syndicated revolving-term credit facility
In January 2018, the maturity of the syndicated revolving-term credit facility was extended to January 30, 2019 and the
maximum credit available was increased from $63.6 million to $70.0 million. The total available draw is based on eligible
receivables and inventory. The interest rates continue to be prime plus 3.50% or bankers’ acceptance plus 4.50%.
32
Sherritt International Corporation
The facility is subject to the following financial covenants and restrictions:
(cid:120) EBITDA, as defined in the agreement, of not less than $100 million;
(cid:120) EBITDA-to-interest expense covenant of not less than 1.75:1;
(cid:120)
Limits on capital expenditures and funding of the Ambatovy Joint Venture and Moa Joint Venture; and
(cid:120) Maintenance of a minimum balance of cash and cash equivalents, short-term investments and undrawn credit held
by the Corporation’s wholly-owned subsidiaries greater than the facility size multiplied by two. The facility size
multiplied by two as at December 31, 2017 ($66.8 million) is $133.5 million.
The principal amount outstanding under this facility at December 31, 2017 was $8.0 million (December 31, 2016 - $43.0
million).
OTHER COMMITMENTS
The following commitments are not reflected in the table above:
Moa Joint Venture
As a result of the Corporation’s 50% interest in the Moa Joint Venture, its proportionate share of significant commitments of the
joint venture includes the following:
(cid:120)
(cid:120)
Environmental rehabilitation commitments of $87.3 million, with no significant payments due in the next five years;
Advances and loans payable of $208.9 million. Included within advances and loans payable is the loan related to the
construction of the acid plant of $16.9 million.
Ambatovy Joint Venture
As a result of the Corporation’s 12% interest in the Ambatovy Joint Venture, its proportionate share of significant commitments
of the Joint Venture includes the following:
(cid:120)
Environmental rehabilitation commitments of $49.2 million, with no significant payments due in the next five years;
(cid:120) Other contractual commitments of $9.2 million;
(cid:120)
(cid:120)
Ambatovy revolving credit facility of $7.7 million. The facility bears interest rates between 10.00% and 10.85% and
matures on July 31, 2018; and
The Ambatovy Joint Venture senior debt financing of US$190.5 million ($238.9 million) which is non-recourse to the
Joint Venture partners. Interest is payable based on LIBOR plus a weighted-average margin of 2.5%. Deferred
principal will be subject to an additional 2% accrued interest calculated from the date of each deferral. On an
undiscounted basis, principal and interest repayments are $290.8 billion.
Covenants
Certain of the Corporation’s credit facilities, loans and debentures have financial tests and other covenants with which the
Corporation and its affiliates must comply. Non-compliance with such covenants could result in accelerated repayment of the
related debt or credit facilities and classification of the amounts to current. The Corporation monitors its covenants on an
ongoing basis and reports on its compliance with the covenants to its lenders on a quarterly basis.
As at December 31, 2017, there are no events of default on the Corporation’s borrowings or debentures.
Sherritt International Corporation
33
Management’s discussion and analysis
CAPITAL STRUCTURE
$ millions, except as otherwise noted
Non-recourse loans and borrowings
Other loans and borrowings
Other financial liabilities
Total debt
Shareholders' equity
Total debt-to-capital (1)
Common shares outstanding
Stock options outstanding
Common Share Warrants outstanding
2017
December 31
2016
December 31
$
$
- $
824.1
24.2
848.3 $
1,056.3
45%
1,367.5
860.7
168.0
2,396.2
1,097.9
69%
301,758,665
10,435,061
11,244,176
294,174,923
9,598,416
18,800,918
Change
(100%)
(4%)
(86%)
(65%)
(4%)
(35%)
3%
9%
(40%)
(1) Calculated as total debt divided by the sum of total debt and shareholders’ equity.
Common Share Warrants
Common Share Warrants were issued as part of the debenture extension in 2016 when 19.1 million warrants with a fair value
of $0.43 were granted to the Noteholders that elected to accept warrants. Warrants are exercisable at any time at an exercise
price of $0.74 per share and had an original term of 5 years. They are not listed on any exchange. During 2017, 7.6 million
warrants were exercised for total proceeds of $5.6 million.
Issue of Units
In January 2018, the Corporation completed an equity offering and issued units consisting of 94.5 million common shares and
47.2 million cobalt-linked warrants at $1.40 per unit, for gross proceeds of approximately $132.0 million, less transaction costs
of approximately $8 million.
The cobalt-linked warrants have an exercise price of $1.95. Each cobalt-linked warrant is exercisable to acquire between 1.00
and 1.25 common shares, determined based on a prescribed cobalt reference price.
COMMON SHARES
As at February 12, 2018, the Corporation had 396,880,293 common shares outstanding. An additional 10,435,061 common
shares are issuable upon exercise of outstanding stock options granted to employees and directors pursuant to the
Corporation’s stock option plan, 10,586,947 common shares are issuable on the exercise of Common Share Warrants and a
maximum of 47,232,200 on the issue of cobalt-linked warrants.
34
Sherritt International Corporation
Managing risk
Sherritt manages a number of risks in each of its businesses in order to achieve an acceptable level of risk without appreciably
hindering its ability to maximize returns. Management has procedures to identify and manage significant operational and
financial risks.
Since the filing of the Corporation’s 2016 AIF, certain risks have changed for the Corporation:
(cid:120) Commodity Risk
(cid:120) Securities Market Fluctuations and Price Volatility
(cid:120) Liquidity and Access to Capital
(cid:120) Ambatovy Liquidity and Funding Risks
(cid:120) Restrictions in Debt Instruments, Debt Covenants and Mandatory Repayments
(cid:120) Depletion of Reserves
(cid:120) Risks Related to Sherritt’s Operating in Cuba
(cid:120) Risks Related to U.S. Government Policy Towards Cuba
(cid:120)
(cid:120)
The U.S. Embargo
The Helms-Burton Act
(cid:120) Risks Related to Sherritt’s Operations in Madagascar
(cid:120) Climate Change/Greenhouse Gas Emissions
(cid:120) Risks to Information Technologies Systems and Cybersecurity
COMMODITY RISK
Sherritt’s principal businesses include the sale of several commodities. Revenues, earnings and cash flows from the sale of
nickel, cobalt, oil and gas are sensitive to changes in market prices, over which the Corporation has no control. The
Corporation’s earnings and financial condition depend largely upon the market prices for nickel, cobalt, oil, gas and other
commodities, which are volatile. Significant reductions in commodity prices or sustained low commodity prices could have a
material adverse effect on the Corporation’s business, results of operations and financial performance. The prices for
commodities produced by the Corporation can be affected by numerous factors beyond the Corporation’s control, including
expectations for inflation, speculative activities, relative exchange rates to the U.S. dollar, production activities of mining and oil
and gas companies, global and regional supply and demand, supply and market prices for substitute commodities, political and
economic conditions and production costs in major producing regions. The prices for these commodities have fluctuated widely
in recent years. Forecasts of commodity prices can prove to be inaccurate as factors such as supply and demand fundamentals
(such as the potential growth in the electric vehicle market), speculative market participation by financial entities, and structural
and economic changes may not behave as predicted.
Sherritt’s current businesses are dependent upon commodity inputs such as natural gas, sulphur, sulphuric acid, coal,
electricity, fuel oil, diesel, limestone and related products, and materials that are subject to prevailing commodity prices. Costs
and earnings from the use of these products are sensitive to changes in market prices over which Sherritt has no control.
SECURITIES MARKET FLUCTUATIONS AND PRICE VOLATILITY
The securities markets in Canada and elsewhere can experience significant price and volume volatility which can affect the
prices of Sherritt’s securities. The prices of Sherritt’s securities have been, and may continue to be, affected by this market
volatility, as well as varying in response to a number of other events and factors. These factors may include, but are not
limited to: the price of commodities; Sherritt’s operating performance; the public’s reaction to the Corporation’s press
releases, other public announcements and the Corporation’s filings with the various securities regulatory authorities; and
changes in earnings estimates or recommendations by research analysts who trade the Common Shares or the shares of
other companies in the resource sector.
Securities of the Corporation listed on these markets or traded over the counter can experience wide fluctuations which are
not necessarily related to the operating performance, underlying asset values or prospects of the Corporation. Such
securities can be affected by a number of factors outside the Corporation’s control and which affect the price and value of
securities more generally, these factors may include, but are not limited to: changes in interest rates, tax policy, and economic
growth rates. As such, the Corporation’s securities have been, and could continue to be, subject to significant volatility in
trading volumes and market prices. There can be no assurance that the market price of the Corporation’s securities will
accurately reflect the value of the Corporation’s underlying assets and future business prospects at any time (including the
value of its interests in commodities and their current and forecasted market prices).
Sherritt International Corporation
35
Management’s discussion and analysis
LIQUIDITY AND ACCESS TO CAPITAL
Sherritt’s ability to fund its capital and operating expenses and to meet its financial obligations depends on being able to
generate sufficient cash flow from its operations and its ability to obtain additional financing and/or refinance its existing credit
facilities and loans on terms that are acceptable to the Corporation. As noted in the risk factor entitled “Commodity Risk”
above, Sherritt’s earnings and financial condition are highly dependent upon the market prices for nickel, cobalt, oil, gas and
other commodities, which are highly volatile in nature. Should a negative trend in commodity prices prevail, Sherritt may find
itself unable to access sufficient capital to fund its operations in the manner required for the long term viability of the business
and/or remain in compliance with its debt covenants. Accordingly, there can be no assurance that Sherritt will have sufficient
funds to repay its Notes at maturity, nor can there be any assurance that Sherritt will be able to refinance its Notes or raise
funds in the equity capital markets on terms and conditions that would be acceptable. Failure to adequately fund its
operations or meet its financial obligations could have a material adverse effect on Sherritt’s business, results of operations
and financial performance.
Sherritt’s current financing includes, among other things, the Syndicated Facility. The total available draw under the
Syndicated Facility is based on eligible receivables and inventory. If prices for nickel and cobalt decline, this could result in a
material reduction in the amount of funding available under the Syndicated Facility. Certain debt covenants under the
Syndicated Facility are based on ratios involving the Corporation’s EBITDA and/or interest expense and other covenants
require the maintenance of minimum cash balances. The Corporation’s ability to satisfy these covenants could also be
negatively affected by decreases in commodity prices. Although the Corporation is currently engaged in the annual renewal
process for the Syndicated Facility, which currently matures on January 31, 2018, there can be no assurance that this
Syndicated Facility can be extended or renewed at any time, or otherwise replaced with a different credit facility on similar
terms.
Agencies of the Cuban government have significant payment obligations to the Corporation in connection with the
Corporation’s Oil and Gas, Metals and Power operations in Cuba. This exposure to the Cuban government and its potential
inability to timely or fully pay such amounts could have a material adverse effect on the Corporation’s financial condition and
results of operations.
AMBATOVY LIQUIDITY AND FUNDING RISKS
The Ambatovy Joint Venture borrowed US$2.1 billion (US$1.6 billion as at December 31, 2017) under the financing
agreements relating to the Ambatovy Joint Venture (the “Ambatovy Financing Agreements”) and all of the Ambatovy Joint
Venture’s assets and the interests of its shareholders in the Ambatovy Joint Venture have been pledged as security for the
financing. If the Ambatovy Joint Venture is unable to make semi-annual interest and principal repayments in 2019, the senior
lenders of the Ambatovy Joint Venture (the “Ambatovy Senior Lenders”) could realize upon their security and seize all of the
Ambatovy Joint Venture’s assets and all of Sherritt’s interest therein. This would have a material adverse effect on Sherritt’s
investment in the Ambatovy Joint Venture, and on the Corporation’s business, results of operations and financial
performance.
Due to the current nickel pricing environment, and current production and pricing forecasts, the Ambatovy Joint Venture may
require ongoing financing in order to support debt service interest payments and continued operations through 2018 and
thereafter, as well as debt service principal repayments that are deferred through 2018 and recommence in 2019. The
Ambatovy Joint Venture secured funding commitments from KORES and Sumitomo (and the Corporation has funded its pro
rata share of such commitments into an escrow account) which were expected to cover debt service requirements and
continued operations through 2018. However, such funding commitments may not be sufficient to do so, and may not be
renewed in future. Although the Ambatovy Joint Venture has successfully secured sufficient financing from its shareholders
and third party lenders in the past, there can be no assurance that it will be successful in securing additional financing or
creditor concessions when required or on favourable terms. If the Ambatovy Joint Venture is unable to continue operations,
this would have a material adverse effect on Sherritt’s investment in the Ambatovy Joint Venture, and could have a material
adverse effect on the Corporation’s business, results of operations and financial performance.
If the escrow account has been fully drawn and the Ambatovy Joint Venture makes a cash call approved by the majority
shareholders, absent a waiver from the other shareholders, Sherritt would become a defaulting shareholder should it fail to
fund its pro rata share of such cash call. Such default could result in, among other things, the following: (a) Sherritt would not
receive any Ambatovy Joint Venture distributions; (b) Sherritt would lose its voting rights at the Ambatovy Joint Venture’s
Executive Committee, its corporate boards of directors and its shareholder meetings; (c) Sherritt would lose its right to attend
and be represented at meetings of the Ambatovy Joint Venture’s Executive Committee and its corporate boards of directors;
(d) Sherritt will be required to offer its 12% shareholder interest pro rata to the other Ambatovy Partners who have the right to
36
Sherritt International Corporation
purchase at the lower of fair market value and book value; (e) the other Ambatovy Partners can elect to cure Sherritt’s funding
deficit by funding on Sherritt’s behalf, in which case such funding is deemed to be a loan to Sherritt, payable on demand,
which accrues interest at LIBOR +3% and is limited recourse to Sherritt’s interest in the Ambatovy Joint Venture and
repayable from future distributions; (f) the other Ambatovy Partners can elect to dilute Sherritt’s interest by converting such
deemed loans or by funding on Sherritt’s behalf and electing dilution of Sherritt’s interest, without any deemed loan; and (g)
the other Ambatovy Partners can elect to fund additional subordinated debt to the Ambatovy Joint Venture, which accrues
interest at a preferential rate and is repaid in priority to all other shareholder distributions (Preferred Debt). In the event that
any of the other Ambatovy Partners elect to purchase the Corporation’s interest pursuant to paragraph (d), there can be no
assurance that the Corporation will receive any proceeds once such purchase price is offset against amounts outstanding
under the Partner Loans. Preferred Debt lenders under paragraph (g) can also elect to exercise an enhanced dilution remedy
entitling them to an equivalent amount of subordinated shareholder loans (and to the extent such loans are not available,
equity) held by the defaulting shareholder for nil consideration. This enhanced dilution mechanism may not alter the defaulting
shareholders equity interest, but could have a significant adverse effect on other shareholders future distributions from the
Ambatovy Joint Venture and its effective economic interest therein.
Due to the Ambatovy Joint Venture’s current and projected funding requirements, in a persistently low nickel price
environment there can be no certainty that Sherritt will receive any distributions from the Ambatovy Joint Venture.
Accordingly, Sherritt’s future funding to the Ambatovy Joint Venture may not be commercially or economically justified.
Whether as a result of Sherritt not funding future cash calls or otherwise, Sherritt’s interest in the Ambatovy Joint Venture and
entitlements to future distributions could be at risk if Sherritt becomes a defaulting shareholder and there is no assurance that
it will be able to retain all or any portion of its 12% interest or entitlement to future distributions, which could have a materially
adverse effect on the Corporation’s business, results of operations, and financial performance.
RESTRICTIONS IN DEBT INSTRUMENTS, DEBT COVENANTS AND MANDATORY REPAYMENTS
Sherritt is a party to certain agreements in connection with the Syndicated Facility, as well as the trust indenture governing
the Notes (collectively, the Indenture). Sherritt is also a party to various agreements with the Ambatovy Senior Lenders
relating to the US$2.1 billion (US$1.6 billion as at December 31, 2017) Ambatovy Financing Agreements. In addition, Sherritt
has received loans from the other Ambatovy Partners (and certain other parties), that were used to fund part of Sherritt’s
contributions to the Ambatovy Joint Venture Partner Loans. These agreements and loans contain covenants which could
have the effect of restricting Sherritt’s ability to react to changes in Sherritt’s business or to local and global economic
conditions. In addition, Sherritt’s ability to comply with these covenants and other terms of its indebtedness may be affected
by changes in the Corporation’s business, local or global economic conditions or other events beyond the Corporation’s
control. Failure by Sherritt to comply with any of the covenants contained in the Indenture, the Syndicated Facility, the
Ambatovy Financing Agreements, the Partner Loans or any future debt instruments or credit agreements, could materially
adversely affect the Corporation’s business, results of operations, and financial performance.
The Corporation provided certain completion guarantees to the Ambatovy Senior Lenders under the Ambatovy Financing
Agreements. These guarantees became non-recourse to the Corporation once the Ambatovy Joint Venture achieved financial
completion in September 2015. As a result, the Ambatovy Senior Lenders’ recourse under the Ambatovy Joint Venture
Financing Agreements, including for repayment of semi-annual principal and interest, is limited to the Ambatovy Joint Venture
and Sherritt’s and the other Ambatovy Partners’ interests therein.
The Partner Loans ($127.8 million as at December, 2017, including accrued interest) are generally repayable by Sherritt at
maturity in August 2023 and are secured by Sherritt’s interest in the Ambatovy Joint Venture, which is subordinate to the
security interests therein held by the Ambatovy Senior Lenders. The Partner Loans can be repaid in cash at any time through
to maturity. At maturity, Sherritt can elect to: (i) repay the loans in cash, (ii) repay the loans in shares or a combination of cash
and shares at 105% of the amount then due, or (iii) repay in 10 equal semi-annual principal installments (plus interest)
commencing in December 2024, at an interest rate of LIBOR +5% applied from the original August 2023 maturity date.
If Sherritt becomes a defaulting shareholder under the terms of the Ambatovy Joint Venture Shareholders Agreement (the
“Shareholders Agreement”), for example, by failing to fund a cash call, a cross default to the Partner Loans would be
triggered and the lenders could, among other things, elect to accelerate repayment. However, due to the limited recourse
nature of the loans, such acceleration will not require Sherritt to repay the loans until maturity and the lenders’ recourse is
effectively limited to their subordinated security interest over Sherritt’s interest in, and future distributions from, the Ambatovy
Joint Venture until that time. Sherritt is also obligated to repay any outstanding amount of the Partner Loans if the Ambatovy
Senior Lenders exercise remedies as a result of a default by the Ambatovy Joint Venture under the Ambatovy Financing
Agreements. In such a circumstance, Sherritt has the option to repay in cash or, provided its Common Shares are trading on
the TSX at the time of payment, in Common Shares. Unless the lenders otherwise agree, the Partner Loans also require
Sherritt International Corporation
37
Management’s discussion and analysis
repayment in cash within five business days in the event of the sale of all or substantially all of the assets of Sherritt, the
acquisition of more than 50% of the Common Shares or a corporate restructuring of Sherritt. Repayment of the Partner Loans
in cash could have significant consequences for Sherritt’s liquidity and could materially adversely affect the Corporation’s
business, results of operations and financial performance. In those cases where it has the option, if Sherritt elects to repay all
or any portion of the Partner Loans in Common Shares this could result in significant dilution to existing shareholders
depending on the prevailing Share price at the time of payment.
If Sherritt becomes a defaulting shareholder under the terms of the Shareholders Agreement, a cross default to the Partner
Loans would be triggered, which in turn could trigger a cross default under the Syndicated Facility.
If a cross default to the Partner Loans is triggered, and the lenders under those loans were to accelerate repayment, although
generally such acceleration would not require repayment by Sherritt until after maturity it could in turn trigger a cross default
under the Indenture. Such a cross default under the Indenture could result in acceleration of the Notes unless the default is
cured by repaying the Initial Partners Loans or is waived in accordance with the Indenture. Sherritt may not have sufficient
cash and short term investments to repay all or any portion of the amounts outstanding under any or all series of outstanding
Notes (in the aggregate, $720 million principal amount as at December 31, 2017) and there can be no assurance that Sherritt
could refinance such amounts. Acceleration of the Partner Loans and/or the Notes would, in turn, trigger an event of default
under the Syndicated Facility. Accordingly, acceleration of any one or more series of debentures could materially adversely
affect the Corporation’s business, results of operations, and financial performance.
DEPLETION OF RESERVES
Subject to any future expansion or other development, production from existing operations at the Corporation’s mines and
wells will typically decline over the life of the mine or well. As a result, Sherritt’s ability to maintain or increase its current
production of nickel, cobalt and oil and gas and generate revenues therefrom will depend significantly upon the Corporation’s
ability to discover or acquire and to successfully bring new mines and wells into production and to expand mineral and oil and
gas reserves at existing or new operations. Exploration and development of mineral and oil and gas properties involves
significant financial risk. Very few exploratory properties are developed into operating mines or wells. Whether a deposit will
be commercially viable depends on a number of factors, including: the particular attributes of the deposit, such as size, grade
and proximity to infrastructure; commodity prices, which are highly cyclical; political and social stability; and government
regulation, including regulations relating to prices, taxes, royalties, land tenure, land use, importing and exporting of natural
resources and supplies and environmental protection. Even if the Corporation identifies and acquires an economically viable
deposit, several years may elapse from the initial stages of development. Significant expenses could be incurred to locate
and establish reserves, to develop the required extractive processes and to construct mining facilities, drill wells and construct
oil and gas processing facilities.
In 2017, the Corporation’s share of oil and gas production from its original PSCs in Cuba provided significant operating cash
flow to the Corporation. In November, 2017 the PSC for Block II (Varadero West) reverted to the Cuban Government. The
other original PSC at Puerto Escondido-Yumuri is scheduled to revert to the Cuban Government in March, 2018; however the
Corporation is negotiating the terms and conditions of an extension on this PSC based on the approval received from the
Executive Committee of the Council of Ministers of the Republic of Cuba. Nevertheless, there can be no assurance that this
extension will be consummated, nor that any such extension will be on the same terms as the original PSC. Accordingly, any
future oil and gas production will depend very substantially on new reserves in Blocks 10, 8A and 6A and/or the ability to
obtain and develop additional PSCs. Sherritt cannot provide assurance that its exploration or development efforts will result in
any new commercial operations or yield new mineral or oil and gas reserves to replace or increase current reserves. Failure
to obtain significant oil production on Blocks 10, 8A and 6A to replace Sherritt’s currently declining and expiring production
volumes could have a material adverse effect on Sherritt’s financial condition and operations.
RISKS RELATED TO SHERRITT’S OPERATING IN CUBA
The Corporation directly or indirectly holds significant interests in mining, metals processing, exploration for and production of
crude oil and the generation of electricity in Cuba. The operations of the Cuban businesses may be affected by economic
pressures on Cuba. Risks include, but are not limited to, fluctuations in official or convertible currency exchange rates and
high rates of inflation. Any changes in regulations or shifts in political attitudes are beyond the control of Sherritt and may
adversely affect its business. There can be no assurance as to the impact of changes in Cuban leadership on the Cuban
Government or policy in the short, medium or long term. Operations may be affected in varying degrees by such factors as
Cuban government regulations with respect to currency conversion, production, project approval and execution, price
controls, import and export controls, income taxes or reinvestment credits, expropriation of property, environmental
legislation, land use, water use and mine and plant safety.
38
Sherritt International Corporation
Operations in Cuba may also be affected by the fact that, as a Caribbean nation, Cuba regularly experiences hurricanes and
tropical storms of varying intensities. The risk of damage is dependent upon such factors as intensity, footprint, wind direction
and the amount of precipitation associated with the storm and tidal surges. While the Corporation, its joint venture partners
and agencies of the Government of Cuba maintain comprehensive disaster plans and the Corporation’s Cuban facilities have
been constructed to the extent reasonably possible to minimize damage, there can be no guarantee against severe property
damage and disruptions to operations.
The Cuban government has allowed, for more than two decades, foreign entities to repatriate profits out of Cuba. However,
there can be no assurance that allowing foreign investment and profit repatriation will continue or that a change in economic
conditions will not result in a change in the policies of the Cuban government or the imposition of more stringent foreign
investment or foreign exchange restrictions. Such changes are beyond the control of Sherritt and the effect of any such
changes cannot be accurately predicted.
All sales of Sherritt’s oil production in Cuba are made to an agency of the Government of Cuba, as are all electricity sales
made by Energas. The access of the Cuban government to foreign exchange is severely limited. As a consequence, from
time to time, the Cuban agencies have had difficulty in discharging their foreign currency obligations. During such times,
Sherritt has worked with these agencies in order to ensure that Sherritt’s operations continue to generate positive cash flow to
the extent possible. However, there is a risk, beyond the control of Sherritt, that receivables and contractual performance due
from Cuban entities will not be paid or performed in a timely manner, or at all. If any of these agencies or the Cuban
government are unable or unwilling to conduct business with Sherritt, or satisfy their obligations to Sherritt, Sherritt could be
forced to close some or all of its Cuban businesses, which could have a material adverse effect upon Sherritt’s results of
operations and financial performance.
Sherritt is entitled to the benefit of certain assurances received from the Government of Cuba and certain agencies of the
Government of Cuba that protect it in many circumstances from adverse changes in law, although such changes remain
beyond the control of the Corporation and the effect of any such changes cannot be accurately predicted.
RISKS RELATED TO U.S. GOVERNMENT POLICY TOWARDS CUBA
The United States has maintained a general embargo against Cuba since the early 1960s, and the enactment in 1996 of the
Cuban Liberty and Democratic Solidarity (Libertad) Act (commonly known as the “Helms-Burton Act”) extended the reach of
the U.S. embargo. In December 2014, President Obama announced his intention to normalize diplomatic relations between
the United States and Cuba and to reduce certain restrictions on travel, commercial and personal transactions between
Americans and Cubans. Bilateral discussions between the U.S. and Cuba continued to advance for the remainder of the
Obama administration. However, President Trump has since reversed many of these changes.
The U.S. Embargo
In its current form, apart from the Helms-Burton Act, the embargo applies to most transactions involving Cuba or Cuban
enterprises, and it bars all “U.S. Persons” from participating in such transactions unless such persons have general or specific
licenses from the U.S. Department of the Treasury (U.S. Treasury) authorizing their participation in the transactions. U.S.
Persons include U.S. citizens, U.S. residents, individuals or enterprises located in the United States, enterprises organized
under U.S. laws and enterprises owned or controlled by any of the foregoing. Subsidiaries of U.S. enterprises are subject to
the embargo’s prohibitions. The embargo also extends to entities deemed to be owned or controlled by Cuba (specially
designated nationals or SDNs). The three entities constituting the Moa Joint Venture (as such term is defined in the 2016 AIF)
in which Sherritt holds an indirect 50% interest have been deemed SDNs by U.S. Treasury. Sherritt is not an SDN. The U.S.
embargo generally prohibits U.S. Persons from engaging in transactions involving the Cuban related businesses of the
Corporation. Furthermore, despite the relaxation of certain restrictions over the past two years, generally U.S. originated
technology, U.S. originated goods, and many goods produced from U.S. originated components or with U.S. originated
technology cannot under U.S. law be transferred to Cuba or used in the Corporation’s operations in Cuba. In 1992, Canada
issued an order pursuant to the Foreign Extraterritorial Measures Act (Canada) to block the application of the U.S. embargo
under Canadian law to Canadian subsidiaries of U.S. enterprises. However, the general embargo limits Sherritt’s access to
U.S. capital, financing sources, customers, and suppliers.
The Helms-Burton Act
Separately from the general embargo, the Helms-Burton Act authorizes sanctions on non U.S. individuals or entities that
“traffic” in Cuban property that was confiscated from U.S. nationals or from persons who have become U.S. nationals. The
term “traffic” includes various forms of use of Cuban property as well as “profiting from” or “participating in” the trafficking of
others.
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Management’s discussion and analysis
The Helms-Burton Act authorizes damage lawsuits to be brought in U.S. courts by U.S. claimants against those “trafficking” in
the claimants’ confiscated property. No such lawsuits have been filed because all Presidents of the United States in office
since the enactment of the Helms-Burton Act have exercised their authority to suspend the right of claimants to bring such
lawsuits for successive periods of up to six months. Pursuant to this authority, the President has suspended the right of
claimants for successive six month periods since 1996; the latest suspension extends through to August 1, 2018. The
Corporation has nevertheless received letters from U.S. nationals claiming ownership of certain Cuban properties or rights in
which the Corporation has an indirect interest. Even if the suspension were permitted to expire, Sherritt does not believe that
its operations would be materially affected by any Helms-Burton Act lawsuits, because Sherritt’s minimal contacts with the
United States would likely deprive any U.S. court of personal jurisdiction over Sherritt. Furthermore, even if personal
jurisdiction were exercised, any successful U.S. claimant would have to seek enforcement of the U.S. court judgment outside
the U.S. in order to reach material Sherritt assets. Management believes it unlikely that a court in any country in which Sherritt
has material assets would enforce a Helms-Burton Act judgment.
The Foreign Extraterritorial Measures Act (Canada) was amended as of January 1, 1997 to provide that any judgment given
under the Helms-Burton Act will not be recognized or enforceable in any manner in Canada. The amendments permit the
Attorney General of Canada to declare, by order, that a Canadian corporation may sue for and recover in Canada any loss or
damage it may have suffered by reason of the enforcement of a Helms-Burton Act judgment abroad. In such a proceeding,
the Canadian court could order the seizure and sale of any property in which the defendant has a direct or indirect beneficial
interest, or the property of any person who controls or is a member of a group of persons that controls, in law or in fact, the
defendant. The property seized and sold could include shares of any corporation incorporated under the laws of Canada or a
province.
The Government of Canada has also responded to the Helms-Burton Act through diplomatic channels. Other countries, such
as the members of the European Union and the Organization of American States, have expressed their strong opposition to
the Helms-Burton Act as well.
Nevertheless, in the absence of any judicial interpretation of the scope of the Helms-Burton Act, the threat of potential
litigation discourages some potential investors, lenders, suppliers and customers from doing business with Sherritt.
In addition to authorizing private lawsuits, the Helms-Burton Act also authorizes the U.S. Secretary of State and the U.S.
Attorney General to exclude from the United States those aliens who engage in certain “trafficking” activities, as well as those
aliens who are corporate officers, principals, or controlling shareholders of “traffickers” or who are spouses, minor children, or
agents of such excludable persons. The U.S. Department of State has deemed Sherritt’s indirect 50% interest in Moa Nickel
S.A. to be a form of “trafficking” under the Helms-Burton Act. In their capacities as directors or officers of the Corporation,
certain individuals have been excluded from entry into the U.S. under this provision. Management does not believe the
exclusion from entry into the U.S. of such individuals will have any material effect on the conduct of the Corporation’s
business.
The U.S. Department of State has issued guidelines for the implementation of the immigration provision, which state that it is
“not sufficient in itself for a determination” of exclusion that a person “has merely had business dealings with a person”
deemed to be “trafficking”. Also, the statutory definition of “traffics” relevant to the Helms-Burton Act’s immigration provision
explicitly excludes “the trading or holding of securities publicly traded or held, unless the trading is with or by a person listed
as a SDN”.
The general embargo has been, and may be, amended from time to time, as may the Helms-Burton Act, and therefore the
U.S. sanctions applicable to transactions with Cuba may become more or less stringent. The stringency and longevity of the
U.S. laws relating to Cuba are likely to continue to be functions of political developments in the United States and Cuba, over
which Sherritt has no control. The process initiated by President Obama to relax the general embargo has been reversed in a
number of respects under President Trump, and the pace and the extent of any future changes are uncertain and beyond
Sherritt’s control. There can be no assurance that the general embargo and the Helms-Burton Act will not have a material
adverse effect on the Corporation’s business, results of operations or financial performance.
RISKS RELATED TO SHERRITT’S OPERATIONS IN MADAGASCAR
The Corporation is the operator of, and indirectly holds a minority interest in, the Ambatovy Joint Venture in Madagascar.
Sherritt is subject to political, economic and social risks related to operating in Madagascar.
In 2002, the government of Madagascar passed the LGIM, which is legislation to manage large scale mining projects. The
Ambatovy Joint Venture is the first and currently the only project to be developed under the LGIM’s terms and provisions,
which have been largely untested. Although the Ambatovy Joint Venture has received its eligibility certification under the
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Sherritt International Corporation
LGIM, it is possible that the LGIM could be interpreted or amended in a manner that has a material adverse effect on the
Ambatovy Joint Venture.
Madagascar has a history of political instability and there is no assurance that continuing political stability will be achieved.
In 2009, Madagascar experienced an unexpected change of government and the Transitional Government of Madagascar
took control of the country. At several points during the following five year political crisis, the Transitional Government
indicated that the Ambatovy Joint Venture’s status under the LGIM could be subject to review. However, the Ambatovy Joint
Venture’s eligible status under the LGIM has since been confirmed by the CGIM, the government body responsible for
overseeing the LGIM, and by the current democratically elected Malagasy government. The Malagasy government had
previously announced that it would be proposing amendments to the mining code during the May 2017 parliamentary session.
However in June 2017, the President of Madagascar stated that no amendment was envisaged in the short term. While the
Government has publicly confirmed that the proposed amendments will not affect the Ambatovy Joint Venture’s rights under
the LGIM, there is no guarantee that such amendments could not be made in the future.
The government may continue to have direct or indirect impact on the Ambatovy Joint Venture and may adversely affect the
Corporation’s business. Any changes in regulations or shifts in political attitudes are beyond the control of Sherritt and may
adversely affect its business. Operations may be affected in varying degrees by the Government of Madagascar’s regulations
with respect to production, price controls, export controls (including the recent requirement for the registration of imports and
exports), income taxes or investment tax credits, tax reimbursements, royalties and fees, expropriation of property,
environmental legislation, land use, water use and mine and plant safety or changes to the LGIM.
Presidential elections are planned to be held at the end of 2018. Historically, electoral periods in Madagascar have typically
been marred by social unrest, stirred by unsuccessful candidates or provoked prior to elections by politicians wishing to gain
power without having to win an election. For the Ambatovy Joint Venture, the risk exists that opposition politicians will try to
mobilize crowds by agitating against foreign interests or against major mining companies. The Ambatovy Joint Venture has
developed a comprehensive stakeholder engagement plan to mitigate this risk. However, no guarantee can be given that
unrest, if it happens, may not restrict temporarily or otherwise, the Ambatovy Joint Venture’s capacity to produce and export
nickel and cobalt or otherwise have a material adverse effect on the Ambatovy Joint Venture’s business, results of operations
or performance.
Operations in Madagascar may also be affected by the fact that Madagascar’s location exposes it to cyclones and tropical
storms of varying intensities. The risk of damage is dependent upon such factors as intensity, footprint, wind direction and the
amount of precipitation associated with the storm and tidal surges. While the Ambatovy Joint Venture maintains
comprehensive disaster plans and its facilities have been constructed to the extent reasonably possible to minimize damage,
there can be no guarantee against severe property damage and disruptions to operations.
Madagascar is one of the poorest countries in the world, with low levels of economic activity and high levels of
unemployment. These conditions are conducive to social unrest and instability that could, under certain circumstances, have
an impact on the Ambatovy Joint Venture’s ability to produce and export its products. The Ambatovy Joint Venture continues
to foster active working relations with relevant Malagasy authorities and civil society to mitigate social risk, maintain its social
license, and facilitate operational activities.
