This Canadian mining stock focuses its production on two elements whose prices have risen substantially during the past year.
Cobalt and nickel can both be key component in electric car batteries, an area of rising demand, and the company produces both at its mines in Cuba, Madagascar and Canada. Meanwhile, the stock has sharply reduced its debt and anticipates rising cash flow in 2018.
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SHERRITT INTERNATIONAL (Toronto symbol S; www.sherritt.com) is focused on nickel/ cobalt production, with operations in Cuba, Madagascar and Canada.
The company’s shares more than doubled between August and December 2017 on surging cobalt prices. Subsequently, Sherritt’s stock fell during the January stock market correction, although the shares are still up 24.3% over the past year.
Cobalt is a crucial component of lithium-ion batteries, used to power electric vehicles as well as portable electronic devices.
Over 66% of the cobalt used globally originates as a byproduct from copper mining in the Democratic Republic of Congo (DRC). Most other cobalt production is a by-product of nickel mining. Sherritt has nickel-cobalt mines in Cuba and Madagascar that produce about 7,000 metric tons of cobalt. That’s about 6% of the world’s production.
Cobalt prices have more than doubled over the last year. They will likely continue to rise, at least in the near term, on increased production of electric car batteries.
That’s especially so for cobalt not produced in the DRC. Big car makers, including Volkswagen AG and nine other leading car makers that use cobalt buyers to source cobalt have set up a Raw Materials Observatory. Its job is to identify and address ethical, environmental and labour issues in the sourcing of raw materials.
The DRC reportedly uses child labour, and all of its miners work in perilous conditions without basic protective equipment.
Longer term, however, cobalt prices could fall if in the near term a spike in demand spurs the development of new mines and brings other operations out of mothballs. Rising demand would also accelerate efforts to produce other types of battery chemistries that do not require cobalt. Electric battery giant Tesla has also been investing in research to try to remove cobalt from its batteries and add nickel instead.
Still, carmakers have so far found it difficult to reduce the amount of cobalt used in batteries. That’s because of the metal’s ability to improve battery stability and capacity. While that could quickly change, for now we see Sherritt as a good way to capitalize on rising cobalt prices. At the same time, its rising nickel and oil production cuts its risk.
Mining Stocks: Restructuring deal helps Sherritt cut over $1 billion in debt
In 2017, Sherritt also restructured its holding in the Ambatovy nickel mine in Madagascar, off Africa’s east coast. That’s partly responsible for Sherritt’s sharply reduced debt.
Specifically, the company transferred two-thirds of its 40% stake in Ambatovy to its joint-venture partners, Japan’s Sumitomo Corp. and Korea Resources Corp.
With this transaction, Sherritt cut $1.3 billion in debt from its balance sheet while maintaining a 12% stake in Ambatovy. The company further ensures continuity for the mine by remaining its operator until 2024 or later.
Sherritt’s long-term debt is still a high $816.0 million, or 1.6 times its $507.1 million market cap. However, it holds cash of $203.0 million.
Rising cobalt and nickel prices and lower debt-servicing costs could all help the company report positive cash flow in 2018.
We see Sherritt as a good way to capitalize on rising cobalt prices. Its nickel and oil production also cut risk.
Recommendation in Stock Pickers Digest: Sherritt is a buy for aggressive investors.
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