Agencies of the Malagasy government have significant payment obligations to the Corporation in connection with the
Ambatovy Joint Venture. This exposure to the Malagasy government and its potential inability or failure to fully pay such
amounts could have an adverse effect of the Corporation’s financial condition and results of operations.
CLIMATE CHANGE/GREENHOUSE GAS EMISSIONS
The Canadian government implemented a national climate plan in 2016, which includes direction to the provinces to
implement a carbon price strategy by 2018,that can be in the form of a carbon tax, starting at a minimum of $10 per tonne
and increasing to $50 per tonne by 2022 or a cap-and-trade system focused on emission reductions. Regulations requiring
significant reductions of GHG emissions by Canada’s largest industrial sectors could impact the Corporation. This includes
the industrial sectors to which the Corporation provides its products, the majority of the facilities in Canada from which the
Corporation ultimately obtains power and some of the Corporation’s facilities. In addition, uncertainty around when and how
regulations may change or be adopted is not an ideal operating environment.
To align with the federal plan, several provincial and territorial governments continue to move ahead with GHG reduction and
other initiatives designed to address climate change, including Alberta’s Climate Leadership Plan. While the climate agenda
continues to evolve, there continues to be a level of uncertainty over the application of specific provisions in any federal
regulations and the impact of other provincial or regional initiatives, thus it is not yet possible to estimate with specificity the
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Management’s discussion and analysis
impact to the Corporation’s operations. However, the Corporation’s Canadian operations are large facilities, therefore the
establishment of emissions regulations (whether in the manner described above or otherwise) may well affect them and may
have a material adverse effect on the Corporation’s business, results of operations and financial performance. In addition, the
Corporation’s operations require large quantities of power and future taxes on or regulation of power producers or the
production of oil and gas or other products may also add to the Corporation’s operating costs.
In addition, over the last few years the frequency and impact of major weather events – such as hurricanes in Cuba and
cyclones in Madagascar – pose increasing operating risks to the Corporation’s facilities. Sherritt has crisis preparedness,
emergency response and recovery procedures and plans at all facilities that address such events.
RISKS TO INFORMATION TECHNOLOGIES SYSTEMS AND CYBERSECURITY
The Corporation may be negatively affected by cybersecurity incidents or other IT systems disruption. The
Corporation relies heavily on its information technology systems including, without limitation, its networks,
equipment, hardware, software, telecommunications, and other information technology (collectively, IT systems),
and the IT systems of its vendors and third-party service providers, to operate its business as a whole, including
mining operations. Although the Corporation has not experienced any material losses to date relating to
cybersecurity, or other IT systems disruptions, there can be no assurance that the Corporation will not incur such
losses in the future. Despite the Corporation’s mitigation efforts including implementing an IT systems security
risk management framework, the risk and exposure to these threats cannot be fully mitigated because of, among
other things, the evolving nature of cybersecurity threats. As a result, cybersecurity and the continued
development and enhancement of controls, processes and practices designed to protect IT systems from
cybersecurity threats remain a priority. As these threats continue to evolve, the Corporation may be required to
expend additional resources to continue to modify or enhance protective measures or to investigate and
remediate any cybersecurity vulnerabilities. Any cybersecurity incidents or other IT systems disruption could
result in production downtimes, operational delays, destruction or corruption of data, security breaches, financial
losses from remedial actions, the theft or other compromising of confidential or otherwise protected information,
fines and lawsuits, or damage to the Corporation’s reputation. Any such occurrence could have an adverse
impact on the Corporation’s financial condition and operations.
OTHER RISKS
Below is a list of the other significant business risks as presented in the Corporation’s 2016 AIF. Further detail of these and
other risks and the strategies designed to manage them can be found in the Corporation’s Annual Information Form to the
extent not included herein.
(cid:120) Reliance on partners
(cid:120) Operating risk
(cid:120)
Transportation
(cid:120) Uncertainty of gas supply to Energas
(cid:120) Reliance on key personnel and skilled workers
(cid:120) Equipment failure and other unexpected failures
(cid:120) Mining, processing and refining risks
(cid:120) Uncertainty of resources and reserves estimates
(cid:120) Environmental rehabilitation provisions
(cid:120) Risks related to Sherritt’s corporate structure
(cid:120) Political, economic, and other risks of foreign
operations
(cid:120) Project development
o Generally
o Capital and operating cost estimates
Foreign exchange and pricing risks
(cid:120)
(cid:120) Environment, health and safety
(cid:120) Community relations and social license to grow
and operate
(cid:120) Credit risk
(cid:120) Shortage of equipment and supplies
(cid:120) Competition in product markets
Future market access
(cid:120)
Interest rate changes
(cid:120)
Insurable risk
(cid:120)
Labour relations
(cid:120)
Legal rights
(cid:120)
(cid:120)
Legal contingencies
(cid:120) Accounting policies
(cid:120) Risks associated with future acquisitions
(cid:120) Government permits
(cid:120) Government regulations
(cid:120) Anti-corruption and bribery
(cid:120) Management of growth
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Critical accounting estimates and judgments
The preparation of financial statements requires the Corporation’s management to make estimates and assumptions that affect
the reported amounts of the assets, liabilities, revenue and expenses reported each period. Each of these estimates varies with
respect to the level of judgment involved and the potential impact on the Corporation’s reported financial results. Estimates are
deemed critical when the Corporation’s financial condition, change in financial condition or results of operations would be
materially impacted by a different estimate or a change in estimate from period to period.
By their nature, these estimates are subject to measurement uncertainty, and changes in these estimates may affect the
consolidated financial statements of future periods.
CRITICAL ACCOUNTING ESTIMATES
Property, plant and equipment
Property, plant and equipment is the largest component of the Corporation’s assets and, as such, the capitalization of costs,
the determination of estimated recoverable amounts and the depletion and depreciation of these assets have a significant
impact on the Corporation’s financial results.
Certain assets are depreciated using a unit-of-production basis, which involves the estimation of recoverable reserves in
determining the depletion and/or depreciation rates of the specific assets. Each item’s life, which is assessed annually, is
assessed for both its physical life limitations and the economic recoverable reserves of the property at which the asset is
located.
For those assets depreciated on a straight-line basis, management estimates the useful life of the assets and their
components, which in certain cases may be based on an estimate of the producing life of the property. These assessments
require the use of estimates and assumptions including market conditions at the end of the asset’s useful life, costs of
decommissioning the asset and the amount of recoverable reserves.
Asset useful lives and residual values are re-evaluated at each reporting date.
Environmental rehabilitation provisions
The Corporation’s operations are subject to environmental regulations in Canada, Cuba, Madagascar and other countries in
which the Corporation operates. Many factors such as future changes to environmental laws and regulations, life of mine
estimates, the cost and time it will take to rehabilitate the property and discount rates, all affect the carrying amount of
environmental rehabilitation provisions. As a result, the actual cost of environmental rehabilitation could be higher than the
amounts the Corporation has estimated. For certain operations, actual costs will ultimately be determined after site closure in
agreement with predecessor companies.
The environmental rehabilitation provision is assessed quarterly and measured by discounting the expected cash flows. The
applicable discount rate is a pre-tax rate that reflects the current market assessment of the time value of money which is
determined based on government bond interest rates and inflation rates. The actual rate depends on a number of factors,
including the timing of rehabilitation activities that can extend decades into the future and the location of the property.
Reserves for oil and gas properties
Reserves are estimates of the amount of product that can be economically and legally extracted from the Corporation’s oil and
gas properties. Reserve estimates are an integral component in the determination of the commercial viability of a site,
depletion amounts charged to the cost of sales and any impairment analysis.
In calculating reserves, estimates and assumptions are required about a range of geological, technical and economic factors,
including quantities, production techniques, production decline rates, production costs, commodity prices and exchange rates.
In addition, future changes in regulatory environments, including government levies or changes in the Corporation’s rights to
exploit the resource imposed over the producing life of the reserves may also significantly impact estimates.
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Management’s discussion and analysis
Income taxes
The Corporation operates in a number of industries in several tax jurisdictions and, consequently, its income is subject to
various rates and rules of taxation. As a result, the Corporation’s effective tax rate may vary significantly from the Canadian
statutory tax rate depending upon the profitability of operations in the different jurisdictions.
The Corporation calculates deferred taxes based upon temporary differences between the assets and liabilities that are
reported in its consolidated financial statements and their tax bases as determined under applicable tax legislation. The
Corporation records deferred tax assets when it determines that it is probable that such assets will be realized. The future
realization of deferred tax assets can be affected by many factors, including current and future economic conditions, net
realizable sale prices, production rates and production costs, and can either be increased or decreased where, in the view of
management, such change is warranted.
CRITICAL ACCOUNTING JUDGMENTS
Interests in other entities
The Corporation applies judgment in determining the classification of its interest in other entities, such as: (i) the determination
of the level of control or significant influence held by the Corporation; (ii) the legal structure and contractual terms of the
arrangement; (iii) concluding whether the Corporation has rights to assets and liabilities or to net assets of the arrangement;
and (iv) when relevant, other facts and circumstances. The Corporation has determined that Energas S.A. and its Oil and Gas
production-sharing contracts represent joint operations while the Moa Joint Venture represents a joint venture as described in
IFRS 11, “Joint Arrangements”. The Corporation has concluded that the Ambatovy Joint Venture represents an investment in
an associate as described in IAS 28, “Investments in Associates and Joint Ventures”. All other interests in other entities have
been determined to be subsidiaries as described in IFRS 10, “Consolidated Financial Statements”.
Ambatovy – Investment in Associate
As a result of the Ambatovy Joint Venture restructuring, post-financial completion cash calls were funded retroactively to
December 2015 at Sherritt’s 12% interest and Sherritt’s voting rights were reinstated. It is the Corporation’s judgment that the
Ambatovy Joint Venture continues to be an associate after the restructuring given the Corporation’s power to participate in its
operating and financial decisions, in particular due to the Corporation’s representation on the board of directors, participation in
policy-making processes, existence of material transactions between the Corporation and the Ambatovy Joint Venture,
interchange of managerial personnel and provision of essential technical information with Sherritt’s commitment to continue as
operator until at least 2024.
Prior to the Ambatovy Joint Venture restructuring, with respect to post-financial completion cash calls not funded by Sherritt
under the Ambatovy Joint Venture financing, Sherritt had the option to pay the amounts in cash at any time, at Sherritt’s
election. Until the funding deficit was addressed, and subject to continued discussions with the Ambatovy Joint Venture
partners, Sherritt did not exercise its Ambatovy Joint Venture voting rights. Sherritt had the ability to cure the underfunding and
regain its voting rights at any time. Therefore, it was the Corporation’s judgment that the Ambatovy Joint Venture continued to
be an associate.
Aggregation of segments
When determining its reportable segments, the Corporation considers qualitative factors, such as operations that offer distinct
products and services and are considered to be significant by the Chief Operating Decision Maker, identified as the senior
executive team. The Corporation also considers quantitative thresholds when determining reportable segments, such as if
revenue, earnings (loss) or assets are greater than 10% of the total consolidated revenue, net earnings (loss), or assets of all
the reportable segments, respectively. Operating segments that share similar economic characteristics are aggregated to form
a single reportable segment. Aggregation occurs when the operating segments have similar economic characteristics, and
have similar (a) products and services; (b) production processes; (c) type or class of customer for their products and services;
(d) methods used to distribute their products or provide their services; and (e) nature of the regulatory environment, if
applicable.
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Impairment of non-financial assets
The Corporation assesses the carrying amount of non-financial assets including property, plant and equipment and intangible
assets subject to depreciation and amortization at each reporting date to determine whether there are any indicators that the
carrying amount of the assets may be impaired or require a reversal of impairment. Impairment is assessed at the CGU level
and the determination of CGUs is an area of judgment.
For purposes of determining fair value, management assesses the recoverable amount of the asset using the net present
value of expected future cash flows. Projections of future cash flows are based on factors relevant to the asset and could
include estimated recoverable production, commodity or contracted prices, foreign exchange rates, production levels, cash
costs of production, capital and reclamation costs. Projections inherently require assumptions and judgments to be made
about each of the factors affecting future cash flows. Changes in any of these assumptions or judgments could result in a
significant difference between the carrying amount and fair value of these assets. Where necessary, management engages
qualified third-party professionals to assist in the determination of fair values.
Measuring the recoverable amount of the Corporation’s interest in the Ambatovy Joint Venture
The Corporation accounts for its investment in an associate and investment in a joint venture using the equity method. The
Corporation assesses the carrying amount of its investments at each reporting date to determine whether there are any
indicators that the carrying amount of the investments may be impaired.
For purposes of determining the recoverable amount, management calculates the net present value of expected future cash
flows. Projections of future cash flows are based on factors relevant to the investment’s operations and could include
estimated recoverable production, commodity or contracted prices, foreign exchange rates, production levels, cash costs of
production, capital and reclamation costs. Projections inherently require assumptions and judgments to be made about each of
the factors affecting future cash flows. The determination of the recoverable amount involves a detailed review of the
investment’s life of mine model and the determination of weighted average cost of capital among other critical factors.
Changes in any of these assumptions or judgments could result in a significant difference between the carrying amount and
the recoverable amount of these investments. Where necessary, management engages qualified third-party professionals to
assist in the determination of recoverable amounts.
Exploration and evaluation
Management must make judgments when determining when to transfer E&E expenditures from intangible asset to property,
plant and equipment, which is normally at the time when commercial viability is achieved. Assessing commercial viability
requires management to make certain judgments as to future events and circumstances, in particular whether an economically
viable operation can be established. Any such judgments may change as new information becomes available. If after having
capitalized the expenditure, a decision is made that recovery of the expenditure is unlikely, the amount capitalized is
recognized in cost of sales in the consolidated statements of comprehensive income (loss).
Commercial viability
Management uses the best available information to determine when a development project reaches commercial viability which
is generally based on management’s assessment of when economic quantities of proven and/or probable reserves are
determined to exist and the point at which future costs incurred to develop a mine on the property are capitalized.
Management also uses the best available information to determine when a project achieves commercial production, the stage
at which pre-production costs cease to be capitalized.
For assets under construction, management assesses the stage of each construction project to determine when a project is
commercially viable. The criteria used to assess commercial viability are dependent upon the nature of each construction
project and include factors such as the asset purpose, complexity of a project and its location, the level of capital expenditure
compared to the construction cost estimates, completion of a reasonable period of testing of the mine plant and equipment,
ability to produce the commodity in saleable form (within specifications), and ability to sustain ongoing production of the
commodity.
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Management’s discussion and analysis
Arrangements containing a lease
The Corporation determined that the Power facilities in Varadero, Cuba are subject to operating lease arrangements. The
Corporation applies judgment in interpreting these arrangements such as determining which assets are specified in an
arrangement, determining whether a right to use a specified asset has been conveyed and if relative fair value or another
estimation technique to separate lease payments from payments for other goods or services should be used. The Corporation
also uses judgment in applying accounting guidance to determine whether these leases are operating or finance leases.
Service concession arrangements
The Corporation determined that the contract terms regarding the Boca de Jaruco and Puerto Escondido, Cuba, facilities
operated by Energas represent service concession arrangements as described in IFRIC 12, “Service concession
arrangements” (IFRIC 12). The Corporation uses judgment to determine whether the grantor sets elements of the services
provided by the operator, whether the grantor retains any significant ownership interest in the infrastructure at the end of the
agreement, and to determine the classification of the service concession asset as either a financial asset or intangible asset.
Income taxes
In determining whether it is probable that a deferred tax asset will be realized, management reviews the timing of expected
reversals of taxable temporary differences, the estimates of future taxable income and prudent and feasible tax planning that
could be implemented. Significant judgment may be involved in determining the timing of expected reversals of temporary
differences.
Accounting Pronouncements
ADOPTION OF NEW AND AMENDED ACCOUNTING PRONOUNCEMENTS
In 2017, there have been no new or amended accounting pronouncements that have had a material impact on the
Corporation’s consolidated financial statements.
ACCOUNTING PRONOUNCEMENTS ISSUED BUT NOT YET EFFECTIVE
IFRS 9 – Financial Instruments
In July 2014, the IASB issued IFRS 9 Financial Instruments (“IFRS 9”) which replaces IAS 39 effective January 1, 2018. IFRS
9 provides new guidance on the classification and measurement, impairment and hedge accounting for financial instruments in
addition to new guidance for the treatment of term modifications for financial liabilities. IFRS 9 is required to be adopted
retrospectively with certain available transition provisions which allow the Corporation to elect not to restate prior period
comparative information.
The Corporation is in the final stages of its evaluation of the impact of this standard on its consolidated financial
statements. The Corporation will adopt IFRS 9 for the annual period beginning January 1, 2018 and will apply the standard on
a retrospective basis using the available transitional provisions. Under this approach, the 2017 comparative period will not be
restated and a cumulative transitional adjustment to the opening deficit balance will be recognized at January 1, 2018.
Classification and measurement:
IFRS 9 requires a new approach for the classification and measurement of financial assets based on the Corporation’s
business models for managing these financial assets and their contractual cash flow characteristics, summarized as follows:
(cid:120) Assets held for the purpose of collecting contractual cash flows that represent solely payments of principal and
interest will be measured at amortized cost.
(cid:120) Assets held within a business model where assets are both held for the purpose of collecting contractual cash flows
or sold prior to maturity and the contractual cash flows represent solely payments of principal and interest will be
measured at fair value through other comprehensive income (‘FVTOCI”).
46
Sherritt International Corporation
(cid:120) Assets held within another business model or assets that do not have contractual cash flow characteristics that are
solely payments of principal and interest will be measured at fair value through profit or loss (“FVTPL”).
The Corporation has completed its review of all financial instruments held and has performed cash flow and business model
assessments on the Corporation’s financial assets. The expected impact is summarized as follows:
(cid:120)
The Corporation’s cash equivalents and short-term investments currently measured at FVTPL will now be measured
at FVTOCI, with unrealized gains and losses recorded in other comprehensive income, until the time they are sold or
otherwise derecognized, at which point gains and losses will be reclassified to profit and loss. The Corporation does
not expect a material impact as a result of this change.
(cid:120) Generally, the Corporation’s other financial assets currently classified as loans and receivables will continue to be
measured at amortized cost. This includes the Ambatovy subordinated loans receivable, Energas conditional sales
agreement, Moa Joint Venture expansion loans receivable and Moa Joint Venture working capital facility.
Impairment:
IFRS 9 introduces a new expected credit loss (“ECL”) impairment model for all financial assets measured at amortized cost or
debt instruments measured at FVTOCI. The new ECL model will result in an allowance for expected credit losses being
recorded regardless of whether or not there has been an actual loss event.
The ECL model is forward-looking and requires the use of a reasonable and supportable forecast of future conditions in the
determination of whether or not there has been a significant increase in credit risk since origination and measurement of the
ECL. The Corporation continues to refine certain aspects of the expected credit loss modelling process leading up to its March
31, 2018 reporting. The expected impact is summarized as follows:
(cid:120)
The Corporation expects to recognize a material ECL allowance against the Ambatovy subordinated loans receivable
due to forecasted conversions of debt to equity in the Ambatovy Joint Venture which will result in a reduction to the
loans receivable. These conversions of debt to equity are undertaken to ensure compliance with a Malagasy mining
regulatory requirement at the Ambatovy Joint Venture.
(cid:120)
The Corporation expects to recognize a material ECL allowance against the Moa expansion loans receivable due to
management’s current forecast of expansion production.
Hedge accounting:
IFRS 9 also introduces a new hedge accounting model that expands the scope of hedge items and risks eligible for hedge
accounting and aligns hedge accounting more closely with risk management. The Corporation does not currently engage in
hedging activity and is not impacted by the new hedge accounting guidance.
Financial liabilities:
Generally, IFRS 9 does not introduce changes to the classification of financial liabilities. The Corporation will continue to
measure its financial liabilities at amortized cost.
In regards to term modifications for financial liabilities, IFRS 9 requires that when a financial liability measured at amortized
cost is modified or exchanged, and such modification or exchange does not result in derecognition, the adjustment to the
amortized cost of the financial liability is recognized in profit or loss. The Corporation continues to refine its measurement of
the required adjustments. The expected impact is summarized as follows:
(cid:120)
(cid:120)
The Corporation expects to recognize a material reduction in the amortized cost of its senior unsecured debentures
resulting from the extension of their maturity dates during 2016.
The Ambatovy Joint Venture expects to recognize a material increase in the amortized cost of the Ambatovy Joint
Venture financing resulting from the deferral of six principal repayments during 2016, resulting in the Corporation
recognizing a material decrease in the investment in an associate based on its 12% ownership.
Sherritt International Corporation
47
Management’s discussion and analysis
IFRS 15 - Revenue from Contracts with Customers
In May 2014, the IASB issued IFRS 15 Revenue from Contracts with Customers (“IFRS 15”) which replaces IAS 18 and IAS
11 effective January 1, 2018. The objective of IFRS 15 is to establish the principles that the Corporation will apply to report
useful information about the nature, amount, timing and uncertainty of revenue and cash flows arising from a contract with a
customer. The Corporation has elected to apply the standard on a modified retrospective basis using certain practical
expedients. Under this approach, the 2017 comparative period will not be restated and a cumulative transitional adjustment to
the opening deficit balance will be recognized at the date of initial application.
The Corporation is in the final stages of its evaluation of the impact of this standard on its consolidated financial statements.
Management has identified the following impacts to revenue recognition and disclosure:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
In the Moa JV and Fort Site segment, revenue of the Moa JV is excluded from consolidated revenue due to the equity
method and is included in the share of earnings (loss) of a joint venture. At the Moa JV, no material transitional
adjustment is expected upon adoption and no material change is expected in the timing and recognition of revenue.
The Corporation determined that Moa JV’s revenue associated with performance obligations for shipping and
insurance for certain sales was immaterial and therefore the current timing of recognition will not change upon
adoption. At the Fort Site, the Corporation will be required to disclose revenue recognized during the year ended
December 31, 2018 that is included in deferred revenue at the beginning of the period.
In the Ambatovy JV segment, all revenue relates to the Ambatovy JV and is excluded from consolidated revenue due
to the equity method and is included in the share of earnings (loss) of an associate. At the Ambatovy JV, no material
transitional adjustment is expected upon adoption and no change is expected in the timing of revenue recognition. A
change is expected in the recognition of marketing expenses paid to customers, which will be accounted for as
reductions of revenue rather than expenses, with no impact to Ambatovy JV’s net earnings (loss). The Corporation
determined that Ambatovy JV’s revenue associated with performance obligations for shipping and insurance for
certain sales was immaterial and therefore the current timing of recognition will not change upon adoption.
In the Oil and Gas segment, no material transitional adjustment is expected upon adoption and no material change is
expected in the timing and recognition of revenue. The Corporation is entitled to the recovery of certain costs
incurred as a result of its production-sharing contracts from an agency of the Government of Cuba. The
Corporation’s receivable for recoverable costs not yet approved by the agency will be required to be presented
separately from trade accounts receivable, net, given that approval is outstanding. In addition, the Corporation will be
required to disclose revenue allocated to remaining performance obligations for production-sharing contracts with an
expected duration of over one year and when it expects to recognize this revenue.
In the Power segment, no material transitional adjustment is expected upon adoption and no material change is
expected in the timing and recognition of revenue. The Corporation will be required to disclose revenue allocated to
remaining performance obligations for service concession arrangements with an expected duration of over one year
and when it expects to recognize this revenue.
No impact on the consolidated statements of cash flow is expected from adoption.
IFRS 16 – Leases
In January 2016, the IASB issued IFRS 16 Leases (“IFRS 16”) which replaces IAS 17 and IFRIC 4 effective January 1, 2019.
The objective of IFRS 16 is to report information that faithfully represents lease transactions and provides a basis for users of
financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. To meet that objective, a
lessee should recognize assets and liabilities arising from a lease.
IFRS 16 introduces a single lessee accounting model and requires a lessee to recognize assets and liabilities for all leases
with a term of more than 12 months, unless the underlying asset is of low value. A lessee is required to recognize a right-of-
use asset representing its right to use the underlying leased asset and a lease liability representing its obligation to make lease
payments.
The Corporation is currently evaluating the impact of this standard on its consolidated financial statements. The Corporation
will not early adopt IFRS 16. The Corporation expects to recognize lease liabilities and right-of-use assets in respect of
operating leases previously expensed.
48
Sherritt International Corporation
Three-year trend analysis(1)
The following table presents select financial and operational results for the last three years:
$ millions, except per share amounts for the years ended December 31
Revenue
Adjusted EBITDA(1)
Earnings (loss) from operations, associate and joint venture
Net earnings (loss) from continuing operations
(Loss) earnings from discontinued operations, net of tax
Net earnings (loss) for the year
Earnings (loss) per common share (basic)($ per share):
Net earnings (loss) from continuing operations
Net earnings (loss) for the year
Earnings (loss) per common share (diluted)($ per share):
Net earnings (loss) from continuing operations
Net earnings (loss) for the year
Dividend rate per share
PRODUCTION VOLUMES
Finished nickel (tonnes)
Moa Joint Venture (50% basis)
Ambatovy Joint Venture (40% basis)
Finished cobalt (tonnes)
Moa Joint Venture (50% basis)
Ambatovy Joint Venture (40% basis)
Oil (boepd, net working-interest production)(2)
Electricity (gigawatt hours) (331/3% basis)
$
$
2017
267.3
149.8
440.8
308.9
(15.1)
293.8
1.04
0.99
1.02
0.97
-
15,762
13,618
1,801
1,173
7,856
848
2016
262.3
40.0
(320.8)
(381.8)
2.9
(378.9)
(1.30)
(1.29)
(1.30)
(1.29)
-
16,464
16,842
1,847
1,309
9,483
894
$
2015
355.9
113.1
(198.6)
(2,071.7)
(5.0)
(2,076.7)
(7.05)
(7.07)
(7.05)
(7.07)
0.02
16,853
18,908
1,867
1,386
11,158
902
(1)
(2)
Sherritt’s share of financial and operating results for the Ambatovy Joint Venture reflects its interest at 40% to December 10, 2017 and 12% thereafter.
For additional information see the Non-GAAP measures section.
In each year, the primary factors affecting on-going operating results are production and sales volumes, commodity prices,
primarily nickel, cobalt and oil; changes in input commodity prices; maintenance and operating costs, which are discussed in the
Review of operations sections; and the exchange relationship between the Canadian and U.S. dollars. Other impacts such as
impairments, gains and losses on sale of assets, among others, are recognized periodically as events occur.
In addition to the impacts of production volumes, commodity prices and input commodity prices, the following factors impacted
operating results:
In 2017, the net earnings from continuing operations was positively impacted by the gain of $629.0 million on the Ambatovy
restructuring and the recognition of $7.7 million of unrealized foreign exchange losses primarily as a result of the change in U.S.
dollar denominated net assets.
In 2016, the loss from continuing operations was positively impacted by $35.9 million of unrealized foreign exchange gains and
a gain on the repurchase of $30.0 million in the Corporation’s debentures of $12.6 million; partly offset by an impairment
recognized in Oil and Gas of $6.6 million after tax and a write down of deferred tax assets of $7.7 million in the Moa Joint
Venture.
In 2015, the loss from continuing operations was negatively impacted by a $1.6 billion after tax impairment of the Ambatovy
Joint Venture assets and $80.6 million impairment on Oil assets, $44.3 million of unrealized foreign exchange losses, partly
offset by the $19.1 million gain on sale of the Corporate office and $43.3 million tax recoveries on the change in Cuban tax
rates.
Sherritt International Corporation
49
Management’s discussion and analysis
Summary of quarterly results(1)
The following table presents a summary of the segment revenue and consolidated operating results for each of the eight
quarters ended March 31, 2016 to December 31, 2017.
$ millions, except per share amounts,
for the three months ended
2017
Dec 31
2017
Sept 30
2017
June 30
2017
Mar 31
2016
Dec 31
2016
Sept 30
2016
June 30
2016
Mar 31
Revenue
Metals
Oil and Gas
Power
Corporate and Other
Combined Revenue(2)
Adjust joint venture and
associate revenue
Financial statement revenue
$
$
$
Share of loss of an associate, net of tax
Share of earnings (loss) of a joint
venture, net of tax
Net earnings (loss) from continuing
operations
(Loss) earnings from discontinued
operations, net of tax(3)
Net earnings (loss) for the period
184.0 $
27.7
12.0
0.1
223.8 $
192.8 $
29.9
12.2
(0.2)
234.7 $
183.0 $
34.1
13.6
0.3
231.0 $
179.5 $
35.3
13.4
(0.2)
228.0 $
195.6 $
30.6
13.7
0.4
240.3 $
143.0 $
27.3
14.4
(0.2)
184.5 $
160.5 $
28.3
14.9
0.4
204.1 $
(169.0)
(171.4)
(154.2)
(155.6)
(169.8)
(126.0)
(129.2)
54.8 $
63.3 $
76.8 $
72.4 $
70.5 $
58.5 $
74.9 $
153.0
22.4
15.6
0.3
191.3
(132.9)
58.4
(27.5)
(53.2)
(64.2)
(50.1)
(31.3)
(55.9)
(58.9)
(65.9)
17.4
552.9
11.6
(69.5)
1.8
(101.9)
1.1
(72.6)
(7.7)
(3.5)
(109.6)
(120.8)
(20.6)
(103.6)
(12.9)
(47.8)
(15.1)
537.8 $
-
(69.5) $
-
(101.9) $
-
(72.6) $
2.9
(106.7) $
-
(120.8) $
-
(103.6) $
-
(47.8)
$
Net earnings (loss) per share, basic ($ per share)
Net earnings (loss) from continuing
operations
$
1.85 $
(0.24) $
(0.35) $
(0.25) $
(0.37) $
(0.41) $
(0.35) $
(0.16)
Net earnings (loss) for the period
1.80
(0.24)
(0.35)
(0.25)
(0.36)
(0.41)
(0.35)
(0.16)
Net earnings (loss) per share, diluted ($ per share)
Net earnings (loss) from continuing
operations
$
1.80 $
(0.24) $
(0.35) $
(0.25) $
(0.37) $
(0.41) $
(0.35) $
(0.16)
Net earnings (loss) for the period
1.75
(0.24)
(0.35)
(0.25)
(0.36)
(0.41)
(0.35)
(0.16)
(1)
(2)
(3)
Sherritt’s share of financial and operating results for the Ambatovy Joint Venture reflects its interest at 40% to December 10, 2017 and 12% thereafter.
For additional information see the Non-GAAP measures section.
Expenses relate to additional costs and penalties in respect of the Obed tailing pond breach, the liability for which was retained by the Corporation following the sale
of the Coal operations in 2014, and insurance recoveries received by the Corporation.
In general, net loss or earnings for the Corporation are primarily affected by production and sales volumes, commodity prices,
maintenance and operating costs, and exchange rates. The average Canadian dollar cost to purchase one U.S. dollar for the
above quarters ranged from $1.25 (Q3 2017) to $1.37 (Q1 2016) and period-end rates ranged between $1.25 (Q3 2017) to
$1.34 (Q4 2016).
In addition to the impact of commodity prices and sales volumes, the net earnings/losses in the eight quarters were impacted by
the following significant items (pre-tax):
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
the fourth quarter of 2017 includes a gain of $629.0 million on the Ambatovy restructuring and the recognition of $24.1
million of unrealized foreign exchange losses primarily as a result of the reduction of U.S. dollar denominated loans
derecognized as part of the Ambatovy restructuring;
the third quarter of 2017 includes a $13.5 million unrealized foreign exchange gain;
the second quarter of 2017 includes a $4.4 million unrealized foreign exchange loss;
the first quarter of 2017 includes a $7.3 million unrealized foreign exchange gain;
the fourth quarter of 2016 includes a $25.7 million unrealized foreign exchange loss;
the third quarter of 2016 includes an impairment of $8.5 million recognized on oil assets. Net finance expense includes
an unrealized foreign exchange loss of $12.8 million;
(cid:120)
the second quarter of 2016 includes a $12.6 million gain on repurchase of $30.0 million of debentures;
50
Sherritt International Corporation
(cid:120)
the first quarter of 2016 includes unrealized foreign exchange gains of $76.0 million, due to the significant
strengthening of the period-end Canadian dollar relative to the U.S. dollar compared to the December 31, 2015.
Off-balance sheet arrangements
The Corporation has no foreign exchange or commodity options, futures or forward contracts.
Transactions with related parties
The Corporation enters into transactions related to its investment in an associate and joint arrangements. For further detail,
refer to Note 7, 8 and 22 of the Corporation’s audited consolidated financial statements for the year ended December 31, 2017.
Transactions between related parties are generally based on standard commercial terms. All amounts outstanding are
unsecured and will be settled in cash. No guarantees have been given or received on the outstanding amounts. No expense
has been recognized in the current or prior periods for bad debts in respect of amounts owed by related parties.
Canadian $ millions, as at December 31
2017
2016
Accounts receivable from joint operations
Accounts receivable from joint venture
Accounts receivable from associate
Accounts payable to joint venture
Accounts payable to associate
Advances and loans receivable from associate
Advances and loans receivable from joint operations
Advances and loans receivable from joint venture
$
0.2 $
15.0
8.2
105.2
5.4
281.0
206.7
268.0
0.4
11.4
33.9
81.3
1.8
943.4
192.4
321.8
Canadian $ millions, for the years ended December 31
December 31
December 31
2017
2016
Total value of goods and services:
Provided to joint operations
Provided to joint venture
Provided to associate
Purchased from joint venture
Purchased from associate
Net financing income from joint operations
Net financing income from associate
Net financing income from joint venture
$
19.9 $
32.0 $
19.9 $
191.8
2.6
736.1
30.4
14.4
37.8
11.4
165.3
3.4
405.3
39.1
14.4
38.9
9.6
191.8
2.6
736.1
30.4
14.4
37.8
11.4
32.0
165.3
3.4
405.3
39.1
14.4
38.9
9.6
Goods and services provided to joint venture primarily relates to services provided by Fort Site to the Moa Joint Venture. Goods
and services purchased from associate relate to nickel purchased from the Ambatovy Joint Venture purchased under long term
nickel off take agreements by a subsidiary of the Corporation established to buy, market and sell certain Ambatovy nickel
production. Net financing income from associate relates to interest income recognized by the Corporation on the Ambatovy
subordinated loans receivable which was repaid as part of the Ambatovy restructuring -- see note 6 of the audited consolidated
financial statements for the year ended December 31, 2017 for additional information.
Sherritt International Corporation
51
Management’s discussion and analysis
KEY MANAGEMENT PERSONNEL
Key management personnel is composed of the Board of Directors, Chief Executive Officer, Chief Operating Officer, Chief Financial Officer
and Senior Vice Presidents of the Corporation. The following is a summary of key management personnel compensation:
Canadian $ millions, for the years ended December 31
Short-term benefits
Post-employment benefits(1)
Share-based payments
2017
2016
$
$
7.8 $
0.4
6.1
14.3 $
7.4
0.4
11.6
19.4
(1) Post-employment benefits include a non-registered defined contribution executive supplemental pension plan. The total cash pension contribution for key management
personnel was $0.9 million for the year ended December 31, 2017 ($0.4 million for the year ended December 31, 2016). The total pension expense that is attributable to
key management personnel was $0.2 million for the year ended December 31, 2017 ($0.2 million for the year ended December 31, 2016).
Controls and procedures
DISCLOSURE CONTROLS AND PROCEDURES
Management is responsible for establishing and maintaining adequate internal control over disclosure controls and procedures,
as defined in National Instrument 52-109 of the Canadian Securities Commission (NI 52-109). Disclosure controls and
procedures are designed to provide reasonable assurance that all relevant information is gathered and reported to
management, including the CEO and CFO, on a timely basis so that appropriate decisions can be made regarding public
disclosure. Management, with the participation of the certifying officers, has evaluated the effectiveness of the design and
operation, as of December 31, 2017, of the Corporation’s disclosure controls and procedures. Based on that evaluation, the
certifying officers have concluded that such disclosure controls and procedures are effective and designed to ensure that
material information known by others relating to the Corporation and its subsidiaries is provided to them.
INTERNAL CONTROLS OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in NI
52-109. Internal control over financial reporting means a process designed by or under the supervision of the CEO and CFO,
management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with IFRS.
The internal controls are not expected to prevent and detect all misstatements due to error or fraud. Management advises that
there have been no changes in the Corporation’s internal controls over financial reporting during 2017 that have materially
affected or are reasonably likely to materially affect the Corporation’s internal control over financial reporting.
Management, with the participation of the certifying officers, conducted an evaluation of the effectiveness of the Corporation’s
internal controls over financial reporting, as of December 31, 2017, using the Internal Control-Integrated Framework published in
2013 by the Committee of Sponsoring Organizations of the Treadway Commission (COSO 2013 Framework). Based on this
evaluation, the CEO and CFO have concluded that the internal controls over financial reporting were effective as of December
31, 2017.
52
Sherritt International Corporation
Supplementary information
SENSITIVITY ANALYSIS
The following table shows the approximate impact on the Corporation’s net earnings and earnings per share from continuing
operations for the year ended December 31, 2017 from a change in selected key variables. The impact is measured changing
one variable at a time and may not necessarily be indicative of sensitivities on future results.
Factor
Prices
Nickel - LME price per pound(2)
Cobalt - Metal Bulletin price per pound(2)
Oil -U.S. Gulf Coast Fuel Oil No. 6 price per barrel
Exchange rate
Strengthening of the Canadian dollar relative
to the U.S. dollar
Ambatovy at 12%(1)
Approximate
Approximate
change in annual
Approximate
change in annual
Approximate
net earnings
change in annual
net earnings
change in annual
($ millions)
Increase/
(decrease)
basic EPS
Increase/
(decrease)
($ millions)
Increase/
(decrease)
basic EPS
Increase/
(decrease)
Increase
US$
US$
US$
1.00 $
5.00
5.00
76 $
37
9
0.26 $
0.13
0.03
50 $
25
9
0.17
0.09
0.03
$
0.05
(27)
(0.09)
(30)
(0.10)
Operating costs(2)
Natural gas - per gigajoule (Moa Joint Venture)
Sulphur - per tonne (Moa Joint Venture and Ambatovy)
Coal - per tonne (Ambatovy)
Limestone - per tonne (Ambatovy)
$
1.00
US$ 25.00
US$ 20.00
5.00
US$
(3)
(10)
(5)
(3)
(0.01)
(0.03)
(0.02)
(0.01)
(3)
(6)
(1)
(1)
(0.01)
(0.02)
-
-
Estimated total impact on current year’s earnings assuming the Corporation’s interest in Ambatovy was 12% for the entire year.
(1)
(2) Changes are applied at the operating level with the approximate change in net earnings and basic EPS representing the Corporation’s 50% interest in the Moa Joint
Venture and 40% interest in the Ambatovy Joint Venture to December 10, 2017 and 12% thereafter.
NON-GAAP MEASURES
Management uses combined results, Adjusted EBITDA, average-realized price, unit operating cost, adjusted earnings, adjusted
operating cash flow, free cash flow and Net Investment in Ambatovy to monitor the financial performance of the Corporation and
its operating divisions and believes these measures enable investors and analysts to compare the Corporation’s financial
performance with its competitors and evaluate the results of its underlying business. These measures do not have a standard
definition under IFRS and should not be considered in isolation or as a substitute for measures of performance prepared in
accordance with IFRS. As these measures do not have a standardized meaning, they may not be comparable to similar
measures provided by other companies.
Combined results
The Corporation presents combined revenue, combined cost of sales, combined administrative expenses, combined net finance
expense, and combined income taxes (together, combined results) as measures which help management assess the
Corporation’s financial performance across its business units. The combined results include the Corporation’s consolidated
financial results and the results of its 50% share of the Moa Joint Venture and its share of the Ambatovy Joint Venture (40% to
December 10, 2017 and 12% thereafter), both of which are accounted for using the equity method for accounting purposes.
Management uses these measures to reflect the Corporation’s economic interest in its business units prior to the application of
equity accounting.
Sherritt International Corporation
53
Management’s discussion and analysis
$ millions
Revenue by segment
Metals
Oil and Gas
Power
Corporate and Other
Combined revenue
Adjust joint venture and associate
Financial statement revenue
Adjusted EBITDA
For the three months ended
2017
December 31
2016
December 31
For the years ended
Change
December 31
2017
2016
December 31
Change
$
$
$
184.0
27.7
12.0
0.1
223.8
(169.0)
54.8
195.6
30.6
13.7
0.4
240.3
(169.8)
70.5
(6%)
(9%)
(12%)
(75%)
(7%)
(22%)
$
739.3
127.0
51.2
-
917.5
(650.2)
267.3
652.1
108.6
58.6
0.9
820.2
(557.9)
262.3
13%
17%
(13%)
(100%)
12%
2%
The Corporation defines Adjusted EBITDA as earnings (loss) from operations, associate and joint venture as reported in the
financial statements for the period adjusted for depletion, depreciation and amortization; impairment charges for long lived
assets, intangible assets, goodwill and investments; gain or loss on disposal of property, plant and equipment of the
Corporation, associate and joint venture; and gain or loss on disposition of an interest in investment in associate or joint venture
of the Corporation. The exclusion of impairment charges eliminates the non-cash impact. The Corporation believes that
Adjusted EBITDA provides useful information to investors in evaluating our operating results in the same manner as
management and the board of directors.
The tables below reconcile Adjusted EBITDA to net earnings (loss) from operations, associate and joint venture:
$ millions, for the three months ended December 31
Metals
Moa JV and Ambatovy
JV
Fort Site
Other
Total
Oil and
Gas
Adjustment
for Joint
Corporate Venture and
Power and Other Associate
2017
Total
Earnings (loss) from operations, associate and joint venture
per financial statements
Add (deduct):
$
19.9 $
(7.7) $
- $
12.2 $
7.9 $
(0.6) $
611.9 $
(24.9) $
606.5
Depletion, depreciation and amortization
Gain on Ambatovy restructuring
Adjustments for share of associate and joint
venture:
Depletion, depreciation and amortization
Gain on write off of operator fee
Net finance expense
Income tax expense
Adjusted EBITDA
$
Earnings from operations, associate and joint venture
Net finance expense
Income tax expense
Net earnings from continuing operations
2.4
-
-
-
-
-
2.4
-
2.6
-
6.1
-
0.5
(629.0)
-
-
11.6
(629.0)
9.8
-
-
-
32.1 $
30.0
(4.2)
-
-
18.1 $
-
-
-
-
- $
39.8
(4.2)
-
-
50.2 $
-
-
-
-
10.5 $
-
-
-
-
5.5 $
-
-
-
-
(16.6) $
-
4.2
16.2
4.5
- $
$
39.8
-
16.2
4.5
49.6
606.5
(50.0)
(3.6)
$
552.9
54
Sherritt International Corporation
$ millions, for the three months ended December 31
Metals
Moa JV and Ambatovy
JV
Fort Site
Other
Total
Oil and
Gas
Adjustment
for Joint
Corporate Venture and
Power and Other Associate
2016
Total
(Loss) earnings from operations, associate and joint venture
per financial statements
Add (deduct):
$
(7.6) $
(15.0) $
0.2 $
(22.4) $
2.8 $
(1.3) $
(12.6) $
(18.7) $
(52.2)
Depletion, depreciation and amortization
2.4
-
-
2.4
8.8
8.7
0.8
-
20.7
Adjustments for share of associate and joint
venture:
Depletion, depreciation and amortization
Net finance expense
Income tax recovery
Adjusted EBITDA
10.8
-
-
5.6 $
39.4
-
-
24.4 $
-
-
-
0.2 $
50.2
-
-
30.2 $
-
-
-
11.6 $
-
-
-
7.4 $
-
-
-
(11.8) $
$
Loss from operations, associate and joint venture
Net finance expense
Income tax recovery (expenses
Net loss from continuing operations
-
19.1
(0.4)
- $
$
$
50.2
19.1
(0.4)
37.4
(52.2)
(53.3)
(4.1)
(109.6)
$ millions, for the year ended December 31
Metals
Moa JV and Ambatovy
JV
Fort Site
Other
Total
Oil and
Gas
Adjustment
for Joint
Corporate Venture and
Power and Other Associate
2017
Total
Earnings (loss) from operations, associate and joint venture
per financial statements
Add (deduct):
$
31.3 $
(109.5) $
0.9 $
(77.3) $
33.6 $
5.2 $
576.7 $
(97.4) $
440.8
Depletion, depreciation and amortization
Gain on Ambatovy restructuring
Adjustments for share of associate and joint
venture:
Depletion, depreciation and amortization
Gain on write off of operator fee
Net finance expense
Income tax expense
Adjusted EBITDA
$
Earnings from operations, associate and joint venture
Net finance expense
Income tax expense
Net earnings from continuing operations
9.9
-
-
-
-
-
9.9
-
28.3
-
24.9
-
2.7
(629.0)
-
-
65.8
(629.0)
39.3
-
-
-
80.5 $
139.7
(4.2)
-
-
26.0 $
-
-
-
-
0.9 $
179.0
(4.2)
-
-
107.4 $
-
-
-
-
61.9 $
-
-
-
-
30.1 $
-
-
-
-
(49.6) $
-
4.2
86.2
7.0
- $
179.0
-
86.2
7.0
149.8
$
440.8
(117.7)
(14.2)
$
308.9
Sherritt International Corporation
55
Management’s discussion and analysis
$ millions, for the year ended December 31
Metals
Moa JV and Ambatovy
JV
Fort Site
Other
Total
Oil and
Gas
Adjustment
for Joint
Corporate Venture and
Power and Other Associate
2016
Total
(Loss) earnings from operations, associate and joint venture
per financial statements
Add (deduct):
$
(28.4) $
(150.9) $
0.8 $
(178.5) $
(16.3) $
(5.3) $
(42.8) $
(77.9) $
(320.8)
Depletion, depreciation and amortization
9.6
-
-
-
9.6
-
43.4
8.5
34.8
-
4.3
-
-
-
92.1
8.5
38.4
-
-
19.6 $
143.9
-
-
(7.0) $
-
-
-
0.8 $
182.3
-
-
13.4 $
-
-
-
35.6 $
-
-
-
29.5 $
-
-
-
(38.5) $
$
-
70.1
7.8
- $
$
$
182.3
70.1
7.8
40.0
(320.8)
(54.5)
(6.5)
(381.8)
Impairment of assets
Adjustments for share of associate and joint
venture:
Depletion, depreciation and amortization
Net finance expense
Income tax recovery
Adjusted EBITDA
Loss from operations, associate and joint venture
Net finance expense
Income tax recovery
Net loss from continuing operations
56
Sherritt International Corporation
Average-realized price
Average-realized price is generally calculated by dividing revenue by sales volume for the given product in a given division. The
average-realized price for nickel, cobalt, and fertilizer excludes the impact of by-product revenue and the metals marketing
company. The average-realized price for oil and gas is based on net working-interest oil plus natural gas production stated in
barrels of oil equivalent. Management uses this measure to better understand the price realized in each reporting period for
nickel, cobalt, fertilizer, oil and gas, and power.
The tables below reconcile average-realized price to revenue as per the financial statements:
$ millions, except average-realized price and sales volume, for the three months ended December 31
2017
Revenue per financial statements
Adjustments to revenue:
By-product revenue
Processing revenue
Revenue for purposes of average-realized price calculation
Sales volume for the period
Volume units
Average-realized price(2)(3)
Metals
Nickel
Cobalt
Fertilizer
Other
revenue
Total Oil and Gas
Power
$
98.8 $
60.0 $
19.2 $
6.0 $
184.0 $
27.7 $
12.0
-
-
98.8
-
-
60.0
-
-
19.2
14.8
1.6
59.3
Millions of
pounds
Millions of
pounds
Thousands
of tonnes
-
(1.1)
26.6
(1.1)
-
10.9
0.6
201
Millions of
barrels(1)
Gigawatts
$
6.66 $
38.86 $
324
$
47.48 $
54.01
$ millions, except average-realized price and sales volume, for the three months ended December 31
2016
Revenue per financial statements
Adjustments to revenue:
By-product revenue
Processing revenue
Service concession arrangement revenue
Revenue for purposes of average-realized price calculation
Sales volume for the period
Volume units
Average-realized price(2)(3)
Metals
Nickel
Cobalt
Fertilizer
Other
revenue
Total Oil and Gas
Power
$
126.7 $
33.0 $
17.4 $
18.5 $
195.6 $
30.6 $
13.7
-
-
-
126.7
-
-
-
33.0
19.6
1.9
-
-
-
17.4
61.2
Millions of
pounds
Millions of
pounds
Thousands
of tonnes
-
(1.4)
-
29.2
(1.0)
-
(0.1)
12.6
0.8
224
Millions of
barrels(1)
Gigawatts
$
6.45 $
17.68 $
284
$
38.98 $
56.24
$ millions, except average-realized price and sales volume, for the year ended December 31
2017
Revenue per financial statements
Adjustments to revenue:
By-product revenue
Processing revenue
Revenue for purposes of average-realized price calculation
Sales volume for the period
Volume units
Average-realized price(2)(3)
Metals
Nickel
Cobalt
Fertilizer
Other
revenue
Total Oil and Gas
Power
$
394.7 $
218.5 $
71.5 $
54.6 $
739.3 $
127.0 $
51.2
-
-
394.7
-
-
218.5
-
-
71.5
64.8
6.6
220.5
Millions of
pounds
Millions of
pounds
Thousands
of tonnes
-
(4.0)
123.0
(4.4)
-
46.8
2.9
848
Millions of
barrels(1)
Gigawatts
$
6.10 $
33.13 $
325
$
42.90 $
55.15
Sherritt International Corporation
57
Management’s discussion and analysis
$ millions, except average-realized price and sales volume, for the year ended December 31
2016
Revenue per financial statements
Adjustments to revenue:
By-product revenue
Processing revenue
Service concession arrangement revenue
Revenue for purposes of average-realized price calculation
Sales volume for the period
Volume units
Average-realized price(2)(3)
Metals
Nickel
Cobalt
Fertilizer
Other
revenue
Total Oil and Gas
Power
$
413.6 $
105.7 $
71.8 $
61.0 $
652.1 $
108.6 $
58.6
-
-
-
413.6
-
-
-
105.7
-
-
-
71.8
73.3
6.9
220.0
Millions of
pounds
Millions of
pounds
Thousands
of tonnes
-
(4.6)
-
104.0
(3.8)
-
(4.6)
50.2
3.5
894
Millions of
barrels(1)
Gigawatts
$
5.65 $
15.33 $
326
$
29.98 $
56.10
For purposes of average-realized price tables, above:
(1) Net working-interest oil production.
(2)
Average-realized price may not calculate based on amounts presented due to foreign exchange and rounding.
Power, average-realized price per MWh.
(3)
Unit operating cost
With the exception of Metals, which uses net direct cash cost, unit operating cost is generally calculated by dividing cost of sales
as reported in the financial statements, less depreciation, depletion and amortization in cost of sales, the impact of impairment,
gains and losses on property, plant, and equipment and exploration and evaluation assets and certain other non-production
related costs by the number of units sold.
Unit operating costs for nickel, oil, and electricity are key measures that management uses to monitor performance.
Management uses these statistics to assess how well the Corporation’s producing mines, oil wells and power facilities are
performing and to assess overall efficiency and effectiveness of the mining operations.
The Moa Joint Venture’s and Ambatovy Joint Venture’s net direct cash cost is calculated by dividing cost of sales, as reported in
the financial statements, adjusted for the following: depreciation, depletion and amortization in cost of sales; cobalt by-product,
fertilizer and other revenue; and other costs primarily related to the impact of opening and closing inventory values, by the
number of finished nickel pounds sold in the period, and expressed in U.S. dollars.
Average unit operating costs for oil and gas is based on gross working-interest oil plus natural gas production stated in barrels
of oil equivalent.
The tables below reconcile unit operating cost to cost of sales per the financial statements:
$ millions, except unit cost and sales volume, for the three months ended December 31
Metals
Moa JV and
Fort Site
Ambatovy
JV
Other
Total
Oil and
Gas
2017
Power
Cost of sales per financial statements
Less:
Depletion, depreciation and amortization in cost of sales
Adjustments to cost of sales:
Cobalt by-product, fertilizer and other revenue
Impact of opening/closing inventory and other
Cost of sales for purposes of unit cost calculation
Sales volume for the period
Volume units
Unit operating cost(2)(3)
Unit operating cost (U.S. dollars) (NDCC)
$
100.0 $
72.8 $
2.9 $
175.7 $
16.4 $
10.9
(12.2)
87.8
(61.7)
(4.7)
21.4
(29.7)
43.1
(20.5)
0.7
23.3
9.1
5.8
Millions of
pounds
Millions of
pounds
$
$
2.35
1.80
3.99
3.27
-
2.9
(41.9)
133.8
(2.6)
13.8
-
-
13.8
(6.0)
4.9
-
-
4.9
1.1
201
Millions of
barrels(1)
Gigawatts
$
12.95 $
23.43
58
Sherritt International Corporation
$ millions, except unit cost and sales volume, for the three months ended December 31
Metals
Moa JV and
Fort Site
Ambatovy
JV
Other
Total
Oil and
Gas
2016
Power
Cost of sales per financial statements
Less:
Depletion, depreciation and amortization in cost of sales
Adjustments to cost of sales:
Cobalt by-product, fertilizer and other revenue
Impact of opening/closing inventory and other
Service concession arrangements – Cost of construction
Cost of sales for purposes of unit cost calculation
Sales volume for the period
Volume units
Unit operating cost(2)(3)
Unit operating cost (U.S. dollars) (NDCC)
$
97.1 $
99.1 $
14.5 $
210.7 $
25.0 $
14.1
(13.1)
84.0
(36.5)
(3.0)
-
44.5
(39.3)
59.8
(16.6)
(0.8)
-
42.4
8.8
10.8
Millions of
pounds
Millions of
pounds
$
$
5.08
3.80
3.90
3.10
-
14.5
(52.4)
158.3
(8.7)
16.3
-
-
-
16.3
(8.7)
5.4
-
-
(0.1)
5.3
1.4
224
Millions of
barrels(1)
Gigawatts
$
11.68 $
24.73
$ millions, except unit cost and sales volume, for the year ended December 31
Metals
Moa JV and
Fort Site
Ambatovy
JV
Other
Total
Oil and
Gas
2017
Power
Cost of sales per financial statements
Less:
Depletion, depreciation and amortization in cost of sales
Adjustments to cost of sales:
Cobalt by-product, fertilizer and other revenue
Impact of opening/closing inventory and other
Cost of sales for purposes of unit cost calculation
Sales volume for the period
Volume units
Unit operating cost(2)(3)
Unit operating cost (U.S. dollars) (NDCC)
$
376.1 $
385.5 $
41.5 $
803.1 $
83.0 $
41.3
(49.0)
327.1
(204.6)
(16.9)
105.6
(139.4)
246.1
(96.9)
1.0
150.2
34.6
30.2
Millions of
pounds
Millions of
pounds
$
$
3.05 $
2.35 $
4.97
3.83
-
41.5
(188.4)
614.7
(27.7)
55.3
-
-
55.3
(24.8)
16.5
-
-
16.5
5.2
848
Millions of
barrels(1)
Gigawatts
$
10.52 $
19.29
$ millions, except unit cost and sales volume, for the year ended December 31
Metals
Moa JV and
Fort Site
Ambatovy
JV
Other
Total
Oil and
Gas
2016
Power
Cost of sales per financial statements
Less:
Depletion, depreciation and amortization in cost of sales
Adjustments to cost of sales:
Cobalt by-product, fertilizer and other revenue
Impact of opening/closing inventory and other
Service concession arrangements – Cost of construction
Cost of sales for purposes of unit cost calculation
Sales volume for the period
Volume units
Unit operating cost(2)(3)
Unit operating cost (U.S. dollars) (NDCC)
For purposes of unit operating cost tables, above:
$
357.3 $
397.3 $
46.3 $
800.9 $
105.7 $
59.7
(47.8)
309.5
(135.8)
(9.8)
-
163.9
(143.5)
253.8
(49.6)
(2.5)
-
201.7
36.2
37.1
Millions of
pounds
Millions of
pounds
$
$
4.53 $
3.42 $
5.43
4.27
(0.2)
46.1
(191.5)
609.4
(43.2)
62.5
-
-
-
62.5
(34.7)
25.0
-
-
(4.6)
20.4
5.9
894
Millions of
barrels(1)
Gigawatts
$
10.58 $
22.94
(1) Gross working-interest oil production.
(2) Unit operating costs may not calculate based on amounts presented due to rounding and foreign exchange.
(3)
Power, unit operating cost per MWh.
Sherritt International Corporation
59
Management’s discussion and analysis
Adjusted earnings from continuing operations
The Corporation defines adjusted earnings from continuing operations as earnings from continuing operations less items not
reflective of operational performance. These adjusting items include, but are not limited to, the Ambatovy VAT receivable
provision fair value adjustment, impairment of assets, gains and losses on the acquisition or disposition of assets (including the
Corporation’s interest in the Ambatovy Joint Venture), gains and losses on unrealized foreign exchange, and other one-time
adjustments. While some adjustments are recurring (such as unrealized foreign exchange (gain) loss), management believes
that they do not reflect the Corporation’s operational performance or future operational performance. Management believes that
these measures, which are used internally to monitor operational performance, provide investors the ability to better assess the
Corporation’s operations.
The table below reconciles adjusted earnings to net earnings (loss) from continuing operations per the financial statements:
$ millions
For the three months ended
2016
2017
For the years ended
2017
2016
December 31
December 31
December 31
December 31
Net earnings (loss) from continuing operations
$
552.9 $
(109.6) $
308.9 $
(381.8)
Adjusting items:
Sherritt - Unrealized foreign exchange (gain) loss - Continuing
Corporate - Gain on repurchase of debentures
Corporate - Gain on Ambatovy restructuring
Ambatovy - Inventory obsolescense
Ambatovy - VAT adjustment
Moa JV - Inventory Impairment
Oil and Gas - Impairment
Oil and Gas - Inventory obsolescence
Oil and Gas - Deferred consideration
Severance
Total adjustments, before tax
Moa joint venture deferred tax asset write-off
Other tax adjustments
Adjusted net loss from continuing operations
Adjusted net loss per share (basic) ($ per share)
24.1
-
(629.0)
1.4
(1.8)
1.0
-
1.2
-
-
$
(603.1) $
-
-
(50.2) $
(0.17) $
$
$
25.7
-
-
-
(2.4)
1.1
-
1.9
-
2.0
28.3 $
-
-
(81.3) $
(0.28) $
7.7
-
(629.0)
1.4
(10.4)
1.0
-
1.2
-
2.1
(626.0) $
-
-
(317.1) $
(1.07) $
(35.9)
(12.6)
-
-
(15.6)
1.1
8.5
1.9
(2.7)
3.4
(51.9)
7.7
(1.9)
(427.9)
(1.46)
60
Sherritt International Corporation
Combined adjusted operating cash flow
The Corporation defines combined adjusted operating cash flow as cash provided (used) by continuing operations adjusted for
dividends received from joint venture and associate and before net changes in non-cash working capital.
Combined adjusted operating cash flow is used by management to assess its ability to generate cash from its operations, while
also taking into consideration changes in the number of outstanding shares of the Corporation.
The tables below reconcile combined adjusted operating cash to the consolidated statement of cash flow:
$ millions, except per share amounts, for the three months ended December 31
Metals
Moa JV and Ambatovy
JV
Fort Site
Other
Total
Oil and
Gas
Adjustment
2017
Total
for Joint derived from
Venture
financial
statements
total Associate
Corporate Combined
Power and Other
Cash provided (used) by continuing
operations
$
32.5 $
(3.4) $
(0.5) $
28.6 $
(2.3) $
5.4 $
(40.3) $
(8.6) $
(25.3) $
(33.9)
Adjust: net change in non-cash
working capital
Adjusted continuing operating cash flow
(0.1)
32.4
8.1
4.7
1.2
0.7
9.2
37.8
12.5
10.2
1.0
6.4
1.6
(38.7)
24.3
15.7
(10.7)
(36.0)
13.6
(20.3)
$ millions, except per share amounts, for the three months ended December 31
Metals
Moa JV and Ambatovy
JV
Fort Site
Other
Total
Oil and
Gas
Adjustment
2016
Total
for Jointderived from
Venture
financial
total Associate statements
Corporate Combined
Power and Other
Cash (used) provided by continuing
operations
$
(6.1) $
(0.8) $
3.3 $
(3.6) $
11.4 $
(3.3) $
(28.0) $
(23.5) $
0.9 $
(22.6)
Adjust: net change in non-cash working
capital
Adjusted continuing operating cash flow
12.0
5.9
9.4
8.6
(3.1)
0.2
18.3
14.7
0.1
11.5
10.5
7.2
2.8
(25.2)
31.7
8.2
(14.1)
(13.2)
17.6
(5.0)
$ millions, for the year ended December 31
Metals
Moa JV and Ambatovy
JV
Fort Site
Other
Total
Oil and
Gas
Adjustment
2017
Total
for Joint derived from
Venture
financial
statements
total Associate
Corporate Combined
Power and Other
Cash provided (used) by continuing
operations
$
58.3 $
(26.7) $
3.0 $
34.6 $
30.8 $
44.5 $
(98.8) $
11.1 $
(20.7) $
(9.6)
Adjust: net change in non-cash
working capital
Adjusted continuing operating cash flow
14.6
72.9
20.8
(5.9)
2.1
5.1
37.5
72.1
19.1
49.9
(13.6)
30.9
(3.4)
(102.2)
39.6
50.7
(46.3)
(67.0)
(6.7)
(16.3)
$ millions, for the year ended December 31
Metals
Moa JV and Ambatovy
JV
Fort Site
Other
Total
Oil and
Gas
Adjustment
2016
Total
for Jointderived from
Venture
financial
total Associate statements
Corporate Combined
Power and Other
Cash (used) provided by continuing
operations
$
(2.7) $
(34.6) $
3.1 $
(34.2) $
76.4 $
8.0 $
(82.5) $
(32.3) $
33.9 $
1.6
Adjust: net change in non-cash working
capital
Adjusted continuing operating cash flow
18.9
16.2
(4.6)
(39.2)
(2.3)
0.8
12.0
(22.2)
(44.8)
31.6
20.4
28.4
(2.1)
(84.6)
(14.5)
(46.8)
0.4
34.3
(14.1)
(12.5)
Sherritt International Corporation
61
Management’s discussion and analysis
Combined free cash flow
The Corporation defines combined free cash flow as cash flow provided (used) by continuing operations adjusted for dividends
received from joint venture and associate less cash spending on property plant and equipment, exploration and evaluation, and
intangible expenditures.
Management uses free cash flow as a non-GAAP measure to analyze cash flows generated from operations. Free cash flow
should be viewed as a measure that provides supplemental information to the Corporation’s condensed consolidated
statements of cash flow, as reconciled below.
$ millions, for the three months ended December 31
Metals
Moa JV and Ambatovy
JV
Fort Site
Other
Total
Oil and
Gas
Adjustment
2017
Total
for Joint derived from
Venture
financial
total Associate statements
Corporate Combined
Power and Other
Cash (used) provided by continuing
operations
Less:
Property, plant and equipment
expenditures
Intangible Expenditures
$
32.5 $
(3.4) $
(0.5) $
28.6 $
(2.3) $
5.4 $
(40.3) $
(8.6) $
(25.3) $
(33.9)
(7.6)
-
(17.3)
-
-
-
(24.9)
-
(1.9)
(5.7)
(0.1)
-
-
-
(26.9)
(5.7)
22.2
-
(4.7)
(5.7)
Free Cash Flow
$
24.9 $
(20.7) $
(0.5) $
3.7 $
(9.9) $
5.3 $
(40.3)
(41.2) $
(3.1) $
(44.3)
$ millions, for the three months ended December 31
Metals
Moa JV and Ambatovy
JV
Fort Site
Other
Total
Oil and
Gas
Adjustment
2016
Total
for Joint derived from
Venture
financial
statements
total Associate
Corporate Combined
Power and Other
Cash provided (used) by continuing
operations
Less:
Property, plant and equipment
expenditures
Intangible expenditures
$
(6.1) $
(0.8) $
3.3 $
(3.6) $
11.4 $
(3.3) $
(28.0) $
(23.5) $
0.9 $
(22.6)
(3.7)
-
(9.8)
-
-
-
(13.5)
-
(0.3)
(7.8)
(0.4)
-
-
-
(14.2)
(7.8)
11.2
-
(3.0)
(7.8)
Free Cash Flow
$
(9.8) $
(10.6) $
3.3 $
(17.1) $
3.3 $
(3.7) $
(28.0)
(45.5) $
12.1 $
(33.4)
$ millions, for the year ended December 31
Metals
Moa JV and Ambatovy
JV
Fort Site
Other
Total
Oil and
Gas
Adjustment
2017
Total
for Joint derived from
Venture
financial
statements
total Associate
Corporate Combined
Power and Other
Cash provided (used) by continuing
operations
Less:
Property, plant and equipment
expenditures
Intangible Expenditures
$
58.3 $
(26.7) $
3.0 $
34.6 $
30.8 $
44.5 $
(98.8) $
11.1 $
(20.7) $
(9.6)
(20.9)
-
(28.9)
-
-
-
(49.8)
-
(9.9)
(12.0)
(1.5)
-
-
-
(61.2)
(12.0)
42.6
-
(18.6)
(12.0)
Free Cash Flow
$
37.4 $
(55.6) $
3.0 $
(15.2) $
8.9 $
43.0 $
(98.8)
(62.1) $
21.9 $
(40.2)
62
Sherritt International Corporation
$ millions, for the year ended December 31
Metals
Moa JV and Ambatovy
JV
Fort Site
Other
Total
Oil and
Gas
Adjustment
2016
Total
for Joint derived from
Venture
financial
statements
total Associate
Corporate Combined
Power and Other
Cash (used) provided by continuing
operations
Less:
Property, plant and equipment
expenditures
Intangible expenditures
$
(2.7) $
(34.6) $
3.1 $
(34.2) $
76.4 $
8.0 $
(82.5) $
(32.3) $
33.9 $
1.6
(31.2)
-
(21.3)
-
-
-
(52.5)
-
(9.0)
(17.0)
(1.0)
-
(0.1)
-
(62.6)
(17.0)
39.4
-
(23.2)
(17.0)
Free Cash Flow
$
(33.9) $
(55.9) $
3.1 $
(86.7) $
50.4 $
7.0 $
(82.6)
(111.9) $
73.3 $
(38.6)
Sherritt International Corporation
63
Management’s discussion and analysis
FORWARD-LOOKING STATEMENTS
This MD&A contains certain forward-looking statements. Forward-looking statements can generally be identified by the use of statements that
include such words as “believe”, “expect”, “anticipate”, “intend”, “plan”, “forecast”, “likely”, “may”, “will”, “could”, “should”, “suspect”, “outlook”,
“potential”, “projected”, “continue” or other similar words or phrases. Specifically, forward-looking statements in this document include, but are
not limited to, statements set out in the “Outlook” sections of this MD&A and certain expectations regarding production volumes, operating costs
and capital spending; supply, demand and pricing outlook in the nickel and cobalt markets; sources of funding for the Moa Joint Venture; future
financing arrangements at the Ambatovy Joint Venture; results of discussions regarding timing of ongoing Cuban payments; drill results on
exploration wells; joint venture environmental rehabilitation costs and amounts of certain other commitments.
Forward looking statements are not based on historical facts, but rather on current expectations, assumptions and projections about future
events, including commodity and product prices and demand; the level of liquidity and access to funding; share price volatility; production
results; realized prices for production; earnings and revenues; development and exploration wells and enhanced oil recovery in Cuba;
environmental rehabilitation provisions; availability of regulatory approvals; compliance with applicable environmental laws and regulations; debt
repayments; collection of accounts receivable; and certain corporate objectives, goals and plans. By their nature, forward looking statements
require the Corporation to make assumptions and are subject to inherent risks and uncertainties. There is significant risk that predictions,
forecasts, conclusions or projections will not prove to be accurate, that those assumptions may not be correct and that actual results may differ
materially from such predictions, forecasts, conclusions or projections.
The Corporation cautions readers of this MD&A not to place undue reliance on any forward looking statement as a number of factors could
cause actual future results, conditions, actions or events to differ materially from the targets, expectations, estimates or intentions expressed in
the forward looking statements. These risks, uncertainties and other factors include, but are not limited to, changes in the global price for nickel,
cobalt, oil and gas or certain other commodities; share price volatility; level of liquidity; access to capital; access to financing; risks related to the
liquidity of the Ambatovy Joint Venture; the risk to Sherritt’s entitlements to future distributions from the Ambatovy Joint Venture; risk of future
non-compliance with debt restrictions and covenants; risks associated with the Corporation’s joint venture partners; variability in production at
Sherritt’s operations in Madagascar and Cuba; potential interruptions in transportation; uncertainty of gas supply for electrical generation;
uncertainty of exploration results and Sherritt’s ability to replace depleted mineral and oil and gas reserves; the Corporation’s reliance on key
personnel and skilled workers; the possibility of equipment and other failures; the potential for shortages of equipment and supplies; risks
associated with mining, processing and refining activities; uncertainty of resources and reserve estimates; uncertainties in environmental
rehabilitation provisions estimates; risks related to the Corporation’s corporate structure; political, economic and other risks of foreign operations;
risks related to Sherritt’s operations in Cuba; risks related to the U.S. government policy toward Cuba, including the U.S. embargo on Cuba and
the Helms-Burton legislation; risks related to Sherritt’s operations in Madagascar; risks associated with Sherritt’s development, construction and
operation of large projects generally; risks related to the accuracy of capital and operating cost estimates; reliance on significant customers;
foreign exchange and pricing risks; compliance with applicable environment, health and safety legislation and other associated matters; risks
associated with governmental regulations regarding greenhouse gas emissions; maintaining the Corporation’s social license to grow and
operate; risks relating to community relations; credit risks; shortage of equipment and supplies; competition in product markets; future market
access; interest rate changes; risks in obtaining insurance; uncertainties in labour relations; uncertainty in the ability of the Corporation to
enforce legal rights in foreign jurisdictions; uncertainty regarding the interpretation and/or application of the applicable laws in foreign
jurisdictions; legal contingencies; risks related to the Corporation’s accounting policies; risks associated with future acquisitions; uncertainty in
the ability of the Corporation to obtain government permits; risks to information technologies systems and cybersecurity; failure to comply with,
or changes to, applicable government regulations; bribery and corruption risks, including failure to comply with the Corruption of Foreign Public
Officials Act or applicable local anti-corruption law; uncertainties in growth management.
The Corporation may, from time to time, make oral forward-looking statements. The Corporation advises that the above paragraph and the risk
factors described in this MD&A and in the Corporation’s other documents filed with the Canadian securities authorities should be read for a
description of certain factors that could cause the actual results of the Corporation to differ materially from those in the oral forward-looking
statements. The forward-looking information and statements contained in this MD&A are made as of the date hereof and the Corporation
undertakes no obligation to update publicly or revise any oral or written forward-looking information or statements, whether as a result of new
information, future events or otherwise, except as required by applicable securities laws. The forward-looking information and statements
contained herein are expressly qualified in their entirety by this cautionary statement.
64
Sherritt International Corporation
CONSOLIDATED FINANCIAL
STATEMENTS
As at and for the years ended December 31, 2017 and 2016
CONSOLIDATED FINANCIAL STATEMENTS
Management’s report
Independent auditor’s report
Consolidated statements of comprehensive income (loss)
Consolidated statements of financial position
Consolidated statements of cash flow
Consolidated statements of changes in shareholders’ equity
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – Nature of operations and corporate information
Note 2 – Basis of presentation
Note 3 – Accounting pronouncements
Note 4 – Segmented information
Note 5 – Expenses
Note 6 – Ambatovy Joint Venture restructuring
Note 7 – Investment in an associate
Note 8 – Joint arrangements
Note 9 – Net finance (expense) income
Note 10 – Income taxes
Note 11 – Earnings (loss) per share
Note 12 – Financial instruments
Note 13 – Advances, loans receivable and other financial assets
Note 14 – Inventories
Note 15 – Non-financial assets
Note 16 – Loans, borrowings and other financial liabilities
Note 17 – Provisions, contingencies and guarantees
Note 18 – Shareholders’ equity
Note 19 – Stock-based compensation plans
Note 20 – Supplementary cash flow information
Note 21 – Financial risk and capital risk management
Note 22 – Related party transactions
Note 23 – Operating lease arrangements
Note 24 – Commitments for expenditures
Note 25 – Subsequent events
66
67
68
69
70
71
72
72
75
80
84
85
86
89
91
91
95
96
99
101
101
108
111
114
115
120
121
124
125
126
126
Sherritt International Corporation 65
Consolidated financial statements
Management’s report
The accompanying consolidated financial statements are the responsibility of Sherritt International Corporation’s (“Sherritt” or
the “Corporation”) management. They have been prepared in accordance with International Financial Reporting Standards as
issued by the International Accounting Standards Board and include amounts based on estimates and judgments. Management
has determined such amounts on a reasonable basis in order to ensure that the consolidated financial statements are presented
fairly, in all material respects.
Management has developed and maintains a system of internal control to provide reasonable assurance that the Corporation’s
assets are safeguarded, transactions are authorized and the consolidated financial statements are complete and accurate.
The consolidated financial statements are approved by the Board of Directors on the recommendation of the audit committee.
The audit committee of the Board of Directors is composed entirely of independent directors. Sherritt’s consolidated financial
statements are reviewed by the audit committee with management before the consolidated financial statements are approved
by the Board of Directors. In addition, the audit committee has the duty to review the accounting principles and practices applied
and followed by the Corporation during the fiscal year, including critical accounting policies and significant estimates and
judgments underlying the consolidated financial statements as presented by management. Deloitte LLP (“Deloitte”) performs an
audit of the consolidated financial statements, the results of which are reflected in their independent auditor’s report for 2017
included on the next page. Deloitte has full and independent access to the audit committee to discuss their audit and related
matters. In addition, Sherritt has an internal audit function that evaluates and formally reports to management and the audit
committee on the adequacy and effectiveness of internal controls specified in the approved annual internal audit plan.
/s/ David V. Pathe
/s/ Andrew Snowden
David V. Pathe
President and Chief Executive Officer
Andrew Snowden
Senior Vice President and Chief Financial Officer
February 12, 2018
66 Sherritt International Corporation
Deloitte LLP
Bay Adelaide East
8 Adelaide Street West
Suite 200
Toronto ON M5H 0A9
Canada
Tel: 416-601-6150
Fax: 416-601-6151
www.deloitte.ca
Independent Auditor’s Report
To the Shareholders of Sherritt International Corporation
We have audited the accompanying consolidated financial statements of Sherritt International Corporation, which comprise the
consolidated statements of financial position as at December 31, 2017 and December 31, 2016, and the consolidated
statements of comprehensive income (loss), consolidated statements of changes in shareholders’ equity and consolidated
statements of cash flow for the years then ended, and a summary of significant accounting policies and other explanatory
information.
Management’s Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance
with International Financial Reporting Standards as issued by the International Accounting Standards Board, and for such
internal control as management determines is necessary to enable the preparation of consolidated financial statements that
are free from material misstatement, whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our
audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with
ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial
statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated
financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of
material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk
assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated
financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the
appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well
as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit
opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Sherritt
International Corporation as at December 31, 2017 and December 31, 2016, and its financial performance and its cash flows
for the years then ended in accordance with International Financial Reporting Standards as issued by the International
Accounting Standards Board.
/s/ Deloitte LLP
Chartered Professional Accountants
Licensed Public Accountants
February 12, 2018
Sherritt International Corporation 67
Consolidated financial statements
Consolidated statements of comprehensive income
(loss)
Canadian $ millions, except per share amounts, for the years ended December 31
Note
2017
2016
Revenue
Cost of sales
Administrative expenses
Impairment of Oil assets
Gain on Ambatovy Joint Venture restructuring
Share of loss of an associate, net of tax
Share of earnings (loss) of a joint venture, net of tax
Earnings (loss) from operations, associate and joint venture
Financing income
Financing expense
Net finance expense
Earnings (loss) before tax
Income tax expense
Net earnings (loss) from continuing operations
(Loss) earnings from discontinued operations, net of tax
Net earnings (loss) for the year
Other comprehensive income (loss)
Items that may be subsequently reclassified to profit or loss:
Foreign currency translation differences on foreign operations
Items that will not be subsequently reclassified to profit or loss:
Actuarial losses on pension plans, net of tax
Other comprehensive loss
Total comprehensive income (loss)
Net earnings (loss) from continuing operations per common share
Basic
Diluted
Net earnings (loss) per common share
Basic
Diluted
The accompanying notes are an integral part of these consolidated financial statements.
4 $
5
5
15
6
7
8
9
9
10
17
18
18
$
$
11 $
11 $
11 $
11 $
267.3 $
(230.1)
(62.3)
-
629.0
(195.0)
31.9
440.8
65.4
(183.1)
(117.7)
323.1
(14.2)
308.9
(15.1)
293.8 $
262.3
(263.4)
(54.5)
(8.5)
-
(212.0)
(44.7)
(320.8)
81.2
(135.7)
(54.5)
(375.3)
(6.5)
(381.8)
2.9
(378.9)
(72.1)
(89.8)
(0.2)
(72.3)
221.5 $
(0.7)
(90.5)
(469.4)
1.04 $
1.02 $
(1.30)
(1.30)
0.99 $
0.97 $
(1.29)
(1.29)
68 Sherritt International Corporation
Consolidated statements of financial position
Canadian $ millions, as at
ASSETS
Current assets
Cash and cash equivalents
Restricted cash
Short-term investments
Advances, loans receivable and other financial assets
Trade accounts receivable, net
Inventories
Prepaid expenses
Non-current assets
Advances, loans receivable and other financial assets
Other non-financial assets
Property, plant and equipment
Investment in an associate
Investment in a joint venture
Intangible assets
Assets held for sale
Total assets
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Other loans and borrowings
Trade accounts payable and accrued liabilities
Income taxes payable
Other financial liabilities
Deferred revenue
Provisions
Non-current liabilities
Non-recourse loans and borrowings
Other loans and borrowings
Other financial liabilities
Deferred revenue
Other non-financial liabilities
Provisions
Deferred income taxes
Total liabilities
Shareholders' equity
Capital stock
Deficit
Reserves
Accumulated other comprehensive income
Total liabilities and shareholders' equity
Note
December 31
December 31
2017
2016
268.6
1.0
40.0
83.5
285.8
39.6
2.4
720.9
1,542.7
0.4
286.4
767.9
336.8
150.9
3,085.1
0.9
3,806.9
43.0
148.3
4.4
5.0
13.1
12.2
226.0
1,367.5
817.7
163.0
3.5
0.4
102.4
28.5
2,483.0
2,709.0
12 $
6
12
13
12
14
6, 13
15
7
8
15
$
185.0 $
13.0
18.0
42.8
284.9
33.9
2.7
580.3
713.0
0.2
228.5
211.9
367.1
142.9
1,663.6
0.9
2,244.8 $
16 $
8.0 $
182.3
11.8
8.0
16.7
18.3
245.1
-
816.1
16.2
3.3
-
92.0
15.8
943.4
1,188.5
16
17
6, 16
16
6, 16
17
10
18
18
6, 18
$
2,784.6
(2,427.7)
232.9
466.5
1,056.3
2,244.8 $
2,775.7
(2,721.5)
234.7
809.0
1,097.9
3,806.9
The accompanying notes are an integral part of these consolidated financial statements.
Approved by the Board of Directors,
/s/ Lisa Pankratz
Lisa Pankratz
Director
/s/ David V. Pathe
David V. Pathe
Director
Sherritt International Corporation 69
Consolidated financial statements
Consolidated statements of cash flow
Canadian $ millions, for the years ended December 31
Operating activities
Net earnings (loss) from continuing operations
Add (deduct):
Depletion, depreciation and amortization
Gain on Ambatovy Joint Venture restructuring
Share of loss of an associate, net of tax
Share of (earnings) loss of a joint venture, net of tax
Loss on impairment of Oil assets
Net finance expense (net of accretion expense)
Income tax expense
Service concession arrangements
Net change in non-cash working capital
Interest received
Interest paid
Income tax paid
Liabilities settled for environmental rehabilitation provisions
Other operating items
Cash (used) provided by continuing operations
Cash used by discontinued operations
Cash used by operating activities
Investing activities
Property, plant and equipment expenditures
Intangible asset expenditures
Increase in advances, loans receivable and other financial assets
Receipts of advances, loans receivable and other financial assets
Increase in restricted cash
Loans to an associate
Net proceeds from sale of property, plant and equipment
Proceeds from short-term investments
Cash (used) provided by continuing operations
Cash (used) provided by investing activities
Financing activities
Repayment of other loans and borrowings
Fees paid on debenture extension
Issuance of common shares
Cash used by continuing operations
Cash used by financing activities
Effect of exchange rate changes on cash and cash equivalents
(Decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of the year
Cash and cash equivalents at end of the year
The accompanying notes are an integral part of these consolidated financial statements.
Note
2017
2016
$
308.9 $
(381.8)
5
6
7
8
15
9
10
20
20
17
6
6, 12
6, 13
16
12 $
65.8
(629.0)
195.0
(31.9)
-
116.7
14.2
-
6.7
9.3
(57.2)
(17.6)
(0.7)
10.2
(9.6)
(5.2)
(14.8)
(18.6)
(12.0)
(10.5)
31.7
(12.0)
(38.6)
0.8
22.0
(37.2)
(37.2)
(35.0)
-
5.6
(29.4)
(29.4)
(2.2)
(83.6)
268.6
185.0 $
92.1
-
212.0
44.7
8.5
53.5
6.5
(4.6)
14.1
8.7
(59.8)
(10.3)
(1.1)
19.1
1.6
(7.4)
(5.8)
(23.2)
(17.0)
-
1.3
-
-
-
164.8
125.9
125.9
(65.7)
(14.8)
0.2
(80.3)
(80.3)
(0.8)
39.0
229.6
268.6
70 Sherritt International Corporation
Consolidated statements of changes in
shareholders’ equity
Canadian $ millions
Note
Capital
stock
Accumulated
other
comprehensive
Deficit
Reserves
income (loss)
Total
Balance as at December 31, 2015
$ 2,775.3 $ (2,342.6) $
224.9 $
899.5 $ 1,557.1
Total comprehensive loss:
Net loss for the year
Foreign currency translation differences on foreign operations
Actuarial loss on pension plans, net of tax
Shares issued for:
Warrants exercised
Stock option plan expense
Warrant issuance
Balance as at December 31, 2016
Total comprehensive income:
Net earnings for the year
Foreign currency translation differences on foreign operations
Actuarial losses on pension plans, net of tax
Shares issued for:
Restricted stock plan (vested)
Warrants exercised
18
18
18
18
16
18
18
18
18
Reclassification to Gain on Ambatovy Joint Venture restructuring
Reclassification to net finance expense upon dissolution of
6, 18
18
foreign operation
Stock option plan expense
Balance as at December 31, 2017
18
-
-
-
-
0.4
-
(378.9)
-
-
(378.9)
-
-
-
-
-
(89.8)
(0.7)
(90.5)
(378.9)
(89.8)
(0.7)
(469.4)
-
-
(0.2)
1.8
-
-
0.2
1.8
-
2,775.7
-
(2,721.5)
8.2
234.7
-
809.0
8.2
1,097.9
-
-
-
-
0.1
8.8
-
-
-
293.8
-
-
293.8
-
-
-
-
-
$ 2,784.6 $ (2,427.7) $
-
-
-
-
(0.1)
(3.2)
-
-
-
(72.1)
(0.2)
(72.3)
293.8
(72.1)
(0.2)
221.5
-
-
-
5.6
(269.6)
(0.6)
(269.6)
(0.6)
1.5
232.9 $
-
1.5
466.5 $ 1,056.3
The accompanying notes are an integral part of these consolidated financial statements.
Sherritt International Corporation 71
Notes to the consolidated financial statements
Notes to the consolidated financial statements
(All dollar amounts presented in tables are expressed in millions of Canadian dollars except share and per share amounts)
1. NATURE OF OPERATIONS AND CORPORATE INFORMATION
Sherritt International Corporation (“Sherritt” or the “Corporation”) is a world leader in the mining and refining of nickel from
lateritic ores with projects and operations in Canada, Cuba, and Madagascar. The Corporation is the largest independent
energy producer in Cuba, with extensive oil and power operations across the island. Sherritt licenses its proprietary
technologies and provides metallurgical services to mining and refining operations worldwide.
The Corporation is domiciled in Ontario, Canada and its registered office is 181 Bay Street, Toronto, Ontario, M5J 2T3. These
consolidated financial statements were approved and authorized for issuance by the Board of Directors of Sherritt on February
12, 2018. The Corporation is listed on the Toronto Stock Exchange.
2. BASIS OF PRESENTATION
2.1 Basis of presentation
The consolidated financial statements of the Corporation are prepared in accordance with International Financial Reporting
Standards (IFRS), as issued by the International Accounting Standards Board (IASB).
The Corporation has consistently applied the same accounting policies to all periods presented.
The consolidated financial statements are prepared on a going concern basis, under the historical cost convention except for
certain financial assets and liabilities and cash-settled share-based payments, which have been measured at fair value. All
financial information is presented in Canadian dollars rounded to the nearest hundred thousand, except as otherwise noted.
The preparation of financial statements requires the use of certain critical accounting estimates. It also requires management
to exercise judgment in applying the Corporation’s accounting policies. These estimates and judgments are continuously
evaluated and are based on management’s experience and knowledge of relevant facts and circumstances. Actual results
may differ from estimates.
Certain of the Corporation’s accounting policies that relate to the financial statements as a whole, as well as estimates and
judgments it has made and how they affect the amounts reported in the consolidated financial statements, are incorporated in
this section. To facilitate a better understanding of the Corporation’s consolidated financial statements, additional significant
accounting policies, estimates and judgments (with the exception of those identified in this note 2) are disclosed throughout the
following notes:
72 Sherritt International Corporation
Note
Topic
4
4
7
8
10
12
14
15
15
15
17
19
20
23
Reportable segments
Revenue recognition
Investment in an associate
Joint arrangements
Income taxes
Financial instruments
Inventories
Property, plant and equipment
Intangible assets
Impairment of non-financial assets
Provisions
Stock-based compensation
Statement of cash flows
Leases
2.2 Principles of consolidation
Accounting
policies
Critical accounting
estimates and
judgments
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
Page
80
80
86
89
91
96
101
101
101
101
111
115
120
125
These consolidated financial statements include the financial position, financial performance and cash flows of the
Corporation, its subsidiaries, its interest in an associate, its interest in a joint venture, and its share of assets, liabilities,
revenues and expenses related to its interests in joint operations. Intercompany balances, transactions, income and expenses,
profits and losses, including gains and losses relating to subsidiaries and joint operations have been eliminated on
consolidation.
The Corporation’s significant subsidiaries, joint arrangements and interest in an associate are as follows:
Relationship
Geographic
location
Economic
interest
Basis of
accounting
Metals
Moa Joint Venture
Composed of the following operating companies:
International Cobalt Company Inc.
Moa Nickel S.A.
The Cobalt Refinery Company Inc.
Joint venture
50%
50%
50%
50%
Bahamas
Cuba
Canada
Equity method
Ambatovy Joint Venture
Associate
40%, 12%(1)
Equity method
Composed of the following operating companies:
Ambatovy Minerals S.A.
Dynatec Madagascar S.A.
Oil and Gas
Madagascar
Madagascar
40%, 12%(1)
40%, 12%(1)
Sherritt International (Cuba) Oil and Gas Ltd.
Sherritt International Oil and Gas Ltd.
Subsidiary
Subsidiary
Cuba
Canada
100%
100%
Consolidation
Consolidation
Power
Energas S.A. (Energas)
Joint operation Cuba
33⅓%
Share of assets, liabilities,
revenues and expenses
(1) On December 11, 2017, the Corporation’s economic interest in the Ambatovy Joint Venture was reduced from 40% to 12% as part of the Ambatovy Joint Venture
restructuring (note 6).
Sherritt International Corporation 73
Notes to the consolidated financial statements
Subsidiaries
Subsidiaries are entities over which the Corporation has control. Control is defined as when the Corporation is exposed or has
rights to the variable returns from the subsidiary and has the ability to affect those returns through its power over the
subsidiary. Power is defined as existing rights that give the Corporation the ability to direct the relevant activities of the
subsidiary. Subsidiaries are fully consolidated from the date control is transferred to the Corporation and are de-consolidated
from the date control ceases.
Joint arrangements
A joint arrangement is an arrangement whereby two or more parties are subject to joint control. Joint control is considered to
be when all parties to the joint arrangement are required to reach unanimous consent over decisions about relevant business
activities pertaining to the contractual arrangement. The Corporation has two types of joint arrangements: a joint venture and
joint operations. See note 8 for details.
Associate
An associate is an entity over which the Corporation has significant influence. Significant influence is the power to participate in
operating and financial decisions of the investee, but is not control or joint control over those policies. The Corporation is
presumed to have significant influence over an entity if it holds, directly or indirectly, 20 percent or more of the voting power of
the entity or if significant influence can be clearly demonstrated. The Corporation has one associate. See note 7 for details.
Impairment of the investment in an associate and investment in a joint venture
At each reporting date, the Corporation assesses whether there is any indication that the carrying amounts of the
Corporation’s investment in an associate and investment in a joint venture, including related mineral rights, may be impaired.
Significant changes in commodity price forecasts, reserve estimates and production forecasts are examples of factors that
could indicate impairment.
Impairment is determined as the excess of the carrying amount of the investment in an associate and investment in a joint
venture over their recoverable amounts (higher of value in use and fair value less costs to sell). The recoverable amount is
based on estimated future recoverable production, expected commodity or contracted prices (considering current and
historical prices, price trends and related factors), discount rates, foreign exchange rates, production levels, cash costs of
production and environmental rehabilitation costs over the life of mine. Cash flow projections are based on detailed mine plans
and independent estimates of critical commodity prices.
See note 15 for the Corporation’s policy on impairment of non-financial assets of its subsidiaries and joint operations.
Critical accounting judgments
Interests in other entities
The Corporation applies judgment in determining the classification of its interest in other entities, such as: (i) the determination
of the level of control or significant influence held by the Corporation; (ii) the legal structure and contractual terms of the
arrangement; (iii) concluding whether the Corporation has rights to assets and liabilities or to net assets of the arrangement;
and (iv) when relevant, other facts and circumstances. The Corporation has determined that Energas S.A. and its Oil and Gas
production-sharing contracts represent joint operations while the Moa Joint Venture represents a joint venture as described in
IFRS 11, “Joint Arrangements”. The Corporation has concluded that the Ambatovy Joint Venture represents an investment in
an associate as described in IAS 28, “Investments in Associates and Joint Ventures”. All other interests in other entities have
been determined to be subsidiaries as described in IFRS 10, “Consolidated Financial Statements”.
Measuring the recoverable amount of the Corporation’s investment in an associate and investment in a joint venture
The Corporation accounts for its investment in an associate and investment in a joint venture using the equity method. The
Corporation assesses the carrying amount of its investments at each reporting date to determine whether there are any
indicators that the carrying amount of the investments may be impaired.
74 Sherritt International Corporation
For purposes of determining the recoverable amount, management calculates the net present value of expected future cash
flows. Projections of future cash flows are based on factors relevant to the investment’s operations and could include
estimated recoverable production, commodity or contracted prices, foreign exchange rates, production levels, cash costs of
production, capital and reclamation costs. Projections inherently require assumptions and judgments to be made about each of
the factors affecting future cash flows. The determination of the recoverable amount involves a detailed review of the
investment’s life of mine model and the determination of weighted average cost of capital among other critical factors.
Changes in any of these assumptions or judgments could result in a significant difference between the carrying amount and
the recoverable amount of these investments. Where necessary, management engages qualified third-party professionals to
assist in the determination of recoverable amounts.
2.3 Foreign currency translation
The consolidated financial statements are presented in Canadian dollars, the Corporation’s functional and presentation
currency.
Translation of foreign entities
The functional currency for each of the Corporation’s subsidiaries, joint arrangements and associate is the currency of the
primary economic environment in which it operates. Operations with foreign functional currencies are translated into the
Corporation’s presentation currency in the following manner:
(cid:131) Monetary and non-monetary assets and liabilities are translated at the spot exchange rate in effect at the reporting
date;
(cid:131) Revenue and expense items (including depletion, depreciation and amortization) are translated at average rates of
exchange prevailing during the period, which approximate the exchange rates on the transaction dates;
(cid:131)
Impairment of assets are translated at the prevailing rate of exchange on the date of the impairment recognition, and;
(cid:131) Exchange gains and losses that result from translation are recognized as foreign currency translation differences on
foreign operations in accumulated other comprehensive income.
Translation of transactions and balances
Operations with transactions in currencies other than the entity’s functional currency are recognized at the rates of exchange
prevailing at the date of the transaction as follows:
(cid:131) Monetary assets and liabilities are translated at current rates of exchange with the resulting gains or losses
recognized within financing expense in the consolidated statements of comprehensive income (loss);
(cid:131) Non-monetary items are translated at historical exchange rates; and
(cid:131) Revenue and expense items are translated at the average rates of exchange, except depletion, depreciation and
amortization, which are translated at the rates of exchange applicable to the related assets, with any gains or losses
recognized within financing expense in the consolidated statements of comprehensive income (loss).
3. ACCOUNTING PRONOUNCEMENTS
Adoption of new and amended accounting pronouncements
In 2017, there have been no new or amended accounting pronouncements that have had a material impact on the
Corporation’s consolidated financial statements.
Sherritt International Corporation 75
Notes to the consolidated financial statements
Accounting pronouncements issued but not yet effective
IFRS 9 – Financial Instruments
In July 2014, the IASB issued IFRS 9 Financial Instruments (“IFRS 9”) which replaces IAS 39 effective January 1, 2018. IFRS
9 provides new guidance on the classification and measurement, impairment and hedge accounting for financial instruments in
addition to new guidance for the treatment of term modifications for financial liabilities. IFRS 9 is required to be adopted
retrospectively with certain available transition provisions which allow the Corporation to elect not to restate prior period
comparative information.
The Corporation is in the final stages of its evaluation of the impact of this standard on its consolidated financial
statements. The Corporation will adopt IFRS 9 for the annual period beginning January 1, 2018 and will apply the standard on
a retrospective basis using the available transitional provisions. Under this approach, the 2017 comparative period will not be
restated and a cumulative transitional adjustment to the opening deficit balance will be recognized at January 1, 2018.
Classification and measurement:
IFRS 9 requires a new approach for the classification and measurement of financial assets based on the Corporation’s
business models for managing these financial assets and their contractual cash flow characteristics, summarized as follows:
(cid:120) Assets held for the purpose of collecting contractual cash flows that represent solely payments of principal and
interest will be measured at amortized cost.
(cid:120) Assets held within a business model where assets are both held for the purpose of collecting contractual cash flows
or sold prior to maturity and the contractual cash flows represent solely payments of principal and interest will be
measured at fair value through other comprehensive income (‘FVTOCI”).
(cid:120) Assets held within another business model or assets that do not have contractual cash flow characteristics that are
solely payments of principal and interest will be measured at fair value through profit or loss (“FVTPL”).
The Corporation has completed its review of all financial instruments held and has performed cash flow and business model
assessments on the Corporation’s financial assets. The expected impact is summarized as follows:
(cid:120)
The Corporation’s cash equivalents and short-term investments currently measured at FVTPL will now be measured
at FVTOCI, with unrealized gains and losses recorded in other comprehensive income, until the time they are sold or
otherwise derecognized, at which point gains and losses will be reclassified to profit and loss. The Corporation does
not expect a material impact as a result of this change.
(cid:120) Generally, the Corporation’s other financial assets currently classified as loans and receivables will continue to be
measured at amortized cost. This includes the Ambatovy subordinated loans receivable, Energas conditional sales
agreement, Moa Joint Venture expansion loans receivable and Moa Joint Venture working capital facility.
Impairment:
IFRS 9 introduces a new expected credit loss (“ECL”) impairment model for all financial assets measured at amortized cost or
debt instruments measured at FVTOCI. The new ECL model will result in an allowance for expected credit losses being
recorded regardless of whether or not there has been an actual loss event.
The ECL model is forward-looking and requires the use of a reasonable and supportable forecast of future conditions in the
determination of whether or not there has been a significant increase in credit risk since origination and measurement of the
ECL. The Corporation continues to refine certain aspects of the expected credit loss modelling process leading up to its March
31, 2018 reporting. The expected impact is summarized as follows:
(cid:120)
The Corporation expects to recognize a material ECL allowance against the Ambatovy subordinated loans receivable
due to forecasted conversions of debt to equity in the Ambatovy Joint Venture which will result in a reduction to the
loans receivable. These conversions of debt to equity are undertaken to ensure compliance with a Malagasy mining
regulatory requirement at the Ambatovy Joint Venture.
76 Sherritt International Corporation
(cid:120)
The Corporation expects to recognize a material ECL allowance against the Moa expansion loans receivable due to
management’s current forecast of expansion production.
Hedge accounting:
IFRS 9 also introduces a new hedge accounting model that expands the scope of hedge items and risks eligible for hedge
accounting and aligns hedge accounting more closely with risk management. The Corporation does not currently engage in
hedging activity and is not impacted by the new hedge accounting guidance.
Financial liabilities:
Generally, IFRS 9 does not introduce changes to the classification of financial liabilities. The Corporation will continue to
measure its financial liabilities at amortized cost.
In regards to term modifications for financial liabilities, IFRS 9 requires that when a financial liability measured at amortized
cost is modified or exchanged, and such modification or exchange does not result in derecognition, the adjustment to the
amortized cost of the financial liability is recognized in profit or loss. The Corporation continues to refine its measurement of
the required adjustments. The expected impact is summarized as follows:
(cid:120)
(cid:120)
The Corporation expects to recognize a material reduction in the amortized cost of its senior unsecured debentures
resulting from the extension of their maturity dates during 2016.
The Ambatovy Joint Venture expects to recognize a material increase in the amortized cost of the Ambatovy Joint
Venture financing resulting from the deferral of six principal repayments during 2016, resulting in the Corporation
recognizing a material decrease in the investment in an associate based on its 12% ownership.
Sherritt International Corporation 77
Notes to the consolidated financial statements
IFRS 15 – Revenue from Contracts with Customers
In May 2014, the IASB issued IFRS 15 Revenue from Contracts with Customers (“IFRS 15”) which replaces IAS 18 and IAS
11 effective January 1, 2018. The objective of IFRS 15 is to establish the principles that the Corporation will apply to report
useful information about the nature, amount, timing and uncertainty of revenue and cash flows arising from a contract with a
customer. The Corporation has elected to apply the standard on a modified retrospective basis using certain practical
expedients. Under this approach, the 2017 comparative period will not be restated and a cumulative transitional adjustment to
the opening deficit balance will be recognized at the date of initial application.
The Corporation is in the final stages of its evaluation of the impact of this standard on its consolidated financial statements.
Management has identified the following impacts to revenue recognition and disclosure:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
In the Moa JV and Fort Site segment, revenue of the Moa JV is excluded from consolidated revenue due to the equity
method and is included in the share of earnings (loss) of a joint venture. At the Moa JV, no material transitional
adjustment is expected upon adoption and no material change is expected in the timing and recognition of revenue.
The Corporation determined that Moa JV’s revenue associated with performance obligations for shipping and
insurance for certain sales was immaterial and therefore the current timing of recognition will not change upon
adoption. At the Fort Site, the Corporation will be required to disclose revenue recognized during the year ended
December 31, 2018 that is included in deferred revenue at the beginning of the period.
In the Ambatovy JV segment, all revenue relates to the Ambatovy JV and is excluded from consolidated revenue due
to the equity method and is included in the share of earnings (loss) of an associate. At the Ambatovy JV, no material
transitional adjustment is expected upon adoption and no change is expected in the timing of revenue recognition. A
change is expected in the recognition of marketing expenses paid to customers, which will be accounted for as
reductions of revenue rather than expenses, with no impact to Ambatovy JV’s net earnings (loss). The Corporation
determined that Ambatovy JV’s revenue associated with performance obligations for shipping and insurance for
certain sales was immaterial and therefore the current timing of recognition will not change upon adoption.
In the Oil and Gas segment, no material transitional adjustment is expected upon adoption and no material change is
expected in the timing and recognition of revenue. The Corporation is entitled to the recovery of certain costs
incurred as a result of its production-sharing contracts from an agency of the Government of Cuba. The
Corporation’s receivable for recoverable costs not yet approved by the agency will be required to be presented
separately from trade accounts receivable, net, given that approval is outstanding. In addition, the Corporation will be
required to disclose revenue allocated to remaining performance obligations for production-sharing contracts with an
expected duration of over one year and when it expects to recognize this revenue.
In the Power segment, no material transitional adjustment is expected upon adoption and no material change is
expected in the timing and recognition of revenue. The Corporation will be required to disclose revenue allocated to
remaining performance obligations for service concession arrangements with an expected duration of over one year
and when it expects to recognize this revenue.
No impact on the consolidated statements of cash flow is expected from adoption.
78 Sherritt International Corporation
IFRS 16 – Leases
In January 2016, the IASB issued IFRS 16 Leases (“IFRS 16”) which replaces IAS 17 and IFRIC 4 effective January 1, 2019.
The objective of IFRS 16 is to report information that faithfully represents lease transactions and provides a basis for users of
financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. To meet that objective, a
lessee should recognize assets and liabilities arising from a lease.
IFRS 16 introduces a single lessee accounting model and requires a lessee to recognize assets and liabilities for all leases
with a term of more than 12 months, unless the underlying asset is of low value. A lessee is required to recognize a right-of-
use asset representing its right to use the underlying leased asset and a lease liability representing its obligation to make lease
payments.
The Corporation is currently evaluating the impact of this standard on its consolidated financial statements. The Corporation
will not early adopt IFRS 16. The Corporation expects to recognize lease liabilities and right-of-use assets in respect of
operating leases previously expensed.
Sherritt International Corporation 79
Notes to the consolidated financial statements
4. SEGMENTED INFORMATION
Accounting policies
The accounting policies of the segments are the same as those described in note 2 and other relevant notes and are
measured in a manner consistent with that of the consolidated financial statements.
Reportable segments
The Corporation has determined the following to be reportable segments based on qualitative and quantitative considerations
discussed within the critical accounting estimates and judgments sections below:
(cid:131)
(cid:131)
(cid:131)
(cid:131)
(cid:131)
(cid:131)
The Moa JV and Fort Site segment is comprised of mining, processing and refining activities of nickel and cobalt for
the Corporation’s 50% interest in the Moa Joint Venture in Cuba and Canada and includes the production and sale of
agricultural fertilizers for its 100% interest in the utility and fertilizer operations in Fort Saskatchewan;
The Ambatovy JV segment represents the Corporation’s interest in the Ambatovy Joint Venture’s integrated nickel
and cobalt facility in Madagascar. Prior to the Ambatovy Joint Venture restructuring (note 6) on December 11, 2017,
the Corporation’s interest was 40%. Subsequent to the restructuring, the Corporation’s interest was 12%;
The Metals Other segment is comprised of the Corporation’s three wholly-owned subsidiaries established to buy,
market and sell certain of Ambatovy Joint Venture’s and Moa Joint Venture’s nickel production;
The Oil and Gas segment includes the oil and gas operations in Cuba as well as the exploration and development of
oil and gas in Cuba, Spain and Pakistan;
The Power segment includes the operations in Cuba, which construct and operate electricity generating plants that
provide electricity in Cuba; and,
The Corporate and Other segment is comprised of the Corporation’s metallurgical technology business, Commercial
and Technologies; management of cash and short-term investments; general corporate activities; and wholly-owned
subsidiaries of the Corporation established to finance the Ambatovy Joint Venture.
Revenue recognition
Revenue from the sale of goods is recognized when the Corporation has transferred to the buyer the significant risks and
rewards of ownership of the goods, the Corporation retains neither continuing managerial involvement nor effective control
over the goods sold, the amount of revenue can be measured reliably, it is probable that the economic benefits associated with
the transaction will flow to the Corporation, and the costs incurred or to be incurred in respect of the transaction can be
measured reliably. Revenue from a contract to provide services is recognized by reference to the stage of completion of the
contract.
Metals
Metals encompasses the Moa JV, the Ambatovy JV and the Metals Other segments. In Metals, these criteria are generally met
when the transfer of ownership, as specified in the sales contract, is fulfilled, which is upon shipment or delivery to destination.
Certain Metals product sales are provisionally priced, with the selling price subject to final adjustment at the end of a quotation
period, in accordance with the terms of the sale. The quotation period is normally within 90 days after shipment to the
customer, and final pricing is based on a reference price established at the end of the quotation period.
Revenue from provisionally priced sales is initially recorded at the estimated fair value of the consideration that is expected to
be ultimately received based on forecast reference prices. At each reporting date, all outstanding receivables originating from
provisionally priced sales are marked-to-market based on a forecast of reference prices at that time. The adjustment to
accounts receivable is recorded as an adjustment to sales revenue. Provisional pricing is only used in the pricing of nickel and
cobalt sales for which reference prices are established in a freely traded and active market.
Oil and Gas
In Oil and Gas, these criteria are met at the time of production based on the Corporation’s working interest. In Cuba, all oil
production is sold to the Cuban government and, accordingly, delivery coincides with production. The Corporation is allocated
a share of Cuban oil production pursuant to its production-sharing contracts.
80 Sherritt International Corporation
Revenue from cost recovery oil, up to the total recoverable costs incurred in connection with oil activities, is recognized when
entitlement to the cost recovery oil component of production is established. The production-sharing contracts limit cost
recovery oil to a maximum percentage of total production in a calendar quarter, ranging generally between 50% and 60% of
total production. Revenue from profit oil represents the Corporation’s share of oil production after cost recovery oil production
is deducted. Recoverable costs that do not provide cost recovery oil entitlements in the current period are included in the
determination of cost recovery oil entitlements, and thus revenue, in future periods.
Power
Substantially all of Power’s revenue is from agencies of the Government of Cuba, with the revenue recognition criteria met at
the time electricity is delivered or services are performed.
The facilities located in Boca de Jaruco and Puerto Escondido, Cuba operate under a service concession arrangement. In
accordance with the accounting guidance for service concession arrangements, Power revenue on operational facilities is
recognized at the time electricity is delivered or services are performed, and construction revenue is recorded during periods of
new construction, enhancement or upgrade activities. The construction revenue relates to the exchange transaction whereby
the Corporation provides design, construction and operating services at Boca de Jaruco or Puerto Escondido in return for the
right to charge the Government of Cuba for the future supply of electricity.
The facilities located in Varadero, Cuba operate under lease arrangements, whereby the Corporation is the lessor. All
operating lease revenue related to the Varadero facility is contingent on the amount of electricity produced or services
rendered and is recognized when lease payments become due.
Critical accounting judgments
When determining its reportable segments, the Corporation considers qualitative factors, such as operations that offer distinct
products and services and are considered to be significant by the Chief Operating Decision Maker, identified as the senior
executive team. The Corporation also considers quantitative thresholds when determining reportable segments, such as if
revenue, earnings (loss) or assets are greater than 10% of the total consolidated revenue, net earnings (loss), or assets of all
the reportable segments, respectively. Operating segments that share similar economic characteristics are aggregated to form
a single reportable segment. Aggregation occurs when the operating segments have similar economic characteristics, and
have similar (a) products and services; (b) production processes; (c) type or class of customer for their products and services;
(d) methods used to distribute their products or provide their services; and (e) nature of the regulatory environment, if
applicable.
Sherritt International Corporation 81
Revenue(6)
Cost of sales
Administrative expenses
Gain on Ambatovy Joint Venture
restructuring
Other gains
Share of loss of an associate, net of tax
Share of earnings of a joint venture,
net of tax
Earnings (loss) from operations,
associate and joint venture
Financing income
Financing expense
Net finance expense
Earnings before tax
Income tax expense
Net earnings from continuing operations
Loss from discontinued operations,
net of tax (note 17)
Net earnings for the year
Supplementary information
Depletion, depreciation and amortization
Property, plant and equipment
expenditures
Intangible asset expenditures
Canadian $ millions, as at December 31
Non-current assets(7)
Total assets
Notes to the consolidated financial statements
Supporting information
Canadian $ millions, for the year ended December 31
Moa JV and
Fort Site(1)
Metals
Ambatovy
JV(2)
Other(3)
Oil and
Gas
Adjustments for
Joint Venture
Power and Other(4) and Associate(5)
Corporate
2017
Total
$
417.0
$
(376.1)
(9.6)
$
279.2
(385.5)
(12.3)
43.1
$
(41.5)
(0.7)
127.0
$
(83.0)
(10.4)
51.2
$
(41.3)
(4.7)
-
-
-
-
4.2
4.9
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$
(9.6)
(42.7)
629.0
-
-
-
(650.2) $
706.9
18.1
267.3
(230.1)
(62.3)
(4.2)
629.0
(4.9)
(195.0)
-
(195.0)
31.9
31.9
31.3
(109.5)
0.9
33.6
5.2
576.7
(97.4)
440.8
65.4
(183.1)
(117.7)
323.1
(14.2)
308.9
(15.1)
293.8
(179.0) $
(42.6)
-
65.8
18.6
12.0
(1,232.7) $
2017
371.4
(933.1) 2,244.8
Adjustments for
Joint Venture
and Associate(5)
2016
Total
$
49.2
$
139.7
$
20.9
-
28.9
-
-
-
-
$
28.3
$
24.9
$
2.7
$
9.9
12.0
1.5
-
-
-
$
$
666.7
932.8
$
704.7
789.8
-
109.6
96.3
$
1,186.6
$
$
132.3
553.7
$
4.1
(394.6)
Canadian $ millions, for the year ended December 31
Moa JV
Fort Site(1)
Metals
Ambatovy
JV(2)
Other(3)
Oil and
Gas
Power
Corporate
and Other(4)
Revenue(6)
Cost of sales
Administrative expenses
Impairment of Oil assets
Share of loss of an associate, net of tax
Share of loss of a joint venture, net of tax
(Loss) earnings from operations, associate
and joint venture
Financing income
Financing expense
Net finance expense
Loss before tax
Income tax expense
Net loss from continuing operations
Earnings from discontinued operations,
net of tax (note 17)
Net loss for the year
Supplementary information
Depletion, depreciation and amortization
Property, plant and equipment
expenditures
Intangible asset expenditures
Canadian $ millions, as at December 31
Non-current assets(7)
Total assets
$
339.3
$
(357.3)
(10.4)
-
-
-
$
264.8
(397.3)
(18.4)
-
-
-
48.0
$
(46.3)
(0.9)
-
-
-
108.6
$
(105.7)
(10.7)
(8.5)
-
-
58.6
$
(59.7)
(4.2)
-
-
-
0.9
$
(10.7)
(33.0)
-
-
-
(557.9) $
713.6
23.1
-
(212.0)
(44.7)
262.3
(263.4)
(54.5)
(8.5)
(212.0)
(44.7)
(28.4)
(150.9)
0.8
(16.3)
(5.3)
(42.8)
(77.9)
(320.8)
81.2
(135.7)
(54.5)
(375.3)
(6.5)
(381.8)
2.9
(378.9)
$
48.0
$
143.9
$
31.2
-
21.3
-
-
-
-
$
43.4
$
34.8
$
4.3
$
9.0
17.0
1.0
-
0.1
-
$
734.0
961.1
$ 2,620.8
2,934.8
$
-
92.2
$
119.9
1,194.0
$
$
165.1
542.6
$
7.3
658.9
(182.3) $
(39.4)
-
92.1
23.2
17.0
2016
(3,209.8) $
437.3
(2,576.7) 3,806.9
(1)
Included in the Moa JV and Fort Site segment are the operations of the Corporation’s 50% interest in the Moa Joint Venture and its 100% interest in the utility and
fertilizer operations in Fort Saskatchewan.
82 Sherritt International Corporation
(2)
(3)
Included in the Ambatovy JV segment are the operations of the Corporation’s interest in the Ambatovy Joint Venture. Prior to the Ambatovy Joint Venture restructuring
(note 6) on December 11, 2017, the Corporation’s interest was 40%. Subsequent to the restructuring, the Corporation’s interest was 12%
Included in the Metals Other segment are the operations of three wholly-owned subsidiaries of the Corporation established to buy, market and sell certain Ambatovy Joint
Venture and Moa Joint Venture nickel and cobalt production.
(4) Revenues from Corporate and Other primarily relate to sales from the Corporation’s metallurgical technologies business, Commercial and Technologies. Also included in
the Corporate and Other segment are the operations of wholly-owned subsidiaries of the Corporation established to finance the Ambatovy Joint Venture.
(5) The Adjustments for Joint Venture and Associate reflect the adjustments for equity-accounted investments in the Ambatovy Joint Venture and Moa Joint Venture.
(6) Revenue in the Metals Other segment includes $7.0 million of intersegment revenue with the Moa JV and Fort Site segment related to marketing of nickel and cobalt
($3.5 million for the year ended December 31, 2016). Revenue in the Corporate and Other segment includes $1.7 million of intersegment revenue, net of elimination,
with the Ambatovy JV segment related to the Ambatovy Joint Venture operator fee for the year ended December 31, 2017 ($1.6 million for the year ended December 31,
2016).
(7) Non-current assets are composed of property, plant and equipment and intangible assets.
Geographic information
Canadian $ millions, as at
North America
Cuba
Madagascar
Europe
Asia
Other
2017
December 31
Non-current
assets(1)
Total
assets(2)
Non-current
assets(1)
2016
December 31
Total
assets(2)
$
$
146.9 $
217.6
-
6.4
0.5
-
371.4 $
497.5 $
1,104.3
483.0
72.8
41.5
45.7
2,244.8 $
155.8 $
263.7
1.0
16.1
0.7
-
437.3 $
646.2
1,164.3
1,896.5
54.3
22.6
23.0
3,806.9
(1) Non-current assets are composed of property, plant and equipment and intangible assets and exclude the non-current assets of equity-accounted investments.
(2) For its geographic information, the Corporation has allocated assets based on their physical location.
Canadian $ millions, for the years ended December 31
North America
Cuba
Madagascar
Europe
Asia
Other
2017
Total
revenue(1)
2016
Total
revenue(1)
$
$
85.4 $
168.5
1.7
8.6
1.7
1.4
267.3 $
87.6
159.6
2.3
10.3
2.1
0.4
262.3
(1) For its geographic information, the Corporation has allocated revenue based on the location of the customer. Revenue excludes the revenue of equity-accounted
investments.
Revenue components
Canadian $ millions, for the years ended December 31
Nickel
Fertilizer
Oil and gas
Power generation
Other
(1) Revenue excludes the revenue of equity-accounted investments.
2017
Total
revenue(1)
2016
Total
revenue(1)
$
$
31.7 $
49.0
123.0
46.8
16.8
267.3 $
40.7
47.9
104.1
50.2
19.4
262.3
Sherritt International Corporation 83
Notes to the consolidated financial statements
Significant customers
The Oil and Gas segment derived $117.3 million of its revenue for the year ended December 31, 2017 ($101.0 million for the
year ended December 31, 2016) directly and indirectly from agencies of the Government of Cuba.
The Power segment derived $51.2 million of its revenue for the year ended December 31, 2017 ($57.7 million for the year
ended December 31, 2016) directly and indirectly from agencies of the Government of Cuba.
The Metals Other segment derived $31.4 million of its revenue for the year ended December 31, 2017 ($32.7 million for the
year ended December 31, 2016) from a customer who markets and sells nickel.
No other single customer contributed 10% or more to the Corporation’s revenue for both 2017 and 2016.
5. EXPENSES
Cost of sales includes the following:
Canadian $ millions, for the years ended December 31
2017
2016
Employee costs
Depletion, depreciation and amortization of property,
plant and equipment and intangible assets
Raw materials and consumables
Repairs and maintenance
Shipping and treatment costs
Impairment losses and inventory obsolescence(1)
Construction costs
Stock-based compensation expense
Other
$
$
63.1 $
63.1
36.9
45.2
12.9
2.4
-
0.6
5.9
230.1 $
65.1
89.4
34.6
38.7
15.6
2.0
4.6
1.1
12.3
263.4
(1)
In the third quarter of 2016, the Corporation recognized an impairment loss of $8.5 million (note 15) representing the write-down of certain Oil assets in the Oil and Gas
segment to their recoverable amount. Due to the significance of this impairment loss, the amount has been presented separately from cost of sales as impairment of Oil
assets in the consolidated statement of comprehensive income (loss).
Administrative expenses include the following:
Canadian $ millions, for the years ended December 31
Employee costs
Severance
Depreciation
Stock-based compensation expense
Consulting services and audit fees
Other
2017
2016
$
$
30.0 $
2.1
2.7
14.1
6.2
7.2
62.3 $
26.2
3.4
2.7
10.9
7.0
4.3
54.5
During the year ended December 31, 2017, the Corporation revised the presentation of stock-based compensation expense
(recovery) to separate amounts included in cost of sales and administrative expense. In the prior year, this amount was
presented entirely within administrative expenses. The Corporation revised this presentation to better allow the users of the
financial statements to identify trends within the expenses note disclosure. For consistency with the current period presented,
the comparative amounts have been reclassified. For the year ended December 31, 2016, employee costs and stock-based
compensation expense (recovery) included within cost of sales have decreased by $1.1 million and increased by $1.1 million,
respectively. For the year ended December 31, 2016, employee costs and stock-based compensation expense (recovery)
included within administrative expenses have increased by $1.1 million and decreased by $1.1 million, respectively.
84 Sherritt International Corporation
6. AMBATOVY JOINT VENTURE RESTRUCTURING
On December 11, 2017, the Corporation closed the transaction to restructure its ownership interest in the Ambatovy Joint
Venture from 40% to 12%, which resulted in the Gain on the Ambatovy Joint Venture restructuring consisting of the following
gain (loss) components:
Canadian $ millions, for the year ended December 31
Non-cash items:
Derecognition of Ambatovy Joint Venture additional partner loans
Reduction of Ambatovy Joint Venture subordinated loans receivable
Reduction of investment in the Ambatovy Joint Venture
Reclassification of accumulated other comprehensive income
Waiver of 50% of Ambatovy Joint Venture operator fee receivable
Accrued transaction and other closing costs
Cash items:
Transaction and other closing costs
Gain on Ambatovy Joint Venture restructuring
$
2017
1,420.1
(562.5)
(480.6)
269.6
(6.3)
(0.9)
$
$
(10.4)
629.0
As part of the restructuring with the Corporation’s joint venture partners, Sumitomo and KORES, the Corporation transferred a
28% ownership interest in the Ambatovy Joint Venture (note 7) and 28% of the pre-completion shareholder subordinated loans
receivable (note 13). The Ambatovy Joint Venture additional partner loans of $1.4 billion were also derecognized (note 16) as
consideration for the ownership interest transferred. The Corporation retains a 12% ownership interest in the Ambatovy Joint
Venture and 12% of the pre-completion shareholder subordinated loans receivable.
On the date of the restructuring, post-financial completion cash calls since Sherritt ceased funding the Ambatovy Joint Venture
in December 2015, including accrued interest, of US$30.0 million ($38.6 million) were funded retroactively at Sherritt’s 12%
ownership interest, increasing advances, loans receivable and other financial assets on the consolidated statements of financial
position and included in loans to an associate in the consolidated statements of cash flow. Advances, loans receivable and
other financial assets increased by an additional US$8.2 million ($10.5 million) for funding paid to Sumitomo and KORES related
to post-financial completion cash calls not previously funded by the Corporation. This funding is presented as an increase in
advances, loans receivable and other financial assets on the consolidated statements of cash flow.
The Corporation made an additional payment of US$9.6 million ($12.0 million) into an escrow account to cover future funding
requirements of the Ambatovy Joint Venture. This amount is classified within restricted cash on the Corporation’s statements of
financial position. Any amounts remaining in escrow in August 2023 will be used to repay the Ambatovy Joint Venture partner
loans.
The Corporation’s non-current financial liability and financial asset of $222.8 million, related to the Corporation’s obligation for
outstanding shareholder funding, were derecognized as part of the retroactive funding (note 13 and note 16). Ambatovy Joint
Venture’s non-current financial asset and financial liability of the same amount, related to Ambatovy Joint Venture’s right to
receive outstanding shareholder funding from the Corporation, were also derecognized as part of the retroactive funding (note
7).
The Corporation’s Ambatovy Joint Venture partner loans continue to be secured by its 12% ownership interest (note 16). The
partner loans can be repaid in cash at any time through to maturity in August 2023. At maturity, Sherritt can elect to: (i) repay
the loans in cash, (ii) repay the loans in shares or a combination of cash and shares at 105% of the amount then due, or (iii)
repay in 10 equal semi-annual principal installments (plus interest) commencing in December 2024, at an interest rate of LIBOR
plus 5% applied from the original August 2023 maturity date.
As a result of the Corporation’s reduction of its ownership interest to 12%, $269.6 million of accumulated other comprehensive
income relating to the Ambatovy Joint Venture was reclassified to the Gain on Ambatovy Joint Venture restructuring within net
earnings, in proportion to the reduction of its interest (note 18). This amount was recognized in other comprehensive (loss)
income and accumulated within shareholders’ equity prior to the reclassification.
The Corporation was responsible for transaction and other closing costs, including financial and legal advisory fees, applicable
taxes and corporate restructuring costs, incurring total fees of $11.3 million. These costs have been recognized within the Gain
on Ambatovy Joint Venture restructuring.
Sherritt International Corporation 85
Notes to the consolidated financial statements
As operator of the Ambatovy Joint Venture, the Corporation is entitled to US$2.0 million per year for operator fees. As at the
date of the restructuring, 50% of accrued and unpaid operator fees outstanding to the Corporation up to and including February
16, 2017 were waived. As a result, the Corporation’s operator fee receivable was reduced by $10.5 million and a loss of $6.3
million, net of elimination of the Corporation’s interest, was recognized in the Gain on Ambatovy Joint Venture restructuring by
the Corporation.
As part of the restructuring, the Corporation has committed to continue as operator until at least 2024.
7. INVESTMENT IN AN ASSOCIATE
Accounting policies
The Ambatovy Joint Venture is recognized as an investment in an associate and accounted for using the equity method as
follows:
(cid:131)
(cid:131)
The Corporation recognizes its share of earnings (loss), net of tax in the consolidated statements of comprehensive
income (loss), which is adjusted against the carrying amount of its investment in an associate;
If the Corporation’s share of losses equals or exceeds the carrying value of its investment in an associate in the
future, the Corporation does not recognize further losses, unless it has incurred obligations or made payments on
behalf of the entity;
(cid:131) Gains and losses on transactions between the Corporation and its associate are eliminated to the extent of the
Corporation’s interest in this entity. Losses are eliminated only to the extent that there is no evidence of impairment;
and
(cid:131)
Interest revenue on a loan receivable from an associate is recognized to the extent of Sherritt’s economic interest.
Critical accounting judgments
As a result of the Ambatovy Joint Venture restructuring, post-financial completion cash calls were funded retroactively to
December 2015 at Sherritt’s 12% interest and Sherritt’s voting rights were reinstated. It is the Corporation’s judgment that the
Ambatovy Joint Venture continues to be an associate after the restructuring given the Corporation’s power to participate in its
operating and financial decisions, in particular due to the Corporation’s representation on the board of directors, participation in
policy-making processes, existence of material transactions between the Corporation and the Ambatovy Joint Venture,
interchange of managerial personnel and provision of essential technical information with Sherritt’s commitment to continue as
operator until at least 2024.
Prior to the Ambatovy Joint Venture restructuring, with respect to post-financial completion cash calls not funded by Sherritt
under the Ambatovy Joint Venture financing, Sherritt had the option to pay the amounts in cash at any time, at Sherritt’s
election. Until the funding deficit was addressed, and subject to continued discussions with the Ambatovy Joint Venture
partners, Sherritt did not exercise its Ambatovy Joint Venture voting rights. Sherritt had the ability to cure the underfunding and
regain its voting rights at any time. Therefore, it was the Corporation’s judgment that the Ambatovy Joint Venture continued to
be an associate.
Supporting information
The Corporation indirectly holds a 12% interest in Ambatovy Minerals S.A. and Dynatec Madagascar S.A. (collectively the
Ambatovy Joint Venture). Prior to the Ambatovy Joint Venture restructuring (note 6) on December 11, 2017, the Corporation
indirectly held a 40% interest in the Ambatovy Joint Venture. Sherritt is the operator of the Ambatovy Joint Venture and has as
its partners, Sumitomo Corporation (Sumitomo) and Korea Resources Corporation (KORES). The Ambatovy Joint Venture
has two nickel deposits located near Moramanga, Madagascar. The ore from these deposits is delivered via pipeline to a
processing plant and refinery located near the Port of Toamasina.
86 Sherritt International Corporation
Ambatovy Joint Venture restructuring
On December 11, 2017, the Corporation restructured its ownership interest in the Ambatovy Joint Venture from 40% to 12%.
As operator of the Ambatovy Joint Venture, the Corporation is entitled to US$2.0 million per year for operator fees. As at the
date of the restructuring, 50% of accrued and unpaid operator fees outstanding to the Corporation up to and including February
16, 2017 were waived. As a result, the Ambatovy Joint Venture’s operator fee payable was reduced by US$8.1 million and a
gain of US$8.1 million was recognized in Gain on Ambatovy Joint Venture restructuring by the Ambatovy Joint Venture. The
operator fee payable was also re-measured at fair value, resulting in a reduction to the payable and a gain of US$2.1 million
recognized in financing income by the Ambatovy Joint Venture.
The non-current financial asset and financial liability of $222.8 million, related to Ambatovy Joint Venture’s right to receive
outstanding shareholder funding from the Corporation, were derecognized as part of the retroactive funding as part of the
Ambatovy Joint Venture restructuring.
Deferral of principal repayment on Ambatovy Joint Venture financing
In August 2016, the Ambatovy Joint Venture financing lenders agreed to up to six principal payment deferrals totaling US$565.1
million (100% basis), which are to be repaid on a schedule starting in June 2021, or earlier subject to cash flow generation. Until
June 2019, the Ambatovy Joint Venture will pay semi-annual interest payments only and will not make semi-annual principal
payments unless there is sufficient free cash flow after required deductions. Deferred principal is subject to an additional 2%
accrued interest calculated from the date of each deferral. Total principal repayments were nil for the year ended December 31,
2017 as a result of this deferral (nil for the year ended December 31, 2016). Interest payments of US$63.2 million were made to
the lenders during the year ended December 31, 2017 (US$54.8 million for the year ended December 31, 2016).
The following provides additional information relating to the Corporation’s interest in the Ambatovy Joint Venture on a 100%
basis:
Statements of financial position
Canadian $ millions, 100% basis, as at
Assets
Cash and cash equivalents(1)
Other current assets
Trade accounts receivable, net
Inventories
Deferred income taxes(2)
Other non-current assets(3)
Property, plant and equipment
Total assets
Liabilities
Trade accounts payable and accrued liabilities
Other taxes payable
Other current financial liabilities
Current portion of loans and borrowings:
Ambatovy revolving credit facility(5)
Non-current portion of loans and borrowings:
Ambatovy Joint Venture financing(4)
Ambatovy subordinated loans payable(6)
Ambatovy subordinated loans payable - post-financial completion(7)
Environmental rehabilitation provisions
Other non-current liabilities(3)
Total liabilities
Net assets of Ambatovy Joint Venture
Proportion of Sherritt's ownership interest
Carrying value of investment in an associate
2017
December 31
2016
December 31
$
$
$
56.6 $
27.1
104.0
517.4
-
7.7
5,870.0
6,582.8
315.7
24.8
0.5
66.6
1,991.0
1,861.5
399.5
129.7
28.0
4,817.3
1,765.5 $
12%
211.9 $
76.7
26.0
109.6
415.5
-
160.2
6,549.3
7,337.3
321.0
21.7
0.1
50.5
2,118.7
2,358.5
242.9
142.0
162.2
5,417.6
1,919.7
40%
767.9
(1)
In accordance with La loi établissant un régime special pour les grands investissements dans le secteur minier malagasy (LGIM), Madagascar’s large scale mining
investment act, the Ambatovy Joint Venture is required to (a) maintain foreign currency in local bank accounts sufficient to pay 90 days of local expenses, or (b)
repatriate all revenue from export sales of mining products, less authorized debt service costs, to local bank accounts within 90 days of receipt. The Ambatovy Joint
Venture is currently electing to repatriate revenue from export sales, less authorized debt service costs, in compliance with the requirements of the LGIM.
Sherritt International Corporation 87
Notes to the consolidated financial statements
(2) As at December 31, 2017, the Ambatovy Joint Venture has earned investment tax credits which management has estimated to be $654.6 million (December 31, 2016 -
$694.2 million), operating losses of $840.0 million (December 31, 2016 - $867.9 million) and $4,423.5 million (December 31, 2016 - $4,359.1 million) of deductible
temporary differences for which deferred tax assets have not been recognized since the realization of any related tax benefit through future taxable profits is not
probable. The investment tax credits have an indefinite carry forward period and may be used to partially offset Malagasy income tax otherwise payable by the Ambatovy
Joint Venture in subsequent years. The operating losses have a 5-year expiry period.
(3) On December 11, 2017, the financial asset and financial liability of $222.8 million related to Ambatovy Joint Venture’s right to receive outstanding shareholder funding
from the Corporation were derecognized as part of the Ambatovy Joint Venture retroactive funding (note 6). As at December 31, 2016, the Ambatovy Joint Venture had
recognized a financial asset of $154.9 million relating to its right to receive outstanding shareholder funding from the Corporation (note 16). The Ambatovy Joint Venture
had also recognized a financial liability relating to future distributions payable to the Corporation if and when the funding deficit was cured (note 13). This financial liability
was not included within the Ambatovy subordinated loans payable as the funding had not yet been provided by the Corporation.
(4) The Ambatovy Joint Venture financing is project financing with a group of international lenders that matures on June 15, 2024. For the year ended December 31, 2017,
nil financing costs relating to the deferral of principal repayments were capitalized (December 31, 2016 - US$8.7 million ($11.4 million)). The project financing became
non-recourse to the partners in September 2015 when the project filed the remaining completion certificates and is now solely secured by the project assets. Interest is
payable based on LIBOR plus a weighted-average margin of 2.6%. Deferred principal is subject to an additional 2% accrued interest calculated from the date of each
deferral. As at December 31, 2017, the Ambatovy Joint Venture had borrowed US$1,601.1 million (December 31, 2016 - US$1,601.1 million) under the project financing.
(5) The Ambatovy revolving credit facility is comprised of a Malagasy Ariary (MGA) 156.0 billion ($60.6 million) revolving credit and MGA 20.0 billion ($7.8 million) overdraft
credit facility agreement with local financial institutions which matures on July 31, 2018 (December 31, 2016 – MGA 126.0 billion ($50.5 million) and nil, respectively).
The facility bears interest rates between 9.00% and 11.85% and is subordinated to the Ambatovy Joint Venture financing. As at December 31, 2017, MGA 156.0 billion
($60.6 million) and MGA 15.6 billion ($6.0 million) was drawn on the revolving and overdraft facilities, respectively (December 31, 2016 - MGA 126.0 billion ($50.5
million) and nil respectively).
(6) The subordinated loans payable is comprised of pro-rata contributions provided by the Ambatovy Joint Venture partners. The debt bears interest at LIBOR plus 6%.
Repayments of principal or interest will not be made prior to certain conditions of the finance agreements being satisfied. Unpaid interest is accrued monthly and
capitalized to the principal balance semi-annually. During the year ended December 31, 2017, US$400.0 million of the Ambatovy Joint Venture subordinated loans
payable was converted to equity which, at the Corporation’s share, resulted in a US$136.2 million ($176.1 million) decrease in the Corporation’s subordinated loans
receivable. The Corporation has recorded its share of the related subordinated loans receivable within advances, loans receivable and other financial assets (note 13).
There was no change to the Corporation’s ownership interest as a result of the conversion.
(7) The subordinated loans payable – post-financial completion is comprised of the Ambatovy Joint Venture partner contributions from and including December 15, 2015,
and accrued interest at a rate of LIBOR plus 8.0%. As part of the Ambatovy Joint Venture restructuring, the Corporation provided US$30.0 million of post-financial
completion cash funding, including accrued interest, retroactive to December 15, 2015 at Sherritt’s 12% interest (note 6), which is included in this balance.
Statements of comprehensive income (loss)
Canadian $ millions, 100% basis, for the years ended December 31
2017
2016
Revenue
Cost of sales(1)
Administrative expenses
Gain on Ambatovy Joint Venture restructuring
Other gains
Loss from operations
Financing income
Financing expense(2)
Net financing expense
Loss before tax
Income tax expense
Net loss and comprehensive loss of Ambatovy Joint Venture
Proportion of Sherritt's ownership interest
Total
Intercompany elimination
Share of loss of an associate, net of tax
$
720.5 $
(988.5)
(32.3)
10.4
14.8
(275.1)
3.7
(273.6)
(269.9)
(545.0)
(4.4)
(549.4) $
40%, 12% (3)
$
(215.2)
20.2
(195.0) $
$
662.1
(993.3)
(46.0)
-
-
(377.2)
1.1
(218.6)
(217.5)
(594.7)
-
(594.7)
40%
(237.9)
25.9
(212.0)
(1)
Included in cost of sales for the year ended December 31, 2017 is depreciation and amortization of $362.1 million ($358.7 million for the year ended December 31,
2016).
(2) The Ambatovy Joint Venture has a value added tax (VAT) receivable of $31.2 million (December 31, 2016 - $23.7 million) from the government of Madagascar. The VAT
receivable is net of a provision of $73.0 million (December 31, 2016 - $145.8 million) reflecting an assessment of the likelihood of receipt of these amounts. During the
year ended December 31, 2017, a gain on the partial reversal of this provision of $27.7 million was recognized in financing expense ($38.8 million for the year ended
December 31, 2016).
(3) Prior to the closing of the Ambatovy Joint Venture restructuring on December 11, 2017, the Corporation recognized its 40% share of the Ambatovy Joint Venture’s
losses. Subsequent to this date, the Corporation recognized its 12% share of the Ambatovy Joint Venture’s losses.
88 Sherritt International Corporation
8. JOINT ARRANGEMENTS
Investment in a joint venture
Accounting policies
The Moa Joint Venture is recognized as an investment in a joint venture and accounted for using the equity method as follows:
(cid:131)
(cid:131)
The Corporation recognizes its share of earnings (loss), net of tax in the consolidated statements of comprehensive
income (loss), which is adjusted against the carrying amount of its interest in a joint venture;
If the Corporation’s share of losses equals or exceeds the carrying value of its investment in joint venture in the
future, the Corporation does not recognize further losses, unless it has incurred obligations or made payments on
behalf of the entity;
(cid:131) Gains and losses on transactions between the Corporation and its joint venture are eliminated to the extent of the
Corporation’s interest in this entity. Losses are eliminated only to the extent that there is no evidence of impairment;
and
(cid:131)
Interest revenue on a loan receivable from a joint venture is recognized to the extent of Sherritt’s economic interest.
Supporting information
The Corporation indirectly holds a 50% interest in the Moa Joint Venture. The operations of the Moa Joint Venture are
currently conducted among three companies. Moa Nickel S.A. owns and operates the mining and processing facilities located
in Moa, Cuba; The Cobalt Refinery Company Inc. owns and operates the metals refinery located at Fort Saskatchewan; and
International Cobalt Company Inc. acquires mixed-sulphides from Moa Nickel S.A. and third parties, contracts the refining of
such purchased materials and then markets finished nickel and cobalt.
The following provides additional information relating to the Corporation’s investment in the Moa Joint Venture:
Statements of financial position
Canadian $ millions, 100% basis, as at
Assets
Cash and cash equivalents
Income taxes receivable
Other current assets
Trade accounts receivable, net
Inventories
Other non-current assets
Property, plant and equipment
Deferred income taxes(1)
Total assets
Liabilities
Trade accounts payable and accrued liabilities
Income taxes payable
Other current financial liabilities(2)
Loans and borrowings(3)
Environmental rehabilitation provisions
Other non-current financial liabilities(4)
Deferred income taxes
Total liabilities
Net assets of Moa Joint Venture
Proportion of Sherritt's ownership interest
Total
Intercompany capitalized interest elimination
Carrying value of investment in a joint venture
2017
December 31
2016
December 31
$
$
$
39.4 $
4.6
8.6
107.0
225.7
3.1
1,144.6
-
1,533.0
13.9
-
8.4
86.0
193.2
13.3
1,274.3
-
1,589.1
72.2
1.4
25.5
33.7
72.1
481.1
24.8
710.8
822.2 $
50%
411.1
(44.0)
367.1 $
57.2
5.1
57.1
48.3
77.6
548.0
26.1
819.4
769.7
50%
384.9
(48.1)
336.8
(1) As at December 31, 2017, the Moa Joint Venture has tax losses of nil (December 31, 2016 - $75.0 million), for which a deferred tax asset had not been recognized in
2016 as the realization of tax losses at Moa Nickel S.A. was not considered probable.
(2)
Included in other current financial liabilities as at December 31, 2017 is a $25.2 million working capital facility with the Corporation (December 31, 2016 - $56.9 million)
(note 13).
Sherritt International Corporation 89
Notes to the consolidated financial statements
(3)
(4)
Included in loans and borrowings as at December 31, 2017 is a $27.9 million loan for the construction of the Moa Joint Venture acid plant (December 31, 2016 - $48.3
million). The acid plant loan accrues interest at a rate of 10% per annum which is payable monthly.
Included in other non-current financial liabilities as at December 31, 2017 is $464.0 million in expansion loans of which $232.0 million are with the Corporation (December
31, 2016 - $529.9 million, $264.9 million of which are with the Corporation) (note 13). During the year ended December 31, 2017, interest was suspended for two years
on the expansion loans, which resulted in a decrease to the Moa Joint Venture expansion loans payable of $64.8 million. The interest suspension was an equity
contribution to the joint venture and is accreted using the effective interest rate method in financing expense. During the year ended December 31, 2017, the Moa Joint
Venture expansion loans payable increased $25.4 million due to accretion.
Statements of comprehensive income (loss)
Canadian $ millions, 100% basis, for the years ended December 31
2017
2016
Revenue
Cost of sales(1)
Administrative expenses
Earnings (loss) from operations
Financing income
Financing expense(2)
Net finance expense
Earnings (loss) before tax
Income tax expense(3)
Net earnings (loss) and comprehensive income (loss) of Moa Joint Venture
Proportion of Sherritt's ownership interest
Total
Intercompany elimination
Share of earnings (loss) of a joint venture, net of tax
$
$
$
741.9 $
(642.7)
(11.5)
87.7
0.3
(45.7)
(45.4)
42.3
(10.5)
31.8 $
50%
15.9
16.0
31.9 $
586.2
(632.6)
(9.5)
(55.9)
0.2
(43.6)
(43.4)
(99.3)
(15.7)
(115.0)
50%
(57.5)
12.8
(44.7)
(1)
(2)
(3)
Included in cost of sales for the year ended December 31, 2017 is depreciation and amortization of $78.5 million (for the year ended December 31, 2016 - $76.8 million).
Included in financing expense for the year ended December 31, 2017 is accretion of $25.4 million on the Moa Joint Venture expansion loans (for the year ended
December 31, 2016 - nil).
Included in income tax expense for the year ended December 31, 2017 is an income tax expense of nil related to the derecognition of the deferred tax asset at Moa
Nickel S.A. ($15.4 million for the year ended December 31, 2016).
Joint operations
Accounting policies
A joint operation is a contractual arrangement whereby two or more parties undertake an economic activity that is subject to
joint control and whereby each party has rights to the assets and obligations for liabilities relating to the arrangement. Interests
in joint operations are accounted for by recognizing the Corporation’s share of assets, liabilities, revenues and expenses.
Supporting information
Sherritt’s primary power generating assets are located in Cuba at Varadero, Boca de Jaruco and Puerto Escondido. These
assets are held by Sherritt through its one-third interest in Energas S.A. (Energas), which is a Cuban joint arrangement
established to process raw natural gas and generate electricity for sale to the Cuban national electrical grid. Cuban
government agencies Union Electrica (UNE) and Unión Cuba Petróleo (CUPET) hold the remaining two-thirds interest in
Energas.
On December 15, 2016, the term of the Varadero lease agreement was extended to March 2023. The Corporation continues
to account for the Varadero lease agreement as an operating lease (note 23) amortized using the straight-line method of
amortization. The extension reduced the amortization expense each period as the asset is now amortized to March 2023. This
change was accounted for prospectively from the date of the extension.
90 Sherritt International Corporation
The following provides information relating to the Corporation’s one-third interest in Energas S.A. (Energas):
Canadian $ millions, 33⅓% basis, as at
Current assets(1)
Non-current assets
Current liabilities
Non-current liabilities
Net assets
(1)
Included in current assets is $45.3 million of cash and cash equivalents (December 31, 2016 - $25.5 million).
Canadian $ millions, 33⅓% basis, for the years ended December 31
Revenue
Expense
Net loss
9. NET FINANCE (EXPENSE) INCOME
Canadian $ millions, for the years ended December 31
Revaluation on financial instruments
Interest income on cash, cash equivalents and short-term investments
Interest income on investments
Interest income on advances and loans receivable
Interest income on accretion of advances and loans receivable(1)
Gain on repurchase of debentures
Total financing income
Interest expense and accretion on loans and borrowings
Unrealized foreign exchange (loss) gain
Realized foreign exchange gain (loss)
Other finance charges
Accretion expense on environmental rehabilitation provisions
Total financing expense
Net finance expense
2017
2016
December 31
December 31
$
$
66.5 $
120.8
20.1
96.2
71.0 $
49.6
151.3
27.0
86.0
87.9
2017
2016
$
$
51.2 $
(54.7)
(3.5) $
58.6
(61.1)
(2.5)
Note
$
16
20
20
17, 20
$
2017
2016
(1.6) $
3.3
0.2
57.2
6.3
-
65.4
(172.9)
(7.7)
0.6
(2.1)
(1.0)
(183.1)
(117.7) $
2.7
2.5
0.4
63.0
-
12.6
81.2
(168.0)
35.9
(0.6)
(2.0)
(1.0)
(135.7)
(54.5)
(1)
Interest income on accretion of advances and loan receivable relates to the Moa Joint Venture expansion loans receivable, which is recognized to the extent of Sherritt’s
economic interest (note 13).
10. INCOME TAXES
Accounting policies
The income tax expense or recovery for the reporting period consists of two components: current and deferred taxes.
The current income tax payable or recoverable is calculated using the tax rates and legislation that have been enacted or
substantively enacted at each reporting date in each of the jurisdictions and includes any adjustments for taxes payable or
recoverable in respect of prior periods.
Current tax assets and liabilities are offset when they relate to the same jurisdiction, the entity has a legally enforceable right to
offset and intends either to settle on a net basis, or to realize the asset and settle the liability simultaneously.
Deferred tax assets and liabilities are determined using the statement of financial position liability method based on temporary
differences between the carrying amount of assets and liabilities for financial reporting purposes and their tax bases. In
calculating the deferred tax assets and liabilities, the tax rates used are those that have been enacted or substantively enacted
at each reporting date in each of the jurisdictions and that are expected to apply when the assets are recovered or the liabilities
are settled. Deferred income tax assets and liabilities are presented as non-current.
Sherritt International Corporation 91
Notes to the consolidated financial statements
Deferred tax liabilities are recognized on all taxable temporary differences, and deferred tax assets are recognized on all
deductible temporary differences, carryforward of unused tax losses and carryforward of unused tax credits, with the exception
of the following items:
(cid:131)
(cid:131)
Temporary differences associated with investments in subsidiaries, associates and interests in joint ventures where
the Corporation is able to control the timing of the reversal of temporary differences and such reversals are not
probable in the foreseeable future;
Temporary differences that arise on the initial recognition of assets and liabilities in a transaction that is not a
business combination and has no impact on either accounting profit or taxable profit; and
(cid:131) Deferred tax assets are only recognized to the extent that it is probable that sufficient taxable profits exist in future
periods against which the deductible temporary differences can be utilized. The probability that sufficient taxable
profits exist in future periods against which the deferred tax assets can be utilized is reassessed at each reporting
date. The amount of deferred tax assets recognized is adjusted accordingly.
Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current
tax liabilities when they relate to income taxes levied by the same taxation authority on the same taxable entity and when the
Corporation has the legal right to offset them.
Current and deferred taxes that relate to items recognized directly in equity are also recognized in equity. All other taxes are
recognized in income tax expense in the consolidated statements of comprehensive income (loss).
Critical accounting estimates
The Corporation operates in a number of industries in several tax jurisdictions and, consequently, its income is subject to
various rates and rules of taxation. As a result, the Corporation’s effective tax rate may vary significantly from the Canadian
statutory tax rate depending upon the profitability of operations in the different jurisdictions.
The Corporation calculates deferred taxes based upon temporary differences between the assets and liabilities that are
reported in its consolidated financial statements and their tax bases as determined under applicable tax legislation. The
Corporation records deferred tax assets when it determines that it is probable that such assets will be realized. The future
realization of deferred tax assets can be affected by many factors, including current and future economic conditions, net
realizable sale prices, production rates and production costs, and can either be increased or decreased where, in the view of
management, such change is warranted.
Critical accounting judgments
In determining whether it is probable that a deferred tax asset will be realized, management reviews the timing of expected
reversals of taxable temporary differences, the estimates of future taxable income and prudent and feasible tax planning that
could be implemented. Significant judgment may be involved in determining the timing of expected reversals of temporary
differences.
Supporting information
Canadian $ millions, for the years ended December 31
Current income tax expense(1)
Current period
Deferred income tax (recovery) expense(1)
Origination and reversal of temporary differences
Non-recognition of tax assets
Income tax expense
2017
2016
25.7 $
25.7
12.4
12.4
(28.4)
16.9
(11.5)
14.2 $
(34.3)
28.4
(5.9)
6.5
$
$
(1) During the year ended December 31, 2017, a deferred income tax liability of $8.4 million was reclassified to current income taxes payable as a result of certain tax
payments due during the first quarter of 2018. These tax payments relate to taxes owed upon the relinquishment of the Varadero West oil field in November 2017 in the
Oil and Gas segment. The reclassification resulted in a current income tax expense of $8.4 million and a corresponding deferred income tax recovery of $8.4 million
during the year ended December 31, 2017.
92 Sherritt International Corporation
The following table reconciles income taxes calculated at a combined Canadian federal/provincial income tax rate with the
income tax expense (recovery) in the consolidated statements of comprehensive income (loss):
Canadian $ millions, for the years ended December 31
Earnings (loss) before tax from continuing operations
Add share of loss of equity accounted investments
Parent companies and subsidiaries loss before tax
Income tax expense (recovery) at the combined basic rate of 27% (2016 - 27%)
Increase (decrease) in taxes resulting from:
Difference between Canadian and foreign tax rates
Non-deductible expenses and losses
Non-recognition of tax assets
Non-taxable gain on Ambatovy Joint Venture restructuring
Other items
2017
2016
323.1 $
163.1
486.2
(375.3)
256.7
(118.6)
131.3
(32.0)
15.3
20.2
16.9
(169.8)
0.3
14.2 $
9.5
0.3
27.9
-
0.8
6.5
$
$
Deferred tax assets (liabilities) relate to the following temporary differences and loss carry forwards:
Canadian $ millions, for the year ended December 31, 2017
Deferred tax assets
Property, plant and equipment
Deferred tax assets
Set off against deferred tax liabilities
Deferred tax liabilities
Property, plant and equipment and intangible assets
Cuban tax contingency reserve
Pension and other benefit plans and reserves
Deferred tax liabilities
Set off against deferred tax assets
Net deferred tax (liabilities) assets
Opening
Balance
Recognized
in net
income
Recognized
in total
comp-
rehensive
income
$
$
$
$
1.1 $
1.1
(1.1)
-
(9.1) $
(19.9)
(0.6)
(29.6)
1.1
(28.5) $
(0.6) $
(0.6)
3.6 $
8.1
0.4
12.1
- $
-
$
0.3 $
0.8
0.1
1.2
11.5 $
1.2 $
Closing
Balance
0.5
0.5
(0.5)
-
(5.2)
(11.0)
(0.1)
(16.3)
0.5
(15.8)
Sherritt International Corporation 93
Notes to the consolidated financial statements
Canadian $ millions, for the year ended December 31, 2016
Deferred tax assets
Property, plant and equipment
Deferred tax assets
Set off against deferred tax liabilities
Deferred tax liabilities
Property, plant and equipment and intangible assets
Cuban tax contingency reserve
Pension and other benefit plans and reserves
Deferred tax liabilities
Set off against deferred tax assets
Net deferred tax (liabilities) assets
Opening
Balance
Recognized
in net
loss
Recognized
in total
comp-
rehensive
loss
$
$
$
$
3.7 $
3.7
(3.7)
-
(16.9) $
(20.2)
(2.0)
(39.1)
3.7
(35.4) $
(2.5) $
(2.5)
7.4 $
(0.3)
1.3
8.4
(0.1) $
(0.1)
$
0.4 $
0.6
0.1
1.1
5.9 $
1.0 $
Closing
Balance
1.1
1.1
(1.1)
-
(9.1)
(19.9)
(0.6)
(29.6)
1.1
(28.5)
As at December 31, 2017, the Corporation had temporary differences of $763.7 million (December 31, 2016 - $752.8 million)
associated with investments in subsidiaries, associated entities and interests in joint ventures for which no deferred tax
liabilities have been recognized, as the Corporation is able to control the timing of the reversal of these temporary differences
and it is not probable that these temporary differences will reverse in the foreseeable future.
As at December 31, 2017, the Corporation had non-capital losses of $567.5 million (December 31, 2016 - $528.5 million) and
capital losses of $1,159.7 million (December 31, 2016 - $1,074.0 million) which may be used to reduce future taxable income.
The Corporation has not recognized a deferred income tax asset on $567.5 million of non-capital losses, $1,159.7 million of
capital losses and $176.3 million of other deductible temporary differences since the realization of any related tax benefit
through future taxable profits is not probable. The capital losses have no expiry dates and the other deductible temporary
differences do not expire under current tax legislation. The non-capital losses are located in the following countries and expire
as follows:
Canadian $ millions, as at December 31, 2017
Canada
Barbados
Spain
Non-capital
Expiry
losses
2026-2037 $
2018-2024
No expiry
549.4
13.6
4.5
94 Sherritt International Corporation
11. EARNINGS (LOSS) PER SHARE
Canadian $ millions, except share amounts in millions and per share amounts in dollars, for the years ended December 31
2017
2016
Net earnings (loss) from continuing operations
(Loss) earnings from discontinued operations, net of tax
Net earnings (loss) - basic and diluted
Weighted-average number of common shares - basic
Weighted-average effect of dilutive securities:
Stock options
Warrants
Weighted-average number of common shares - diluted(1)
Net earnings (loss) from continuing operations per common share:
Basic
Diluted
(Loss) earnings from discontinued operations per common share:
Basic
Diluted
Net earnings (loss) per common share:
Basic
Diluted
$
$
308.9 $
(15.1)
293.8 $
(381.8)
2.9
(378.9)
295.6
1.2
5.6
302.4
293.9
-
-
293.9
1.04 $
1.02 $
(1.30)
(1.30)
(0.05) $
(0.05) $
0.01
0.01
0.99 $
0.97 $
(1.29)
(1.29)
$
$
$
$
$
$
(1) The determination of the weighted-average number of common shares - diluted excludes 6.6 million shares related to stock options and nil shares related to warrants
that were anti-dilutive for the year ended December 31, 2017 (9.6 million and 18.8 million, respectively, for the year ended December 31, 2016).
In January 2018, an additional 94.5 million common shares and 47.2 million cobalt-linked warrants were issued (note 25).
Sherritt International Corporation 95
Notes to the consolidated financial statements
12. FINANCIAL INSTRUMENTS
Accounting policies
Management determines the classification of financial assets and financial liabilities at initial recognition and, except in very
limited circumstances, the classification is not changed subsequent to initial recognition. The classification depends on the
purpose for which the financial instruments were acquired, their characteristics and/or management’s intent. Transaction costs
with respect to instruments not classified as fair value through profit or loss are recognized as an adjustment to the cost of the
underlying instruments and amortized using the effective interest method.
The Corporation’s financial instruments were classified in the following categories:
Financial assets
Financial assets, measured at fair value through profit or loss:
(cid:131) Restricted cash; cash equivalents; short-term investments.
Loans and receivables, measured at amortized cost:
(cid:131) Cash held in banks; advances and loans receivable; other financial assets; trade accounts receivable.
Financial liabilities
Other financial liabilities, measured at amortized cost:
(cid:131)
Trade accounts payable and accrued liabilities; loans and borrowings; other financial liabilities.
Financial assets, measured at fair value through profit or loss
An instrument is classified as fair value through profit or loss if it is held for trading or is designated as such upon initial
recognition. A financial asset is classified as fair value through profit or loss if acquired principally for the purpose of selling in
the short term or if so designated by management. Financial instruments included in this category are initially recognized at fair
value and transaction costs are taken directly to earnings along with gains and losses arising from changes in fair value.
Derivative instruments, including embedded derivatives, are recorded at fair value unless exempted from derivative treatment
as normal purchase and sale. All changes in their fair value are recorded in net earnings (loss).
Financial assets and liabilities, measured at amortized cost
Trade accounts receivable are initially recognized at fair value net of transaction costs and are subsequently measured at
amortized cost reduced for any impairment losses. An allowance for impairment of trade accounts receivable is established
when there is objective evidence that an amount will not be collectible or, in the case of long-term receivables, if there is
evidence that the amount will not be collectible in accordance with payment terms.
Cash on hand and balances at bank and advances and loans receivable are initially recognized at fair value net of transaction
costs and are subsequently measured at amortized cost. Interest revenue on advances and loans receivable are recognized
using the effective interest method.
Trade accounts payable and accrued liabilities are initially recognized at fair value net of transaction costs and are
subsequently measured at amortized cost using the effective interest method.
Loans and borrowings include short-term loans and long-term loans. These liabilities are initially recognized at fair value net of
transaction costs and are subsequently measured at amortized cost. Any difference between the proceeds (net of transaction
costs) and the redemption amount is recorded in financing expense or financing income in the consolidated statements of
comprehensive income (loss) over the period of the borrowings using the effective interest method.
Loans and borrowings are classified as a current liability unless the Corporation has an unconditional right to defer settlement
for at least 12 months after the consolidated statements of financial position date.
Other financial assets primarily include other loans and receivables. Other financial liabilities primarily include other loans and
payables. Other financial assets are initially recognized at fair value net of transaction costs and are subsequently measured at
amortized cost. Other financial liabilities are initially recognized at fair value net of transaction costs and are subsequently
measured at amortized cost using the effective interest method.
96 Sherritt International Corporation
Derecognition of financial assets and liabilities
A financial asset is derecognized when its contractual rights to the cash flows that compose the financial asset expire or
substantially all the risks and rewards of the asset are transferred. A financial liability is derecognized when the obligation
under the liability is discharged, cancelled or expired. Gains and losses on derecognition are recognized within financing
income and financing expense, respectively.
Impairment of financial assets, carried at amortized costs
At each reporting date, the Corporation assesses whether there is any objective evidence that a financial asset or a group of
financial assets is impaired. A financial asset or a group of financial assets is impaired if there is objective evidence that the
estimated future cash flows of the financial asset or the group of financial assets have been negatively impacted. Evidence of
impairment may include indications that debtors are experiencing financial difficulty, default or delinquency in interest or
principal payments, or other observable data which indicates that there is a measurable decrease in the estimated future cash
flows.
If an impairment loss has occurred, the loss is measured as the difference between the asset’s carrying amount and the
present value of estimated future cash flows (excluding future expected credit losses that have not yet been incurred). The
present value of the estimated future cash flows is discounted at the financial asset’s original effective interest rate. If a
financial asset has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest
rate.
The carrying amount of the asset is reduced through the use of an allowance account, and the loss is recognized in financing
expense. Interest income continues to be accrued on the reduced carrying amount using the rate of interest used to discount
the future cash flows for the purpose of measuring the impairment loss. The interest income is recorded as part of financing
income. Loans together with the associated allowance are written off when there is no realistic prospect of future recovery and
all collateral has been realized or has been transferred to the Corporation.
If, in a subsequent year, the amount of the estimated impairment loss increases or decreases because of an event occurring
after the impairment was recognized, the previously recognized impairment loss is increased or reduced by adjusting the
allowance account. If an impairment is later recovered, the recovery is credited to financing income.
Financial instrument measurement hierarchy
All financial instruments are required to be measured at fair value on initial recognition. For those financial assets or liabilities
measured at fair value at each reporting date, financial instruments and liquidity risk disclosures require a three-level hierarchy
that reflects the significance of the inputs used in making the fair value measurements. These levels are defined below:
Level 1: Determined by reference to unadjusted quoted prices in active markets for identical assets and liabilities that the
entity can access at the measurement date;
Level 2: Valuations using inputs other than the quoted prices for which all significant inputs are based on observable market
data, either directly or indirectly; and
Level 3: Valuations using inputs that are not based on observable market data.
Supporting information
Cash, cash equivalents, restricted cash and short-term investments
Cash and cash equivalents consist of:
Canadian $ millions, as at
Cash equivalents
Cash held in banks
2017
2016
December 31
December 31
$
$
57.2 $
127.8
185.0 $
162.9
105.7
268.6
The Corporation’s cash balances are deposited with major financial institutions rated A- or higher by Standard and Poor’s
except for institutions located in Madagascar and Cuba that are not rated. The total cash held in Madagascan and Cuban bank
deposit accounts was $2.8 million and $46.0 million, respectively, as at December 31, 2017 (December 31, 2016 – $3.8 million
and $26.8 million, respectively).
Sherritt International Corporation 97
Notes to the consolidated financial statements
As at December 31, 2017, $45.3 million of cash on the Corporation’s consolidated statements of financial position was held by
Energas (December 31, 2016 – $25.5 million). These funds are for use locally by the joint operation and will be transferred to
the Corporation upon foreign exchange approval.
The Corporation’s cash equivalents consist of Government of Canada treasury bills, term deposits with maturities of 90 days or
less and demand deposits redeemable upon 31 days request. The term deposits and demand deposits are with major
financial institutions. As at December 31, 2017, the Corporation had $41.9 million in Government of Canada treasury bills, nil
in term deposits and $15.3 million in demand deposits (December 31, 2016 - $122.9 million, $25.0 million and $15.0 million,
respectively) included in cash and cash equivalents and $18.0 million in Government of Canada treasury bills included in
short-term investments (December 31, 2016 - $40.0 million).
The Corporation’s restricted cash balances are deposited with major financial institutions rated BBB+ or higher by Standard
and Poor’s.
Fair value measurement
As at December 31, 2017, the carrying amounts of cash and cash equivalents, short-term investments, restricted cash, trade
accounts receivable, current portion of advances, loans receivable and other financial assets, current portion of other loans
and borrowings, current portion of other financial liabilities, trade accounts payable and accrued liabilities are at fair value or
approximate fair value due to their immediate or short terms to maturity.
The fair values of non-current loans and borrowings and other non-current financial assets and liabilities approximate their
carrying amount except as indicated in the below table. Due to the use of judgment and uncertainties in the determination of
the estimated fair values, these values should not be interpreted as being realizable in the immediate term.
The following table presents financial instruments with carrying amounts different from their fair values(1):
Canadian $ millions, as at
Note
2017
December 31
Hierarchy
level
Carrying
value
Fair
value
Carrying
value
2016
December 31
Fair
value
Liabilities:
8.00% senior unsecured debentures due 2021
7.50% senior unsecured debentures due 2023
7.875% senior unsecured debentures due 2025
Ambatovy Joint Venture additional partner loans(2)(4)
Ambatovy Joint Venture partner loans(2)(4)
Assets:
Ambatovy subordinated loans receivable(3)(4)
Energas conditional sales agreement(3)(4)
Moa Joint Venture expansion loans receivable(3)(4)
16
16
16
16
16
13
13
13
1 $
1
1
3
3
3
3
3
213.2 $
240.7
234.4
-
127.8
223.4
189.1
232.0
189.8 $
203.4
200.6
-
79.6
211.8 $
239.5
233.1
1,367.5
133.3
195.2
210.3
212.0
943.4
168.6
264.9
162.8
181.3
177.5
640.6
110.7
796.8
169.6
260.5
(1) The carrying values are net of financing costs. Fair values exclude financing costs and are based on market closing prices.
(2) The fair values of the Ambatovy Joint Venture partner loans and Ambatovy Joint Venture additional partner loans are calculated by discounting future cash flows using
rates that are based on market rates adjusted for the borrowers’ credit quality for instruments with similar maturity horizons.
(3) The fair values of the Ambatovy subordinated loans receivable, Energas conditional sales agreement and Moa Joint Venture expansion loans receivable are calculated
by discounting future cash flows using rates that are based on market rates adjusted for the borrowers’ credit quality.
(4) For disclosure purposes, the Corporation revised its methodology for the calculation of the fair values of financial instruments using updated market participant discount
rates. For consistency with the current period presentation, comparative amounts have been restated.
98 Sherritt International Corporation
The following table presents financial assets, measured at fair value through profit or loss on a recurring basis:
Canadian $ millions, as at
Cash equivalents
Short-term investments
Restricted cash
Trade accounts receivable, net
Canadian $ millions, as at
Trade accounts receivable
Allowance for doubtful accounts
Accounts receivable from joint operations
Accounts receivable from joint venture
Accounts receivable from associate
Other
Aging of receivables not impaired
Canadian $ millions, as at
Not past due
Past due no more than 30 days
Past due for more than 30 days but no more than 60 days
Past due for more than 60 days
Hierarchy
2017
2016
level
December 31
December 31
1 $
1
1
57.2 $
18.0
13.0
162.9
40.0
1.0
2017
2016
December 31
December 31
241.2 $
(10.7)
0.2
15.0
8.2
31.0
284.9 $
211.4
(11.0)
0.4
11.4
33.9
39.7
285.8
2017
2016
December 31
December 31
222.6 $
12.6
8.1
41.6
284.9 $
227.7
25.2
6.3
26.6
285.8
$
$
$
$
Payment terms for oil sales to an agency of the Cuban government are based on Gulf Coast No. 6 Fuel Oil (FO#6) reference
prices. If the FO#6 price is greater than US$29.50, payment terms are 180 days from the date of invoice. If FO#6 price is
between US$24.76 and US$29.50, payment terms are 150 days from the date of invoice. If FO#6 price is between US$20.01
and US$24.75, payment terms are 120 days from the date of invoice. If FO#6 price is equal to or less than US$20.00,
payment terms are 90 days from the date of invoice.
Payment terms for electricity and by-product sales to Cuban state enterprises are 60 days from the date of invoice.
13. ADVANCES, LOANS RECEIVABLE AND OTHER FINANCIAL ASSETS
Canadian $ millions, as at
Advances and loans receivable
Ambatovy subordinated loans receivable(1)
Ambatovy subordinated loans receivable - post-financial completion(1)
Energas conditional sales agreement(1)
Moa Joint Venture expansion loans receivable(1)
Moa Joint Venture working capital facility
Other
Other financial assets
Current portion of advances, loans receivable and other financial assets
2017
December 31
2016
December 31
$
$
$
223.4
47.9
206.7
232.0
25.2
20.6
943.4
-
192.4
264.9
56.9
10.8
-
755.8
(42.8)
713.0
$
157.8
1,626.2
(83.5)
1,542.7
(1) As at December 31, 2017, the non-current portions of the Ambatovy subordinated loans receivable, Ambatovy subordinated loans receivable – post-financial completion,
Energas conditional sales agreement and the Moa Joint Venture expansion loans receivable are $223.4 million, $47.9 million, $189.1 million and $232.0 million,
respectively (December 31, 2016 – $943.4 million, nil, $168.6 million and $264.9 million, respectively).
Sherritt International Corporation 99
Notes to the consolidated financial statements
Ambatovy subordinated loans receivable
A funding agreement was entered into by the Corporation with the Ambatovy Joint Venture to finance the development of the
Ambatovy Project. The facility bears interest at six-month LIBOR plus 6%. Repayments of principal or interest will not be made
prior to certain conditions of the Ambatovy Joint Venture financing agreements being satisfied. Unpaid interest is accrued
monthly and capitalized to the principal balance semi-annually. During the year ended December 31, 2017, the Ambatovy
Joint Venture converted US$400.0 million of its subordinated loans payable to equity (note 7) which, at the Corporation’s
share, resulted in a US$136.2 million ($176.1 million) decrease in the Corporation’s subordinated loans receivable. As a result
of the Ambatovy Joint Venture restructuring (note 6), the Ambatovy subordinated loans receivable decreased by US$436.5
million ($561.1 million). During the year ended December 31, 2016, the Ambatovy Joint Venture converted US$510.0 million of
its subordinated loans payable to equity (note 7) which, at the Corporation’s 40% share, resulted in a US$204.0 million $284.1
million) decrease in the Corporation’s subordinated loans receivable. There was no change to the Corporation’s ownership
interest as a result of the conversions.
Ambatovy subordinated loans receivable – post-financial completion
The Ambatovy subordinated loans receivable – post-financial completion is comprised of funding from the Corporation to the
Ambatovy Joint Venture as part of the Ambatovy Joint Venture restructuring (note 6). The facility bears interest at six-month
LIBOR plus 8%. Repayments of principal or interest will not be made prior to certain conditions of the Ambatovy Joint Venture
senior debt finance agreements being satisfied. Unpaid interest is accrued monthly and capitalized to the principal balance
semi-annually. For the year ended December 31, 2017, US$30.0 million ($38.6 million) and US$8.2 million ($10.5 million) of
post-financial completion cash funding, including accrued interest, was provided to the Ambatovy Joint Venture and the
Corporation’s joint venture partners, KORES and Sumitomo, respectively, (nil and nil for the year ended December 31, 2016,
respectively) retroactive to December 15, 2015 at Sherritt’s 12% interest.
Energas conditional sales agreement
A conditional sales agreement was entered into by the Corporation with Energas to finance construction activity on specific
power generating assets in Cuba. The agreement directs the Corporation to arrange for the performance of certain
construction activity on behalf of Energas, and contains design specifications for each new construction phase. The
Corporation retains title to the constructed assets until the loan is fully repaid. The facility bears interest at 8%. Income
generated by the constructed assets will be used to repay the facilities. Until the loan is fully repaid, all of the income
generated by these assets is paid to the Corporation. The amount of advances and loans receivable from Energas are
presented net of the elimination of the 33⅓% proportionately consolidated intercompany balances.
Moa Joint Venture expansion loans receivable
The Moa Joint Venture expansion loans receivable is a funding agreement entered into by the Corporation in prior years to
finance expansion. This loans receivable has a fixed interest rate of 6.5%. In June 2015, the maturity date of this agreement
was extended to December 31, 2026. Repayments are being made from available distributable cash flows from the Moa Joint
Venture. During the year ended December 31, 2017, interest was suspended for two years on the expansion loans, which
resulted in a decrease to the Moa Joint Venture expansion loans receivable of $32.4 million. The interest suspension was an
equity contribution to the joint venture and is accreted using the effective interest rate method in financing income. During the
year ended December 31, 2017, the Moa Joint Venture expansion loans receivable increased $12.7 million due to accretion.
Moa Joint Venture working capital facility
The Moa Joint Venture working capital facility is a working capital facility for use by the Moa Joint Venture. In November 2016,
the maturity of the working capital facility was extended to January 31, 2017 and the maximum credit available was reduced
from $90.0 million to $65.0 million. The interest rates increased from prime plus 2.25% or bankers’ acceptance plus 3.25% to
prime plus 2.50% or bankers’ acceptance plus 3.50%.
On January 31, 2017, the credit facility was renewed with a maximum credit available of $65.0 million, $13.7 million of which
matured on April 21, 2017. Thereafter, the facility size decreased by 4.167% quarterly beginning April 28, 2017. Collectively,
these reductions resulted in a facility size of $38.6 million at January 30, 2018. The interest rates increased from prime plus
2.50% or bankers’ acceptance plus 3.50% to prime plus 3.50% or bankers’ acceptance plus 4.50%.
In January 2018, the maturity of the Moa Joint Venture working capital facility was extended to January 30, 2019 and the
maximum credit available was increased from $38.6 million to $45.0 million. The interest rates continue to be prime plus 3.50%
or bankers’ acceptance plus 4.50%.
100 Sherritt International Corporation
Other financial assets
As at December 31, 2017, included in other financial assets is nil (December 31, 2016 - $154.9 million) related to the
Corporation’s right to receive future distributions from the Ambatovy Joint Venture (note 16). On December 11, 2017, $222.8
million was derecognized as part of the Ambatovy Joint Venture retroactive funding (note 6). As at December 31, 2016, this
non-current financial asset was not included within Ambatovy subordinated loans receivable as the funding had not yet been
provided by the Corporation (note 7).
As at December 31, 2017, included in other financial assets is $9.7 million (December 31, 2016 - nil) related to the Ambatovy
operator fee.
14. INVENTORIES
Accounting policies
Raw materials, materials in process and finished products are valued at the lower of average production cost and net
realizable value, with cost determined on a moving weighted-average basis. Spare parts and operating materials within
inventory are valued at the lower of average cost and net realizable value, and recognized as cost of sales when used.
The cost of inventory includes all costs related to bringing the inventory to its current condition, including mining and
processing costs, labour costs, supplies, direct and allocated indirect operating overhead and depreciation expense, where
applicable, including allocation of fixed and variable costs.
Write-downs to net realizable value may be reversed, up to the amount previously written down, when circumstances support
an increased inventory value.
Supporting information
Canadian $ millions, as at
Raw materials
Materials in process
Finished products
Spare parts and operating materials
2017
2016
December 31
December 31
$
$
0.1 $
0.1
8.9
9.1
24.8
33.9 $
-
0.1
11.0
11.1
28.5
39.6
For the year ended December 31, 2017, the cost of inventories included in cost of sales was $61.2 million ($46.9 million for the
year ended December 31, 2016).
15. NON-FINANCIAL ASSETS
Accounting policies
Property, plant and equipment
Property, plant and equipment include acquisition costs, capitalized development costs and pre-production expenditures that
are recorded at cost less accumulated depreciation and accumulated impairment losses. Costs of property, plant and
equipment are incurred while construction is in progress and before the commencement of commercial production. Once the
construction of an asset is substantially complete, and the asset is ready for its intended use, these costs are depreciated.
Plant and equipment
Plant and equipment include assets under construction, equipment and processing, refining, power generation and other
manufacturing facilities.
The Corporation recognizes major long-term spare parts and standby equipment as plant and equipment when the parts and
equipment are significant and are expected to be used over a period greater than a year. Major inspections and overhauls
required at regular intervals over the useful life of an item of plant and equipment are recognized in the carrying amount of the
related item if the inspection or overhaul provides benefit exceeding one year.
Sherritt International Corporation 101
Notes to the consolidated financial statements
Plant and equipment are depreciated using the straight-line method based on estimated useful lives, once the assets are
available for use. Plant and equipment may have components with different useful lives. Depreciation is calculated based on
each individual component’s useful life. New components are capitalized to the extent that they meet the recognition criteria of
an asset. The carrying amount of the replaced component is derecognized, and any gain/loss is included in net earnings
(loss). If the carrying amount of the replaced component is not known, it is estimated based on the cost of the new component
less estimated depreciation. The useful lives of the Corporation’s plant and equipment are as follows:
Buildings and refineries
Machinery and equipment
Office equipment
Fixtures and fittings
Assets under construction
Oil and Gas properties
5 to 40 years
3 to 50 years
3 to 35 years
3 to 35 years
not depreciated during development period
Oil and Gas properties include acquisition costs and development costs related to properties in production, under development
and held for future development. Ongoing pre-development costs relating to properties held for future development are
capitalized as incurred. Development costs incurred to access reserves at producing properties and properties under
development are capitalized and are depreciated on a unit-of-production basis over the life of such reserves. Reserves are
measured based on proven and probable reserves.
Capitalization of borrowing costs
Borrowing costs on funds directly attributable to finance the acquisition, construction or production of a qualifying asset are
capitalized until such time as substantially all the activities necessary to prepare the qualifying asset for its intended use or sale
are complete. A qualifying asset is one that takes a substantial period of time to prepare the asset for its intended use. Where
money borrowed specifically to finance a project is invested to earn interest income, the income generated is also capitalized
to reduce the total capitalized borrowing costs.
Where the funds used to finance a project form part of general borrowings, interest is capitalized based on the weighted-
average interest rate applicable to the general borrowings outstanding during the period of construction.
Derecognition
An item of property, plant and equipment is derecognized upon disposal or when no future economic benefits are expected to
arise from the continued use of the asset. Any gain or loss arising on derecognition of the asset (calculated as the difference
between the net disposal proceeds and the carrying amount of the item) is included in net earnings (loss) in the period the item
is derecognized.
Intangible assets
Intangible assets are developed internally or acquired as part of a business combination. Internally generated assets are
recognized at cost and primarily arise as a result of exploration and evaluation activity and service concession arrangements.
Intangible assets acquired as part of a business combination are recognized separately from goodwill, if the asset is separable
or arises from contractual or legal rights, and are initially recorded at their acquisition date fair value.
The useful lives of intangible assets are assessed as either finite or indefinite.
Intangible assets with a finite life are amortized over their useful economic lives on a straight-line or units-of-production basis,
as appropriate. The amortization expense is included in cost of sales unless otherwise noted. Intangible assets that are not yet
ready for use are not amortized until put into use.
Intangible assets with indefinite useful lives are not amortized, but are tested for impairment annually, either individually or at
the cash-generating unit level. The Corporation has no identifiable intangible assets for which the expected useful life is
indefinite.
Exploration and evaluation
Exploration and evaluation (E&E) expenditures are measured using the cost model and generally include the costs of licenses,
technical services and studies, seismic studies, exploration drilling and testing, and directly attributable overhead and
administration expenses including remuneration of operating personnel and supervisory management. These costs do not
include general prospecting or evaluation costs incurred prior to having obtained the rights to explore an area, which are
expensed as they are incurred.
102 Sherritt International Corporation
E&E expenditures related to Oil and Gas properties are capitalized and carried forward until technical feasibility and
commercial viability of extracting the resource is established. The technical feasibility and commercial viability is established
when economic quantities of proven and/or probable reserves are determined to exist, at which point the E&E assets
attributable to those reserves are reviewed for impairment before being transferred to property, plant and equipment.
Service concession arrangements
Service concession arrangements are contracts between private sector and government entities and can involve the
construction, operation or upgrading of public infrastructure. Service concession arrangements can be classified as financial
assets (where the operator has an unconditional right to receive a specified amount of cash or other financial asset over the
life of the arrangement) or intangible assets (where the operator’s future cash flows are not specified).
Through its interest in Energas, the Corporation has been contracted to design, construct and operate electrical generating
facilities at Boca de Jaruco and Puerto Escondido, Cuba, on behalf of the Cuban government. The sale price of electricity is
contractually fixed, but decreases after loans provided by the Corporation to fund the construction are fully repaid. Ownership
of these facilities will be transferred to the Cuban government for nil consideration at the end of the contract term which ends in
2023. Energas bears the demand risk on revenues related to assets covered under service concession arrangements as
receipts are based on usage rather than an unconditional right to receive cash. As a result, the Boca de Jaruco and Puerto
Escondido assets have been classified as intangible assets and represent the Corporation’s right to charge the Government of
Cuba for future electricity and by-products delivered.
During periods of new construction, enhancement or upgrade activities, the Corporation records a new intangible asset and a
corresponding construction revenue amount to reflect the right to charge the Cuban government for an incremental future
supply of electricity. The construction expenses relating to the new construction activity are expensed as incurred. The net
result of the construction activity is a nil impact to net earnings. Once operational, the carrying amount of the new service
concession intangible asset, including capitalized interest, is amortized on a straight-line basis over the remaining contract
term.
Repair, maintenance and replacement costs incurred in relation to service concession intangible assets are expensed as
incurred.
Amortization
The following intangible assets are amortized on a straight-line basis over the following estimated useful lives:
Service concession arrangements
Exploration and evaluation
12 years
not amortized during development period
Impairment of non-financial assets
The Corporation assesses the carrying amount of non-financial assets including property, plant and equipment and intangible
assets at each reporting date to determine whether there is any indication of impairment. Internal factors, such as estimated
reserves, budgets and forecasts, as well as external factors, such as expected future prices, costs and other market factors
are also monitored to determine if indications of impairment exist.
An impairment loss is the amount equal to the excess of the carrying amount over the recoverable amount. The recoverable
amount takes into account a market participant’s ability to generate economic benefits by using the asset in its highest and
best use. To achieve this, the recoverable amount is the higher of value in use (being the net present value of expected pre-
tax future cash flows of the relevant asset) and fair value less costs to sell the asset(s).
Impairment is assessed at the cash-generating unit (CGU) level. A CGU is the smallest identifiable group of assets that
generates cash inflows largely independent of the cash inflows from other assets or group of assets. The assets of the
corporate head office are allocated on a reasonable and consistent basis to CGUs or groups of CGUs.
If, after the Corporation has previously recognized an impairment loss, circumstances indicate that the recoverable amount of
the impaired assets is greater than the carrying amount, the Corporation reverses the impairment loss by the amount the
revised recoverable amount exceeds its carrying amount, to a maximum of the previous impairment loss. In no case shall the
revised carrying amount exceed the original carrying amount, after depreciation or amortization, that would have been
determined if no impairment loss had been recognized. An impairment loss or a reversal of an impairment loss is recognized in
the consolidated statements of comprehensive income (loss).
Sherritt International Corporation 103
Notes to the consolidated financial statements
Impairment of exploration and evaluation expenditures at Oil and Gas
Upon determination of proven and probable reserves, the related E&E assets attributable to those reserves are tested for
impairment prior to being transferred to property, plant and equipment. Capitalized E&E costs are reviewed and evaluated for
impairment at each reporting date for events or changes in circumstances that indicate the carrying amount may not be
recoverable from future cash flows of the property.
Critical accounting estimates
Property, plant and equipment
Property, plant and equipment is the largest component of the Corporation’s assets and, as such, the capitalization of costs,
the determination of estimated recoverable amounts and the depletion and depreciation of these assets have a significant
impact on the Corporation’s financial results.
Certain assets are depreciated using a unit-of-production basis, which involves the estimation of recoverable reserves in
determining the depletion and/or depreciation rates of the specific assets. Each item’s life, which is assessed annually, is
assessed for both its physical life limitations and the economic recoverable reserves of the property at which the asset is
located.
For those assets depreciated on a straight-line basis, management estimates the useful life of the assets and their
components, which in certain cases may be based on an estimate of the producing life of the property. These assessments
require the use of estimates and assumptions including market conditions at the end of the asset’s useful life, costs of
decommissioning the asset and the amount of recoverable reserves.
Asset useful lives and residual values are re-evaluated at each reporting date.
Reserves for Oil and Gas properties
Reserves are estimates of the amount of product that can be economically and legally extracted from the Corporation’s oil and
gas properties. Reserve estimates are an integral component in the determination of the commercial viability of a site,
depletion amounts charged to the cost of sales and any impairment analysis.
In calculating reserves, estimates and assumptions are required about a range of geological, technical and economic factors,
including quantities, production techniques, production decline rates, production costs, commodity prices and exchange rates.
In addition, future changes in regulatory environments, including government levies or changes in the Corporation’s rights to
exploit the resource imposed over the producing life of the reserves may also significantly impact estimates.
Critical accounting judgments
Exploration and evaluation
Management must make judgments when determining when to transfer E&E expenditures from intangible asset to property,
plant and equipment, which is normally at the time when commercial viability is achieved. Assessing commercial viability
requires management to make certain judgments as to future events and circumstances, in particular whether an economically
viable operation can be established. Any such judgments may change as new information becomes available. If after having
capitalized the expenditure, a decision is made that recovery of the expenditure is unlikely, the amount capitalized is
recognized in cost of sales in the consolidated statements of comprehensive income (loss).
Service concession arrangements
The Corporation determined that the contract terms regarding the Boca de Jaruco and Puerto Escondido, Cuba, facilities
operated by Energas represent service concession arrangements as described in IFRIC 12, “Service concession
arrangements” (IFRIC 12). The Corporation uses judgment to determine whether the grantor sets elements of the services
provided by the operator, whether the grantor retains any significant ownership interest in the infrastructure at the end of the
agreement, and to determine the classification of the service concession asset as either a financial asset or intangible asset.
104 Sherritt International Corporation
Commercial viability
Management uses the best available information to determine when a development project reaches commercial viability which
is generally based on management’s assessment of when economic quantities of proven and/or probable reserves are
determined to exist and the point at which future costs incurred to develop a mine on the property are capitalized.
Management also uses the best available information to determine when a project achieves commercial production, the stage
at which pre-production costs cease to be capitalized.
For assets under construction, management assesses the stage of each construction project to determine when a project is
commercially viable. The criteria used to assess commercial viability are dependent upon the nature of each construction
project and include factors such as the asset purpose, complexity of a project and its location, the level of capital expenditure
compared to the construction cost estimates, completion of a reasonable period of testing of the mine plant and equipment,
ability to produce the commodity in saleable form (within specifications), and ability to sustain ongoing production of the
commodity.
Impairment of non-financial assets
The Corporation assesses the carrying amount of non-financial assets including property, plant and equipment and intangible
assets subject to depreciation and amortization at each reporting date to determine whether there are any indicators that the
carrying amount of the assets may be impaired or require a reversal of impairment. Impairment is assessed at the CGU level
and the determination of CGUs is an area of judgment.
For purposes of determining fair value, management assesses the recoverable amount of the asset using the net present
value of expected future cash flows. Projections of future cash flows are based on factors relevant to the asset and could
include estimated recoverable production, commodity or contracted prices, foreign exchange rates, production levels, cash
costs of production, capital and reclamation costs. Projections inherently require assumptions and judgments to be made
about each of the factors affecting future cash flows. Changes in any of these assumptions or judgments could result in a
significant difference between the carrying amount and fair value of these assets. Where necessary, management engages
qualified third-party professionals to assist in the determination of fair values.
Supporting information
Property, plant and equipment
Canadian $ millions, for the year ended December 31
Cost
Balance, beginning of the year
Additions
Additions and changes in estimates to environmental rehabilitation provisions
Disposals and derecognition
Effect of movements in exchange rates
Balance, end of the year
Depletion and depreciation
Balance, beginning of the year
Depletion and depreciation
Disposals and derecognition
Effect of movements in exchange rates
Balance, end of the year
Net book value
Oil and Gas
equipment
Plant,
properties
and land
Total
2017
$
$
$
$
$
1,520.8 $
1.4
(9.3)
(1,286.2)
(50.7)
176.0 $
1,496.9 $
11.6
(1,287.6)
(51.4)
169.5 $
6.5 $
687.4 $
17.2
(2.7)
(19.5)
(27.9)
654.5 $
2,208.2
18.6
(12.0)
(1,305.7)
(78.6)
830.5
424.9 $
34.0
(4.2)
(22.2)
432.5 $
222.0 $
1,921.8
45.6
(1,291.8)
(73.6)
602.0
228.5
Expiry of the Varadero West production-sharing contract
During the year ended December 31, 2017, the Varadero West production-sharing contract expired, resulting in the
Corporation derecognizing its related property, plant and equipment from Oil and Gas properties. The derecognition had no
impact on net earnings as the property, plant and equipment had a net book value of nil upon expiry.
Sherritt International Corporation 105
Notes to the consolidated financial statements
Canadian $ millions, for the year ended December 31
Cost
Balance, beginning of the year
Additions
Additions and changes in estimates to environmental rehabilitation provisions
Disposals and derecognition
Effect of movements in exchange rates
Balance, end of the year
Depletion, depreciation and impairment losses
Balance, beginning of the year
Depletion and depreciation
Impairments
Disposals and derecognition
Effect of movements in exchange rates
Balance, end of the year
Net book value
Canadian $ millions
Assets under construction, included in above
As at December 31, 2017
As at December 31, 2016
Impairment of Oil assets
Oil and Gas
equipment
Plant,
properties
and land
Total
2016
$
$
$
$
$
1,564.0 $
2.9
4.9
-
(51.0)
1,520.8 $
1,507.8 $
30.0
8.0
-
(48.9)
1,496.9 $
23.9 $
716.9 $
20.7
(5.5)
(30.1)
(14.6)
687.4 $
422.0 $
39.2
0.5
(26.0)
(10.8)
424.9 $
262.5 $
2,280.9
23.6
(0.6)
(30.1)
(65.6)
2,208.2
1,929.8
69.2
8.5
(26.0)
(59.7)
1,921.8
286.4
Plant,
equipment
and land
$
14.0
16.6
The Corporation has the following four cash-generating units (“CGUs”) within its Oil and Gas segment: Puerto
Escondido/Yumuri, Puerto Escondido/Yumuri extension (“PE/YU extension”), Spain and Varadero West. These CGUs are
determined by geographical area or production-sharing contract (“PSC”). Any impairment of these CGUs will be recognized
within the consolidated statements of comprehensive income (loss) as Impairment of Oil assets.
During the third quarter of 2016, the Corporation recognized an impairment loss of $8.5 million representing the write-down of
the PE/YU extension CGU, within the Oil and Gas segment, to its recoverable amount. This impairment was the result of a
decrease in internally forecasted oil reserves at the PE/YU extension due to two oil wells being shut-in as a result of low oil
production. The PE/YU extension was the only CGU where an impairment indicator was identified. Its recoverable amount was
determined to be negligible based on value in use analysis at September 30, 2016. In determining value in use for the PE/YU
extension CGU, the cash flows were discounted at a rate of 10.0%.
106 Sherritt International Corporation
Intangible assets
Canadian $ millions, for the year ended December 31
2017
Contractual
Exploration
concession
arrange-
and
arrange-
Service
ments
Evaluation
ments
Other
Total
$
$
$
$
$
$
$
$
$
$
27.0 $
-
-
27.0 $
24.8 $
0.3
-
25.1 $
1.9 $
32.9 $
21.1
(1.7)
52.3 $
233.3 $
-
(15.1)
218.2 $
12.3 $
-
-
12.3 $
40.0 $
105.5 $
19.0
(7.3)
117.2 $
101.0 $
9.1 $
-
-
9.1 $
8.8 $
0.3
-
9.1 $
- $
302.3
21.1
(16.8)
306.6
151.4
19.6
(7.3)
163.7
142.9
2016
Service
Contractual
Exploration
concession
arrange-
and
ments
Evaluation
arrange-
ments
27.0 $
-
-
27.0 $
23.0 $
1.8
-
24.8 $
2.2 $
13.8 $
18.8
0.3
32.9 $
235.5 $
4.6
(6.8)
233.3 $
12.3 $
-
-
12.3 $
20.6 $
88.2 $
19.6
(2.3)
105.5 $
127.8 $
Other
Total
9.1 $
-
-
9.1 $
7.1 $
1.7
-
8.8 $
0.3 $
285.4
23.4
(6.5)
302.3
130.6
23.1
(2.3)
151.4
150.9
Cost
Balance, beginning of the year
Additions through internal development
Effects of movements in exchange rates
Balance, end of the year
Amortization and impairment losses
Balance, beginning of the year
Amortization
Effect of movements in exchange rates
Balance, end of the year
Net book value
Canadian $ millions, for the year ended December 31
Cost
Balance, beginning of the year
Additions through internal development
Effect of movements in exchange rates
Balance, end of the year
Amortization and impairment losses
Balance, beginning of the year
Amortization
Effect of movements in exchange rates
Balance, end of the year
Net book value
Contractual arrangements
In 2003, in connection with the acquisition of outside interests in Sherritt Power Corporation, the Corporation acquired
significant long-term contractual arrangements.
Exploration and evaluation
In 2014, the Corporation signed two new PSCs with the Government of Cuba, respectively referred to as Block 8A and Block
10. In 2017, the Corporation signed an additional new PSC with the Government of Cuba referred to as Block 6A. The three
PSCs have terms of 25 years. Exploration and evaluation assets include capitalized expenditures on these three blocks, and
primarily consist of exploration drilling performed on Block 10.
Service concession arrangements
In 2016, construction of the Puerto Escondido/Yumuri pipeline was completed and the pipeline became operational. Also
included in service concession arrangements is construction at the Energas Boca de Jaruco facility completed in 2014.
Revenues and expenses relating to the construction activity for the year ended December 31, 2017 is nil (December 31, 2016
- $4.6 million). Expenses incurred in relation to the construction activity are included in cost of sales in the consolidated
statements of comprehensive income (loss).
Other
Sherritt International Corporation 107
Notes to the consolidated financial statements
In 2007, the Corporation acquired scientific and technical knowledge related primarily to hydrometallurgical technologies for
the treatment and recovery of non-ferrous metals.
16. LOANS, BORROWINGS AND OTHER FINANCIAL LIABILITIES
Loans and borrowings
Canadian $ millions
Note
December 31
Repayments
As at
2017
Effect of
movement in
exchange
rates
As at
2016
Other
December 31
For the year ended December 31, 2017
Cash flows
Non-cash changes
Non-recourse loans and borrowings
Ambatovy Joint Venture additional partner loans(1)
Other loans and borrowings
8.00% senior unsecured debentures due 2021(2)
7.50% senior unsecured debentures due 2023(2)
7.875% senior unsecured debentures due 2025(2)
Ambatovy Joint Venture partner loans(3)
Syndicated revolving-term credit facility
Current portion of other loans and borrowings
12 $
- $
- $
(60.3) $
(1,307.2) $
1,367.5
12 $
12
12
12
$
$
213.2 $
240.7
234.4
127.8
8.0
824.1 $
(8.0)
816.1
- $
-
-
-
(35.0)
(35.0) $
- $
-
-
(8.9)
-
(8.9) $
1.4 $
1.2
1.3
3.4
-
7.3 $
$
211.8
239.5
233.1
133.3
43.0
860.7
(43.0)
817.7
(1) As part of the Ambatovy Joint Venture restructuring (note 6), $1.4 billion of the Ambatovy Joint Venture additional partner loans was derecognized and is included in
other non-cash changes. Other non-cash changes also include $57.0 million of capitalized interest, $0.2 million of amortization of deferred financing costs and $1.7
million of deferred financing costs which were also derecognized. Accrued and unpaid interest on these loans was capitalized to the loan balance every six months prior
to derecognition.
(2) Other non-cash changes on the debentures consist of amortization of deferred financing costs.
(3) Other non-cash changes on the Ambatovy Joint Venture partner loans consist of capitalized interest and amortization of deferred financing costs. Accrued and unpaid
interest on these loans is capitalized to the loan balance every six months.
Senior unsecured debentures
During the year ended December 31, 2016 the maturity dates of the outstanding senior unsecured debentures (the “Notes”)
were extended by three years from 2018, 2020 and 2022 to 2021, 2023 and 2025, respectively (the “Extension”). The
applicable interest rates and existing covenants for the Notes remain unchanged. The Noteholders that voted in favour of the
Extension received, at the option of the Noteholder, either:
(cid:120)
(cid:120)
cash consent consideration equal to 2% of the principal amount of the debentures; or,
73.25 warrants for each $1,000 of principal amount of debentures held. The warrants have a term of 5 years, are not
listed on any exchange and have an exercise price of $0.74 per share.
During the year ended December 31, 2016, 19.1 million warrants were granted to the Noteholders that elected for this option
with a fair value of $0.43 per warrant which totalled $8.2 million. The fair value of the warrants was determined using the
Black-Scholes option valuation model using observable market data and an expected dividend of 0% and was recognized in
Reserves (note 18). Cash consent fees paid to Noteholders that voted in favour of the extension and other transaction fees
totalled $14.8 million and have been capitalized to the Notes on a pro-rata basis.
The 8.00% senior unsecured debentures, due 2021, are net of financing costs of $6.8 million at December 31, 2017
(December 31, 2016 - $8.2 million).
The 7.50% senior unsecured debentures, due 2023, are net of financing costs of $9.3 million at December 31, 2017
(December 31, 2016 - $10.5 million).
The 7.875% senior unsecured debentures, due 2025, are net of financing costs of $15.6 million at December 31, 2017
(December 31, 2016 - $16.9 million).
During the year ended December 31, 2016, the Corporation repurchased $30.0 million aggregate principal amount of its 8.00%
senior unsecured debentures due 2021 for $17.4 million. A gain of $12.6 million was recognized during the year ended
December 31, 2016 within net finance expense in the consolidated statements of comprehensive income (loss) (note 9).
108 Sherritt International Corporation
Under the Corporation’s indenture agreement, the Corporation is subject to restrictions, often referred to as “baskets”, which
limit the incurrence of indebtedness and the ability to make certain distributions, unless certain financial ratios are met. If
earnings before interest, taxes, depreciation and amortization (“EBITDA”)-to-interest expense, both as defined in the
agreement, is above 2:1, debt can be incurred without the use of a basket and an additional basket for restricted payments
becomes available. Similarly, if indebtedness-to-EBITDA is below 3:1, distributions and other restricted payments are no
longer limited.
Ambatovy Joint Venture additional partner loans
Sherritt had arrangements with its Ambatovy Joint Venture partners, Sumitomo and KORES, for a mechanism through which
the joint venture partners would finance the Corporation’s pro-rata share of shareholder funding requirements for the
Ambatovy Joint Venture up to US$600.9 million plus accrued interest.
These loans, which were fully drawn, were non-recourse to the Corporation except in circumstances where there was a direct
breach by the Corporation of restrictions in the loan documents, which limited the activities of certain subsidiaries and the use
of proceeds from the loans to the development of the Ambatovy mine.
Interest and principal on these loans was repaid solely through the Corporation’s share of the distributions from the Ambatovy
Joint Venture. However, the Corporation had the right to prepay some or all of the loans at its option. Until the Ambatovy Joint
Venture additional partner loans and the Ambatovy Joint Venture partner loans, as described below, were fully repaid, 45% of
the Corporation’s share of distributions were applied to repay the Ambatovy Joint Venture additional partner loans, 25% were
applied to repay the Ambatovy Joint Venture partner loans and the remaining 30% were payable to the Corporation. When one
loan had been repaid in full, 70% of such distributions would be applied to repay the loan that remains outstanding and the
Corporation would receive the balance of the distributions until such time as both loans had been repaid in full and the
Corporation would be entitled to receive all of its distributions.
Each lender individually had the right to exchange some or all of its Ambatovy Joint Venture additional partner loan for up to a
maximum 15% equity interest, in aggregate, at any time. Exercise of these rights in full would reduce Sherritt’s interest in the
Ambatovy Joint Venture to 25%. This right was subject to senior project lender consent and Sherritt’s right to repay such loans
and avoid the reduction in its equity interest.
The lenders’ conversion option incorporated in these loan agreements was an embedded derivative. The lenders’ conversion
option was bifurcated from the loan and ascribed a nominal value. These loans carried interest at a rate of six-month LIBOR
plus 7.0% per annum.
The Ambatovy Joint Venture additional partner loans, which amounted to $1.4 billion as at the date of the restructuring, were
derecognized as part of the Ambatovy Joint Venture restructuring (note 6). The principal amount outstanding under this facility
at December 31, 2017 was nil, including accrued interest (December 31, 2016 - $1,367.5 million). This amount is net of
financing costs of nil at December 31, 2017 (December 31, 2016 - $1.9 million).
Ambatovy Joint Venture partner loans
In 2008, the Ambatovy Joint Venture partners finalized agreements to provide Sherritt with loans of up to US$236.0 million to
be used to fund Sherritt’s contributions for the project. The loans are provided at an interest rate based on a six-month LIBOR
plus 1.125% with a 15-year term.
The partner loans continue to be secured by Sherritt’s 12% interest following the Ambatovy Joint Venture restructuring on
December 11, 2017 (note 6). The partner loans can be repaid in cash at any time through to maturity in August 2023. At
maturity, Sherritt can elect to: (i) repay the loans in cash, (ii) repay the loans in shares or a combination of cash and shares at
105% of the amount then due, or (iii) repay in 10 equal semi-annual principal installments (plus interest) commencing in
December 2024, at an interest rate of LIBOR +5% applied from the original August 2023 maturity date.
The principal amount outstanding under this facility at December 31, 2017 was $127.8 million, including accrued interest
(December 31, 2016 - $133.3 million). This amount is net of financing costs of $0.4 million at December 31, 2017 (December
31, 2016 - $0.5 million). The Corporation’s ability to draw additional amounts on the facility expired on August 22, 2014.
Syndicated revolving-term credit facility
In November 2016, the maturity of the syndicated revolving-term credit facility was extended to January 31, 2017 and the
maximum credit available was reduced from $115.0 million to $90.0 million. The total available draw was based on eligible
receivables and inventory. The interest rates increased from prime plus 2.25% or bankers’ acceptance plus 3.25% to prime
plus 2.50% or bankers’ acceptance plus 3.50%. Transaction costs related to this amendment were expensed.
Sherritt International Corporation 109
Notes to the consolidated financial statements
The facility was subject to the following financial covenants: net financial debt-to-EBITDA covenant of 4.25:1, net financial
debt-to-equity covenant of 0.55:1 and EBITDA-to-interest expense covenant of not less than 1.75:1. If net financial debt-to-
EBITDA is greater than 3.75:1, unrestricted cash must be greater than 50% of the lower of the borrowing base amount and
facility amount.
On January 31, 2017, the syndicated revolving-term credit facility was renewed for one year with a maximum credit available
of $90.0 million, of which $13.7 million matured on April 21, 2017. Thereafter, the facility size decreased by 4.167% quarterly
beginning April 28, 2017. Collectively, these reductions will result in a facility size of $63.6 million at January 30, 2018. The
interest rates increased from prime plus 2.50% or bankers’ acceptance plus 3.50% to prime plus 3.50% or bankers’
acceptance plus 4.50%. The facility is subject to the following financial covenants and restrictions as at December 31, 2017:
(cid:120) Net financial debt-to-EBITDA covenant of 4.75:1;
(cid:120) EBITDA-to-interest expense covenant of not less than 1.75:1;
(cid:120)
Limits on capital expenditures and funding of the Ambatovy Joint Venture and Moa Joint Venture; and
(cid:120) Maintenance of a minimum balance of cash and cash equivalents, short-term investments and undrawn credit held
by the Corporation’s wholly-owned subsidiaries greater than the facility size multiplied by two. The facility size
multiplied by two as at December 31, 2017 is $133.5 million.
The minimum balance restriction was amended during the third quarter of 2017 to include undrawn credit and to change the
minimum balance required from $180.0 million to the facility size multiplied by two.
As at December 31, 2017, the Corporation has $50.0 million of letters of credit outstanding pursuant to this facility (December
31, 2016 - $46.8 million). As at December 31, 2017, $8.0 million has been drawn on this facility (December 31, 2016 - $43.0
million).
In January 2018, the maturity of the syndicated revolving-term credit facility was extended to January 30, 2019 and the
maximum credit available was increased from $63.6 million to $70.0 million. The total available draw is based on eligible
receivables and inventory. The interest rates continue to be prime plus 3.50% or bankers’ acceptance plus 4.50%.
The facility is subject to the following financial covenants and restrictions:
(cid:120) EBITDA, as defined in the agreement, of not less than $100 million;
(cid:120) EBITDA-to-interest expense covenant of not less than 1.75:1;
(cid:120)
Limits on capital expenditures and funding of the Ambatovy Joint Venture and Moa Joint Venture; and
(cid:120) Maintenance of a minimum balance of cash and cash equivalents, short-term investments and undrawn credit held
by the Corporation’s wholly-owned subsidiaries greater than the facility size multiplied by two. The facility size
multiplied by two as at December 31, 2017 is $133.5 million.
Line of credit
On February 23, 2016, the Corporation repaid the outstanding balance of $35.0 million and terminated its line of credit.
Covenants
As at December 31, 2017, there are no events of default on the Corporation’s borrowings or debentures. The Corporation did
not meet the financial ratios required to remove restrictions on the incurrence of debt or certain distributions under the senior
unsecured debentures indenture agreement.
110 Sherritt International Corporation
Other financial liabilities
Canadian $ millions, as at
Other non-current financial liabilities(1)
Stock-based compensation liability
Current portion of other financial liabilities
2017
2016
December 31
December 31
$
$
0.6 $
23.6
24.2
(8.0)
16.2 $
155.7
12.3
168.0
(5.0)
163.0
(1) As at December 31, 2017, included in other non-current financial liabilities is nil (December 31, 2016 - $154.9 million) related to the Corporation’s obligation for
outstanding shareholder funding to the Ambatovy Joint Venture. This obligation represented cash calls that were not funded since financial completion (note 7). On
December 11, 2017, $222.8 million was derecognized as part of the Ambatovy restructuring (note 6). The Corporation had also recognized a financial asset relating to its
right to future distributions from the Ambatovy Joint Venture if and when this financial obligation were cured (note 13).
17. PROVISIONS, CONTINGENCIES AND GUARANTEES
Accounting policies
Provisions are recognized when the Corporation has a present obligation (legal or constructive) as a result of a past event, it is
probable that an outflow of resources will be required to settle the obligation and a reliable estimate can be made of the
amount of the obligation. Where appropriate, the future cash flow estimates are adjusted to reflect risks specific to the
obligation. Where the Corporation expects some or all of a provision to be reimbursed, for example, under an insurance
contract, the reimbursement is recognized as a separate asset, but only when the reimbursement is virtually certain. The
expense relating to any provision is presented in cost of sales or administrative expenses, depending on the nature of the
provision. If the effect of the time value of money is material, provisions are determined by discounting the expected future
cash flows at a pre-tax rate that reflects current market assessments of the time value of money. Where discounting is used,
the increase in the provision due to the passage of time is recognized as financing expense. A contingent liability is disclosed
where the existence of an obligation will only be confirmed by future events or where the amount of the obligation cannot be
measured with reasonable reliability. Contingent assets are not recognized, but are disclosed where an inflow of economic
benefits is probable.
Environmental rehabilitation
Provisions for environmental rehabilitation include decommissioning and restoration costs when the Corporation has an
obligation to dismantle and remove infrastructure and residual materials as well as to restore the disturbed area. Estimated
decommissioning and restoration costs are provided for in the accounting period when the obligation arising from the
disturbance occurs, whether this occurs during mine development or during the production phase, based on the net present
value of estimated future costs. The provision for environmental rehabilitation is reviewed and adjusted each period to reflect
developments which could include changes in closure dates, legislation, discount rate or estimated future costs.
The amount recognized as a liability for environmental rehabilitation is calculated as the present value of the estimated future
costs determined in accordance with local conditions and requirements. An amount corresponding to the provision is
capitalized as part of property, plant and equipment and is depreciated over the life of the corresponding asset. The impact of
amortization or unwinding of the discount rate applied in establishing the net present value of the provision is recognized in
financing expense. The applicable discount rate is a pre-tax rate that reflects the current market assessment of the time value
of money which is determined based on government bond interest rates and inflation rates.
Changes to estimated future costs are recognized in the consolidated statements of financial position by either increasing or
decreasing the rehabilitation liability and rehabilitation asset if the initial estimate was originally recognized as part of an asset
measured in accordance with IAS 16, “Property, Plant and Equipment”. Any reduction in the rehabilitation liability and therefore
any deduction from the rehabilitation asset may not exceed the carrying amount of that asset. If it does, any excess over the
carrying amount is taken immediately to cost of sales.
Sherritt International Corporation 111
Notes to the consolidated financial statements
If the change in estimate results in an increase in the rehabilitation provision and therefore an addition to the carrying amount
of the asset, the entity is required to consider whether the new carrying amount is recoverable, and whether this is an
indication of impairment of the asset as a whole. If indication of impairment of the asset as a whole exists, the Corporation
tests for impairment in accordance with IAS 36, “Impairment of Assets”. If the carrying amount of the revised mine assets, net
of rehabilitation provisions, exceeds the recoverable value, that portion of the increase is charged directly to cost of sales. For
closed sites, changes to estimated costs are recognized immediately in cost of sales. Also, rehabilitation obligations that arise
as a result of the production phase of a mine are expensed as incurred.
Where rehabilitation is conducted systematically over the life of the operation, rather than at the time of closure, provision is
made for the estimated cost of outstanding rehabilitation work at each statement of financial position date and any increase in
overall cost is expensed.
Critical accounting estimates
The Corporation’s operations are subject to environmental regulations in Canada, Cuba, Madagascar and other countries in
which the Corporation operates. Many factors such as future changes to environmental laws and regulations, life of mine
estimates, the cost and time it will take to rehabilitate the property and discount rates, all affect the carrying amount of
environmental rehabilitation provisions. As a result, the actual cost of environmental rehabilitation could be higher than the
amounts the Corporation has estimated. For certain operations, actual costs will ultimately be determined after site closure in
agreement with predecessor companies.
The environmental rehabilitation provision is assessed quarterly and measured by discounting the expected cash flows. The
applicable discount rate is a pre-tax rate that reflects the current market assessment of the time value of money which is
determined based on government bond interest rates and inflation rates. The actual rate depends on a number of factors,
including the timing of rehabilitation activities that can extend decades into the future and the location of the property.
Supporting information
Canadian $ millions, as at
Environmental rehabilitation provisions
Other provisions
Current portion of provisions
Environmental rehabilitation provisions
2017
2016
December 31
December 31
$
$
95.3 $
15.0
110.3
(18.3)
92.0 $
103.2
11.4
114.6
(12.2)
102.4
Provisions for environmental rehabilitation obligations are recognized in respect of Oil and Gas, Power and mining operations
and include associated infrastructure and buildings, such as oil and gas production facilities, refinery, fertilizer and utilities
facilities. The obligations normally take place at the end of the asset’s useful life.
The following is a reconciliation of the environmental rehabilitation provisions:
Canadian $ millions, for the years ended December 31
Note
2017
2016
Balance, beginning of the year
Change in estimates
Utilized during the year
Accretion
Effect of movement in exchange rates
Balance, end of the year
$
9
$
103.2 $
(12.0)
(0.4)
1.0
3.5
95.3 $
107.8
(0.6)
(1.3)
1.0
(3.7)
103.2
The Corporation has estimated that it will require approximately $143.5 million in undiscounted cash flows to settle these
obligations. The payments are expected to be funded by cash generated from operations. Discount rates from 2.14% to
11.49% were applied to expected future cash flows to determine the carrying value of the environmental rehabilitation
provision.
112 Sherritt International Corporation
Other provisions
The following is a reconciliation of other provisions:
Canadian $ millions, for the years ended December 31
Balance, beginning of the year
Change in estimates
Reclassified to trade accounts payable and accrued liabilities
Utilized during the year
Balance, end of the year
2017
2016
$
$
11.4 $
15.1
(3.4)
(8.1)
15.0 $
18.8
-
-
(7.4)
11.4
On October 31, 2013, a breach of an onsite water containment pond occurred at the Coal operations’ Obed Mountain mine
near Hinton, Alberta. The release consisted of 670,000 cubic metres of process water, containing water mixed with clay, mud,
slate and coal particles. The Corporation continues to be subject to financial obligations relating to the Obed breach
subsequent to the sale of the Coal operations.
For the year ended December 31, 2017, the Corporation recognized $15.1 million in loss from discontinued operations in the
consolidated statements of comprehensive income (loss) due to an increase in its estimate of remediation costs for the Obed
breach.
For the year ended December 31, 2017, the Corporation recognized $5.2 million in cash used by discontinued operations in
the consolidated statements of cash flow ($7.4 million for the year ended December 31, 2016). Cash used by discontinued
operations includes $8.1 million of cash paid to settle the obligations relating to the Obed breach, net of $2.9 million of cash
provided from an insurance reimbursement related to the Obed breach. Included within the $8.1 million of cash paid is $6.2
million related to provincial and federal fines formalized by the Court in Alberta during the year ended December 31, 2017.
Contingencies
A number of the Corporation’s subsidiaries and affiliates have operations located in Cuba. The Corporation will continue to be
affected by the difficult political relationship between the United States and Cuba. The Corporation has received letters from
U.S. citizens claiming ownership of certain Cuban properties or rights in which the Corporation has an indirect interest, and
explicitly or implicitly threatening litigation. Having regard to legal and other developments in the United States, and remedies
available in Canada and in Europe, the Corporation believes that the impact of any claims against it will not be material.
In addition to the above matter, the Corporation and its subsidiaries are also subject to routine legal proceedings and tax
audits. The Corporation does not believe that the outcome of any of these matters, individually or in aggregate, would have a
material adverse effect on its consolidated net earnings, cash flow or financial position.
Sherritt International Corporation 113
Notes to the consolidated financial statements
18. SHAREHOLDERS’ EQUITY
Capital stock
The Corporation’s common shares have no par value and the authorized share capital is composed of an unlimited number of
common shares. The changes in the Corporation’s outstanding common shares were as follows:
Canadian $ millions, except share amounts, for the years ended December 31
Note
Number
2017
Capital stock
Number
Capital stock
2016
Balance, beginning of the year
Restricted stock plan (vested)
Warrants exercised
Balance, end of the year
19
294,174,923
27,000
7,556,742
301,758,665
$
$
2,775.7
0.1
8.8
2,784.6
293,853,001 $
-
321,922
294,174,923 $
2,775.3
-
0.4
2,775.7
As at December 31, 2017, 11,244,176 warrants were outstanding.
Reserves
Canadian $ millions, for the years ended December 31
Stated capital reserve
Balance, beginning of the year
Warrant issuance
Warrants exercised
Balance, end of the year
Stock-based compensation reserve(1)
Balance, beginning of the year
Restricted stock plan (vested)
Stock option plan expense
Balance, end of the year
Total reserves, end of the year
Note
2017
2016
$
16
225.8 $
-
(3.2)
222.6
217.8
8.2
(0.2)
225.8
$
$
8.9 $
(0.1)
1.5
10.3
232.9 $
7.1
-
1.8
8.9
234.7
(1)
Stock-based compensation reserve relates to equity-settled compensation plans issued by the Corporation to its directors, officers and employees.
Accumulated other comprehensive income
Canadian $ millions, for the years ended December 31
Foreign currency translation reserve
Balance, beginning of the year
Foreign currency translation differences on foreign operations
Reclassification to Gain on Ambatovy Joint Venture restructuring
Reclassification to net finance expense upon dissolution of foreign operation
Balance, end of the year
Actuarial losses on pension plans
Balance, beginning of the year
Actuarial losses on pension plans, net of tax
Balance, end of the year
Total accumulated other comprehensive income
Note
2017
2016
$
6
$
813.2 $
(72.1)
(269.6)
(0.6)
470.9
(4.2)
(0.2)
(4.4)
466.5 $
903.0
(89.8)
-
-
813.2
(3.5)
(0.7)
(4.2)
809.0
114 Sherritt International Corporation
19. STOCK-BASED COMPENSATION PLANS
Accounting policies
The Corporation operates a number of equity-settled and cash-settled share-based compensation plans under which it issues
equity instruments of the Corporation, or makes cash payments based on the value of the underlying equity instrument of the
Corporation, to directors, officers and employees in exchange for services.
The Corporation’s equity-settled compensation plans include the stock options plan and the Restricted Stock Plan (“RSP”).
Equity-settled stock options obligations are settled by the issuance of shares from treasury. RSP obligations are settled by the
purchase of shares on the open market. The fair value of grants issued under the stock options plan are determined at the
date of grant using the Black-Scholes option valuation model. They are only re-measured if there is a modification to the terms
of the option, such as a change in exercise price or legal life. The fair value of the RSP obligation is measured as the value at
which the shares are purchased on the market. The fair value of the equity-settled compensation plans is recognized as an
expense over the expected vesting period with a corresponding entry to shareholders’ equity.
The Corporation’s cash-settled share plans, including stock options with tandem stock appreciation rights (“Options with
Tandem SARs”), Restricted Share Units (“RSUs”), Performance Share Units (“PSUs”) and Deferred Share Units (“DSUs”), are
recognized as liabilities at the date of grant.
The fair value of the liability of the Options with Tandem SARs is determined based on the application of the Black-Scholes
option valuation model at the date granted and subsequently re-measured each reporting date based on the market value of
the Corporation’s shares and management’s estimate of the number of shares expected to vest. Projections are reviewed at
each reporting date up to the vesting date to reflect management’s best estimates and adjusted as required. Movements in the
liability between reporting dates are recognized as an adjustment to the liability and an offsetting expense or recovery. At each
reporting date until settlement, the fair value of the awards is re-measured based on revised pricing parameters of the model
based on market conditions at the reporting date and estimates of forfeiture rates. Options with Tandem SARs permit awards
to be settled in shares. If this occurs, the liability is transferred directly to equity as part of the consideration for the equity
instruments issued.
The fair value of the RSU liability at the date of grant and at each subsequent reporting date until settlement is based on the
market value of the Corporation’s shares. If the Corporation’s share price changes between reporting dates then the fair value
of the RSU liability is adjusted and an offsetting expense or recovery is recognized in the statement of comprehensive income
(loss). The adjusted fair value of the RSU liability is then amortized over the remaining vesting period. For RSUs issued with
performance requirements, the fair value at the date of grant and at each subsequent reporting date until settlement is based
on performance metrics which are defined at the time of issuance and on the market value of the Corporation’s shares with the
liability expensed over the vesting period. Adjustments recorded are amortized over the remaining vesting period.
The fair value of the PSU liability at the date of grant and at each subsequent reporting date until settlement is based on
performance metrics which are defined at the time of issuance and on the market value of the Corporation’s shares with the
liability expensed over the vesting period. If the Corporation’s share price or the expected achievement of the performance
requirements changes between reporting dates then the fair value of the PSU liability is adjusted and an offsetting expense or
recovery is recognized in the statement of comprehensive income (loss). Adjustments recorded are amortized over the
remaining vesting period.
The fair value of DSUs at the date of grant and at each subsequent reporting date until settlement is based on the market
value of the shares with the liability expensed over the vesting period. Movements in the liability between reporting dates are
recognized as an adjustment to the liability and an offsetting expense or recovery. The adjustment amount is amortized over
the remaining vesting period.
Sherritt International Corporation 115
Notes to the consolidated financial statements
Supporting information
Stock options and options with tandem stock appreciation rights
The following is a summary of stock option activity:
Stock options and options with tandem stock appreciation rights
The Corporation maintains a stock option plan, pursuant to which securities of the Corporation may be issued as
compensation. Eligible participants are those persons designated from time to time by the Human Resources Committee of the
Board of Directors (the Committee) from among the executive officers and certain senior employees of the Corporation or its
subsidiaries who occupy responsible managerial or professional positions and who have the capacity to contribute to the
success of the Corporation.
Under the Corporation’s stock option plan, the Committee has the discretion to attach Tandem SARs to options, which entitles
the holder to a cash payment of the difference between the option’s exercise price and the volume-weighted average trading
price of a share on the Toronto Stock Exchange for the five trading days preceding the exercise date. Options with Tandem
SARs have not been issued since March 2010.
The maximum number of stock options issuable is 17,500,000. The remaining number of options which may be issued under
the stock option plan is 849,943 at December 31, 2017. Under the stock option plan, the exercise price of each option equals
the volume-weighted average trading price over the five days prior to the date the option is granted. An option’s maximum term
is 10 years. Options vest on such terms as the Committee determines, generally in three equal instalments on the annual
anniversary date of the grant of the options. When options with or without Tandem SARs are exercised, the related options are
cancelled and the shares underlying such options are issued and are no longer available for issuance under the stock option
plan.
The following is a summary of stock option activity:
Canadian $, except number of options, for the years ended December 31
Outstanding, beginning of the year
Granted
Forfeited
Expired
Outstanding, end of the year
Options exercisable, end of the year
2017
Weighted-
average
exercise
price
3.57
1.20
15.02
12.51
2.77
4.10
Number of
options
9,598,416 $
1,382,814
(50,000)
(496,169)
10,435,061 $
5,924,077 $
2016
Weighted-
average
exercise
price
5.80
0.68
-
11.34
3.57
6.57
Number of
options
6,149,349 $
3,802,400
-
(353,333)
9,598,416 $
4,270,510 $
The following table summarizes information on stock options outstanding and exercisable:
116 Sherritt International Corporation
As at December 31
Range of exercise prices
outstanding
life (years)
price
exercisable
Weighted-
average
remaining
Number
contractual
Weighted-
average
exercise
Number
2017
Exercisable
weighted-
average
exercise
price
$0.68 - $2.10
$2.11 - $5.05
$5.06 - $9.77
$9.78 - $15.02
Total
5,185,214
2,836,800
2,168,047
245,000
10,435,061
8.4 $
6.7
3.3
0.5
6.7 $
0.82
2.49
6.43
15.02
2.77
1,267,465 $
2,243,565
2,168,047
245,000
5,924,077 $
0.68
2.58
6.43
15.02
4.10
As at December 31, 2017, 1,236,547 options with tandem SARs (December 31, 2016 – 1,670,216) and 9,198,514 options
without tandem SARs (December 31, 2016 – 7,928,200) remained outstanding for which the Corporation has recognized a
compensation expense of $1.5 million for the year ended December 31, 2017 (compensation expense of $1.9 million for the
year ended December 31, 2016). The carrying amount of liabilities associated with stock options with tandem SARs is nil as at
December 31, 2017 (December 31, 2016 – $0.1 million).
Inputs for measurement of grant date fair values
The fair value at the grant date of the stock options was measured using Black-Scholes. The following summarizes the
weighted average fair value measurement factors for options granted during the year:
Canadian $, except as noted, for the years ended December 31
Share price at grant date
Exercise price
Risk-free interest rates (based on 10-year Government of Canada bonds)
Expected volatility
Expected dividend yield
Expected life of options
Weighted-average fair value of options granted during the year
2017
2016
$
$
$
1.20 $
1.20 $
1.61%
57.92%
0.00%
10 years
0.79 $
0.68
0.68
1.14%
55.12%
0.00%
10 years
0.43
Expected volatility is estimated based on the average historical share price volatility for a period equal to the expected life of
the option. The expected life of the option is estimated to equal its legal life at the time of grant. The expected dividend yield is
determined by comparing the most recent dividend payment to the share price at grant date.
Other stock-based compensation
Restricted Share Units (RSUs)
Under the terms of the Executive Share Unit Plan, the RSUs are available to be granted to executives and employees. The
RSUs represent a right to receive a cash amount payable by the Corporation to a participant at the end of the vesting period
for RSUs determined by reference to the market price of the common shares multiplied by the number of RSUs held by the
participant as adjusted for dividend equivalents credited. RSUs are issued subject to vesting conditions, including performance
criteria, if any, which are set by the Committee. The RSUs vest at the sole discretion of the Committee. RSUs vest not later
than the earlier of (a) the earlier of: (i) December 31 of the third calendar year following the calendar year in respect of which
the RSUs were granted or (ii) the date set out in the RSU grant agreement; and (b) the date of death of a participant. The
vesting date set out in the grant agreement is typically the third anniversary of the grant date. The Corporation shall redeem all
of a participant’s vested RSUs on the vesting date and may, at the discretion of the Committee, redeem all or any part of a
participant’s unvested RSUs prior to the vesting date.
Sherritt International Corporation 117
Notes to the consolidated financial statements
Beginning in 2013, the Corporation began issuing performance based RSUs to certain employees, which vest at the end of
three years. Under the plan, each unit awarded is equivalent to a common share. A liability is accrued related to the units
awarded and a compensation expense is recognized in the consolidated statement of comprehensive income (loss) over the
service period required for employees to become fully entitled to the award. At the maturity date, the participant receives cash
representing the value of the units. The final number of units that vest will vary from 80% to 120% of the number of outstanding
units on the vesting date (initial number awarded plus additional units for dividend equivalents) based on the Corporation’s
total shareholder return relative to a benchmark index comprised of mining and oil and gas companies. The number of RSUs
subject to a performance condition based solely on the Corporation’s relative total shareholder return outstanding at December
31, 2017 was 13,704,281 (December 31, 2016 – 16,150,734).
In the first quarter of 2016, the Corporation’s Board of Directors approved an additional one-time grant of performance based
RSUs to certain employees which vest at December 31, 2018. Under the plan, each unit awarded is equivalent to a common
share. A liability is accrued related to the units awarded and a compensation expense is recognized in the consolidated
statement of comprehensive income (loss) over the service period required for employees to become fully entitled to the
award. At the maturity date, the participant receives cash representing the value of the units. The final number of units that
vest will be either 0%, 50% or 100% of the initial number awarded, plus dividend equivalents (if any), depending on the
Corporation’s ability to achieve certain net direct cash cost (NDCC) milestones in the Corporation’s Metals operations. On May
3, 2017, all 8,448,555 units were cancelled. The number of RSUs subject to this performance condition outstanding at
December 31, 2017 was nil (December 31, 2016 – 8,448,555).
In the first quarter of 2017, the Corporation’s Board of Directors approved the grant of RSUs to certain employees with a 3-
year vesting period with no performance conditions. The number of RSUs subject to no performance conditions outstanding at
December 31, 2017 was 2,387,491 (December 31, 2016 – nil).
Performance Share Units (PSUs)
In the first quarter of 2017, the Corporation’s Board of Directors approved the grant of PSUs to certain employees. The PSUs
represent a right to receive a cash amount payable by the Corporation to a participant at the end of the vesting period
determined by reference to the market price of the common shares multiplied by the number of PSUs held by the participant
as adjusted for dividend equivalents credited, if any. A liability is accrued related to the units awarded and a compensation
expense is recognized in the consolidated statements of comprehensive income (loss) over the 3-year service period required
for employees to become fully entitled to the award. The PSUs are issued subject to vesting conditions, including performance
conditions, which are set by the Human Resources Committee. The vesting of PSUs will be subject to the achievement of two
equally-weighted performance conditions measured over the 3-year vesting period: (i) the Corporation’s total shareholder
return relative to benchmark indices comprised of mining and oil and gas companies (a market condition); and (ii) unit cost of
production compared to budget (a non-market condition). The value of PSUs that vest will vary from 0% to 200% based on the
achievement of the market and non-market performance conditions. The number of PSUs subject to these performance
conditions outstanding at December 31, 2017 was 3,761,449 (December 31, 2016 – nil).
Deferred Share Units (DSUs)
Under the terms of the Non-executive Directors’ Deferred Share Unit Plan, the DSUs are available to be granted to non-
executive directors. The DSUs represent a right to receive a cash amount payable by the Corporation to a participant following
departure from the Board of Directors. The value payable is determined by reference to the market price of the common
shares multiplied by the number of DSUs held by the participant as adjusted for dividend equivalents credited. DSUs vest on
the later of (a) the grant date or (b) the date that any terms of vesting conditions attached to the DSUs are satisfied. DSUs
generally vest on the grant date. DSUs are redeemed by the Corporation at the election of the participant by filing a notice of
redemption not earlier than the participant’s termination date and not later than December 1st of the calendar year following the
termination date.
Restricted Stock Plan (RSP)
The Corporation has a Restricted Stock Plan intended for senior executives, under which the Committee may grant restricted
shares to employees of the Corporation. Under the terms of the plan, shares that are issued are subject to vesting conditions,
which are set by the Committee for each grant of restricted stock. The shares granted under this plan are purchased on the
open market by a trustee and held in each participant’s custodial account until the vesting conditions have been met, or the
shares are forfeited. The participant owns the restricted shares but cannot dispose or otherwise transfer ownership of them
until the restrictions and performance conditions, if any, specified by the Committee at the time of grant have been satisfied.
118 Sherritt International Corporation
For accounting purposes, these shares are excluded from the number of outstanding common shares of the Corporation and
reduce the capital stock of the Corporation. As the shares vest, the shares are included in the number of outstanding common
shares of the Corporation and the capital stock of the Corporation is increased accordingly. The Corporation purchased nil
common shares during the year ended December 31, 2017 (for the year ended December 31, 2016 the Corporation
purchased nil common shares). These shares are excluded from the calculation of the weighted-average number of common
shares used for the purposes of calculating basic earnings per share. In June 2017, the restricted shares fully vested and the
plan was closed.
A summary of the RSU, PSU, DSU and RSP units outstanding as at December 31, 2017 and 2016 and changes during the
year ended is as follows:
For the year ended December 31
Outstanding, beginning of the year
Issued
Exercised
Forfeited
Vested
Outstanding, end of the year
Units exercisable, end of the year
For the year ended December 31
Outstanding, beginning of the year
Issued
Exercised
Forfeited
Outstanding, end of the year
Units exercisable, end of the year
RSU
PSU
DSU
24,670,181
2,404,158
(1,971,994)
(9,010,573)
-
16,091,772
n/a
-
3,778,116
-
(16,667)
-
3,761,449
n/a
1,682,089
620,450
-
-
-
2,302,539
2,302,539
RSU
DSU
7,208,937
19,083,980
(1,149,336)
(473,400)
24,670,181
n/a
738,699
943,390
-
-
1,682,089
1,682,089
2017
RSP
27,000
-
-
-
(27,000)
-
n/a
2016
RSP
27,000
-
-
-
27,000
n/a
For other stock-based compensation plans the Corporation recorded a compensation expense of $13.2 million for the year
ended December 31, 2017 (compensation expense of $10.1 million for the year ended December 31, 2016). The carrying
amount of liabilities associated with cash-settled compensation arrangements is $23.6 million as at December 31, 2017
(December 31, 2016 - $12.2 million).
Measurement of fair values at grant date
The fair value of the RSUs, PSUs, DSUs and RSPs are determined by reference to the market value and performance
conditions, as applicable, of the shares at the time of grant. The following summarizes the grant date fair values for the RSU,
PSU and DSU units granted during the period:
Canadian $, for the years ended December 31
RSU
PSU
DSU
2017
2016
$
1.20 $
1.20
1.10
0.68
-
0.76
The intrinsic value of cash-settled stock-based compensation awards vested and outstanding as at December 31, 2017 was
$19.0 million (December 31, 2016 - $11.4 million).
Sherritt International Corporation 119
Notes to the consolidated financial statements
Employee share ownership plan
The Corporation offers an employee share ownership plan (ESOP) for eligible employees. Under the ESOP, contributions by
the Corporation and eligible employees will be used by the plan administrator to make purchases of common shares of the
Corporation on the open market. Each eligible employee may contribute up to 10% of the employee’s salary to the ESOP. The
Corporation will match 50% of employee contributions to the plan, up to a maximum annual contribution. Employer
contributions will be used by the plan administrator to purchase additional common shares in the Corporation. These additional
shares cannot be sold or withdrawn until the employee has participated in the plan for a continuous 24-month period.
Shareholder approval is not required for this plan or any amendments to this plan.
The Corporation accounts for its contributions to the employee share ownership plan (ESOP) as compensation and benefits
expense when the amounts are contributed to the plan. Compensation and benefits expense related to this plan was $0.6
million for the year ended December 31, 2017 ($0.6 million for the year ended December 31, 2016).
20. SUPPLEMENTAL CASH FLOW INFORMATION
Accounting policies
The Corporation presents the consolidated statements of cash flow using the indirect method. The Corporation presents
interest paid and received as an operating activity in the consolidated statements of cash flow. Dividends paid are presented
as a financing activity and dividends received are presented as an operating activity in the consolidated statements of cash
flow.
Supporting information
Other operating items includes the following:
Canadian $ millions, for the years ended December 31
Note
2017
2016
Add (deduct) non-cash items:
Accretion expense on environmental rehabilitation provisions
Stock-based compensation expense, net
Other items
Cash flow arising from changes in:
Other finance charges
Realized foreign exchange gain (loss)
Ambatovy Joint Venture transaction and other closing costs
Net change in non-cash working capital includes the following:
Canadian $ millions, for the years ended December 31
Trade accounts receivable, net
Inventories
Prepaid expenses
Trade accounts payable and accrued liabilities
Deferred revenue
9, 17 $
5
9
9
6
$
1.0 $
14.7
6.4
(2.1)
0.6
(10.4)
10.2 $
1.0
12.0
8.7
(2.0)
(0.6)
-
19.1
2017
2016
$
$
(34.9) $
2.7
(0.4)
36.0
3.3
6.7 $
(45.3)
(2.1)
2.0
71.3
(11.8)
14.1
120 Sherritt International Corporation
21. FINANCIAL RISK AND CAPITAL RISK MANAGEMENT
Risk management policies and hedging activities
The Corporation is sensitive to changes in commodity prices, foreign exchange and interest rates. The Corporation’s Board of
Directors has overall responsibility for the establishment and oversight of the Corporation’s risk management framework.
Although the Corporation has the ability to address its price-related exposures through the use of options, futures and forward
contracts, it does not generally enter into such arrangements. The Corporation reduces the business-cycle risks inherent in its
commodity operations through industry diversification.
Credit risk
Sherritt’s sales of nickel, cobalt, oil, gas and electricity expose the Corporation to the risk of non-payment by customers.
Sherritt manages this risk by monitoring the creditworthiness of its customers, covering some exposure through receivables
insurance, documentary credit and seeking prepayment or other forms of payment security from customers with an
unacceptable level of credit risk. In addition, there are certain credit risks that arise due to the fact that all sales of oil and
electricity in Cuba are made to agencies of the Cuban government. Although Sherritt seeks to manage its credit risk exposure,
there can be no assurance that the Corporation will be successful in eliminating the potential material adverse impacts of
such risks.
Cuba
The Corporation has credit risk exposure related to its share of cash, accounts receivable and advances and loans receivable
associated with its businesses located in Cuba or businesses which have Cuban joint venture partners as follows:
Canadian $ millions, as at
Cash
Trade accounts receivable, net
Advances and loans receivable
Total
2017
2016
December 31
December 31
$
$
51.9 $
114.5
567.2
733.6 $
27.3
106.4
610.4
744.1
The table above reflects the Corporation’s maximum credit exposure to Cuban counterparties which may differ from balances
in the consolidated results due to eliminations in accordance with accounting principles for subsidiaries and joint ventures.
Madagascar
The Corporation has credit risk exposure in Madagascar related to its share (12% basis) of net accounts receivable of $12.5
million (December 31, 2016 - $43.8 million, 40% basis) associated with the Ambatovy Joint Venture including value added tax
(VAT) receivables of $3.7 million (12% basis) (December 31, 2016 - $9.5 million, 40% basis) from the government of
Madagascar. The VAT receivable is net of a provision of $8.8 million (12% basis) (December 31, 2016 - $58.3 million, 40%
basis) reflecting an assessment of the likelihood of receipt of these amounts. During the year ended December 31, 2017, a
gain on the partial reversal of this provision of $10.4 million (40% basis until the Ambatovy Joint Venture restructuring on
December 11, 2017, 12% basis thereafter) was recognized in financing expense ($15.6 million for the year ended December
31, 2016, 40% basis). As at December 31, 2017, total overdue VAT receivable (net of provision) for the Ambatovy Joint
Venture amount to $2.4 million (12% basis) (December 31, 2016 - $5.8 million, 40% basis).
Liquidity risk
Liquidity risk is the risk that the Corporation will not be able to meet its obligations associated with financial liabilities. Liquidity
risk arises from the Corporation’s financial obligations and in the management of its assets, liabilities and capital structure. The
Corporation manages this risk by regularly evaluating its liquid financial resources to fund current and long-term obligations
and to meet its capital commitments in a cost-effective manner.
The main factors that affect liquidity include realized sales prices, production levels, cash production costs, working capital
requirements, capital-expenditure requirements, scheduled repayments of long-term loans and borrowing obligations, credit
capacity and debt and equity capital market conditions.
The Corporation’s liquidity requirements are met through a variety of sources, including cash and cash equivalents, cash
generated from operations, existing credit facilities, leases, and debt and equity capital markets.
Sherritt International Corporation 121
Notes to the consolidated financial statements
Based on management’s assessment of its financial position and liquidity profile at December 31, 2017, the Corporation will be
able to satisfy its current and long-term obligations as they come due.
The agreements establishing certain jointly controlled entities require the unanimous consent of shareholders to pay dividends.
It is not expected that this restriction will have a material impact on the ability of the Corporation to meet its obligations.
Financial obligation maturity analysis
The Corporation’s significant contractual commitments, obligations, and interest and principal repayments in respect of its
financial liabilities, provisions and operating leases are presented in the following table:
Canadian $ millions, as at December 31, 2017
Total
1 year
Falling
due within
Falling
due
between
1-2 years
Falling
due
between
2-3 years
Falling
due
between
3-4 years
Falling
due
Falling
due in
between
more than
4-5 years
5 years
Trade accounts payable and
accrued liabilities
Income taxes payable
Senior unsecured debentures
Ambatovy Joint Venture
partner loans(1)
Syndicated revolving-term credit
facility
Provisions
Operating leases
Other
Total
$
$
182.3 $
11.8
1,060.2
182.3 $
11.8
56.0
- $
-
56.0
- $
-
56.0
- $
-
276.0
- $
-
38.4
-
-
577.8
153.3
-
-
10.2
-
-
143.1
8.0
158.5
14.1
0.6
1,588.8 $
8.0
20.8
3.0
-
281.9 $
-
1.0
3.0
-
60.0 $
-
-
3.0
0.2
69.4 $
-
-
1.0
0.2
277.2 $
-
0.4
1.0
0.2
40.0 $
-
136.3
3.1
-
860.3
(1) Ambatovy Joint Venture partner loans are loans provided by the Ambatovy Joint Venture partners to finance Sherritt’s portion of the funding requirements of the Joint
Venture, bearing interest of LIBOR plus a margin of 1.125%. The partner loans are to be repaid from the Corporation’s share of cash distributions from the Ambatovy
Joint Venture (note 16). The amounts above are based on management’s best estimate of future cash flows including estimating assumptions such as commodity
prices, production levels, cash costs of production, capital and reclamation costs. The maturity analysis table includes an estimate of interest repayments.
As a result of the Corporation’s 12% interest in the Ambatovy Joint Venture, its proportionate share of significant undiscounted
commitments of the joint venture include accounts payable of $37.9 million, income taxes payable of $3.0 million,
environmental rehabilitation commitments of $49.2 million, other contractual commitments of $11.7 million and Ambatovy Joint
Venture financing and revolving credit facility of $298.8 million.
As a result of the Corporation’s 50% interest in the Moa Joint Venture, its proportionate share of significant undiscounted
commitments of the joint venture include accounts payable of $36.1 million, income taxes payable of $0.7 million, advances
and loans payable of $208.9 million, environmental rehabilitation commitments of $87.3 million and other commitments of $0.9
million.
Market risk
Market risk is the potential for financial loss from adverse changes in underlying market factors, including foreign exchange
rates, commodity prices, interest rates and stock-based compensation costs.
Foreign exchange risk
Many of Sherritt’s businesses transact in currencies other than the Canadian dollar. The Corporation is sensitive to foreign
exchange exposure when commitments are made to deliver products quoted in foreign currencies or when the contract
currency is different from the product price currency. Derivative financial instruments are not used to reduce exposure to
fluctuations in foreign exchange rates. The Corporation is also sensitive to foreign exchange risk arising from the translation of
the financial statements of subsidiaries with a functional currency other than the Canadian dollar impacting other
comprehensive income (loss).
Based on financial instrument balances as at December 31, 2017, a weakening or strengthening of $0.05 of the Canadian
dollar to the U.S. dollar with all other variables held constant could have a favourable or unfavourable impact of approximately
$25.3 million, respectively, on net earnings.
122 Sherritt International Corporation
Based on financial instrument balances as at December 31, 2017, a weakening or strengthening of $0.05 of the Canadian
dollar to the U.S. dollar with all other variables held constant could have a favourable or unfavourable impact of approximately
$5.8 million, respectively, on other comprehensive loss.
Commodity price risk
The Corporation is exposed to fluctuations in certain commodity prices. Realized prices for finished products and for input
commodities are the most significant factors affecting the Corporation’s revenue and earnings. Revenue, earnings and cash
flows from the sale of nickel, cobalt and oil are sensitive to changes in market prices over which the Corporation has little or no
control.
The Corporation has the ability to address its price-related exposures through the limited use of options, future and forward
contracts, but has not entered into such arrangements for the years ended December 31, 2017 and December 31, 2016.
Sherritt reduces the business-cycle risks inherent in its commodity operations through industry diversification.
The Corporation has certain provisional pricing agreements in Metals. These provisionally priced transactions are periodically
adjusted to actual as prices are confirmed as the settlement occurs within a short period of time. In periods of volatile price
movements, adjustments may be material to the Ambatovy Joint Venture or Moa Joint Venture.
Interest rate risk
The Corporation is exposed to interest rate risk based on its outstanding loans and borrowings, and short-term and other
investments. A change in interest rates could affect future cash flows or the fair value of financial instruments.
Based on the balance of short-term and long-term loans and borrowings, cash equivalents, short-term and long-term
investments, and advances and loans receivable at December 31, 2017, excluding interest capitalized to project costs, a 1.0%
decrease or increase in the market interest rate could decrease or increase the Corporation’s net earnings by approximately
$2.5 million, respectively. The Corporation does not engage in hedging activities to mitigate its interest rate risk.
Stock-based compensation risk
The Corporation is exposed to a financial risk related to stock-based compensation costs.
Potential fluctuations in the price of Sherritt’s common shares would have an impact on the stock-based compensation
expense. Based on balances at December 31, 2017, a strengthening or weakening of $0.50 in the price of the Corporation’s
common shares would have had an unfavourable or favourable impact of approximately $7.5 million on the Corporation’s net
earnings, respectively.
Capital risk management
In the definition of capital, the Corporation includes, as disclosed in its consolidated financial statements and notes: capital
stock, deficit, loans and borrowings, other financial liabilities and available credit facilities.
Canadian $ millions, as at
Capital stock
Deficit
Loans and borrowings
Other financial liabilities
Available credit facilities
2017
2016
December 31
December 31
$
2,784.6 $
(2,427.7)
824.1
24.2
8.8
2,775.7
(2,721.5)
2,228.2
168.0
0.2
The Corporation’s objectives, when managing capital, are to maintain financial liquidity and flexibility in order to preserve its
ability to meet financial obligations throughout the various resource cycles with sufficient capital and capacity to manage
unforeseen operational and industry developments and to ensure the Corporation has the capital and capacity to allow for
business growth opportunities and/or to support the growth of its existing businesses.
In order to maintain or adjust its capital structure, the Corporation may purchase shares for cancellation pursuant to normal
course issuer bids, issue new shares, repay outstanding debt, issue new debt (secured, unsecured, convertible and/or other
types of available debt instruments), refinance existing debt with different characteristics, acquire or dispose of assets or adjust
the amount of cash and short-term investment balances.
Sherritt International Corporation 123
Notes to the consolidated financial statements
Certain of the Corporation’s credit facilities, loans and debentures have financial tests and other covenants with which the
Corporation and its affiliates must comply. Non-compliance with such covenants could result in accelerated repayment of the
related debt or credit facilities and reclassification of the amounts to current liabilities. The Corporation monitors its covenants
on an ongoing basis and reports on its compliance with the covenants to its lenders on a quarterly basis.
Refer to note 16 for the Corporation’s compliance with financial covenants as at December 31, 2017.
22. RELATED PARTY TRANSACTIONS
The Corporation and subsidiaries provide goods, labour, advisory and other administrative services to jointly controlled entities
and an associate at fair value. The Corporation and its subsidiaries also market, pursuant to sales agreements, a portion of the
nickel, cobalt and certain by-products produced by certain jointly controlled entities and an associate in the Metals business.
Balances and transactions between the Corporation and its subsidiaries, which are related parties of the Corporation, have been
eliminated and are not disclosed in this note. A listing of the Corporation’s subsidiaries is included in note 2.2.
A description of the Corporation’s interests in an associate and its interest in jointly controlled entities are included in notes 7
and 8, respectively.
Canadian $ millions, for the years ended December 31
Total value of goods and services:
Provided to joint operations
Provided to joint venture
Provided to associate
Purchased from joint venture
Purchased from associate
Net financing income from joint operations
Net financing income from associate
Net financing income from joint venture
Canadian $ millions, as at
Accounts receivable from joint operations
Accounts receivable from joint venture
Accounts receivable from associate
Accounts payable to joint venture
Accounts payable to associate
Advances and loans receivable from associate
Advances and loans receivable from joint operations
Advances and loans receivable from joint venture
2017
2016
$
19.9 $
191.8
2.6
736.1
30.4
14.4
37.8
11.4
32.0
165.3
3.4
405.3
39.1
14.4
38.9
9.6
2017
2016
Note
December 31
December 31
12 $
12
12
13
13
13
0.2 $
15.0
8.2
105.2
5.4
281.0
206.7
268.0
0.4
11.4
33.9
81.3
1.8
943.4
192.4
321.8
Transactions between related parties are generally based on standard commercial terms. All amounts outstanding are
unsecured and will be settled in cash. No guarantees have been given or received on the outstanding amounts. No expense
has been recognized in the current or prior periods for bad debts in respect of amounts owed by related parties.
124 Sherritt International Corporation
Key management personnel
Key management personnel are composed of the Board of Directors, Chief Executive Officer, Chief Operating Officer, Chief
Financial Officer and Senior Vice Presidents of the Corporation. The following is a summary of key management personnel
compensation:
Canadian $ millions, for the years ended December 31
Short-term benefits
Post-employment benefits(1)
Share-based payments
2017
2016
$
$
7.8 $
0.4
6.1
14.3 $
7.4
0.4
11.6
19.4
(1) Post-employment benefits include a non-registered defined contribution executive supplemental pension plan. The total cash pension contribution for key management
personnel was $0.9 million for the year ended December 31, 2017 ($0.4 million for the year ended December 31, 2016). The total pension expense that is attributable to
key management personnel was $0.2 million for the year ended December 31, 2017 ($0.2 million for the year ended December 31, 2016).
23. OPERATING LEASE ARRANGEMENTS
Accounting policies
Leases of property, plant and equipment are classified as finance leases when the lessee retains substantially all the risks and
rewards of ownership. Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor
are classified as operating leases.
Corporation as a lessee
Finance leases are recognized at the lower of the fair value of the leased property and the present value of the minimum lease
payments. The corresponding lease obligations, net of finance charges, are recorded as interest-bearing liabilities. Each lease
payment is allocated between the liability and finance cost when paid.
Operating lease payments (net of any amortization of incentives) are expensed as incurred. Incentives received from the
lessor to enter into an operating lease are capitalized and depreciated over the life of the lease.
Corporation as a lessor
Rental income from operating leases is recognized on a straight-line basis over the term of the relevant lease. Contingent
rental income is recognised as revenue in the period in which it is earned. Initial direct costs incurred in negotiating and
arranging an operating lease are added to the carrying amount of the leased asset and recognised over the lease term on the
same basis as rental income.
Determining whether an arrangement contains a lease
The Corporation determines whether a lease exists at the inception of an arrangement. A lease exists when one party is
effectively granted control of a specific asset over the term of the arrangement.
At inception or upon reassessment of arrangements containing leases, the Corporation separates payments and other
consideration required related to lease payments from those related to other goods or services using relative fair value or other
estimation techniques.
Critical accounting judgments
The Corporation determined that the Power facilities in Varadero, Cuba are subject to operating lease arrangements. The
Corporation applies judgment in interpreting these arrangements such as determining which assets are specified in an
arrangement, determining whether a right to use a specified asset has been conveyed and if relative fair value or another
estimation technique to separate lease payments from payments for other goods or services should be used. The Corporation
also uses judgment in applying accounting guidance to determine whether these leases are operating or finance leases.
Sherritt International Corporation 125
Notes to the consolidated financial statements
Supporting information
Corporation acts as a lessor
The Corporation acts as a lessor in operating leases related to the Power facilities in Varadero, Cuba. All operating lease
payments related to the Varadero facility are contingent on power generation. For the year ended December 31, 2017,
contingent revenue was $15.2 million ($15.0 million for the year ended December 31, 2016). The Corporation’s operating
lease commitments are disclosed in note 21.
24. COMMITMENTS FOR EXPENDITURES
Canadian $ millions, as at December 31
Property, plant and equipment commitments
Joint venture:
Property, plant and equipment commitments
25. SUBSEQUENT EVENTS
Equity offering
2017
$
22.1
5.9
In January 2018, the Corporation completed an equity offering and issued units consisting of 94.5 million common shares and
47.2 million cobalt-linked warrants at $1.40 per unit for gross proceeds of approximately $132.0 million, less transaction costs
of approximately $8 million.
The cobalt-linked warrants have an exercise price of $1.95. Each cobalt-linked warrant is exercisable to acquire between 1.00
and 1.25 common shares, determined based on a prescribed cobalt reference price.
Extension of the Puerto Escondido/Yumuri production-sharing contract
In January 2018, a three-year extension of the Puerto Escondido/Yumuri production-sharing contract to March 2021 was
executed with an agency of the Government of Cuba.
126 Sherritt International Corporation
Global Assets
Sherritt has operations in Canada, Cuba and Madagascar and our
technology is used in more than 35 locations around the globe
Metals
Oil and Gas
Power
Commercial operations developed
with Sherritt technologies
Shareholder Information
INVESTOR RELATIONS
Sherritt International Corporation
181 Bay St. 26th Floor
Toronto, ON M5J 2T3
Telephone: 416-935-2451
Toll-free: 1-800-704-6698
Fax: 416-935-2283
Email: Investor@sherritt.com or
info@sherritt.com
Website: www.sherritt.com
TRANSFER AGENT AND REGISTRAR AUDITORS
Deloitte LLP, Toronto
AST Trust Company
1 Toronto Street, Suite 1200
Toronto, ON M5C 2V6
Toll-free:1-800-387-0825
Local: 416-682-3860
Fax: 1-877-715-0494
Email: inquiries@canstockta.com
STOCK EXCHANGE LISTING
Toronto Stock Exchange
Ticker Symbol - S