By HCG Business Intelligence Unit
The Canadian company Sherrit International Corporation has announced that it has reached an agreement with the Cuban regime to be able to collect 361.9 million Canadian dollars in accounts receivable that have been stuck for five years. For this, the Cuban counterpart General Nickel Company (GNC) will pay the Canadian counterpart with the finished cobalt production corresponding to its part of the business up to a maximum annual volume of cobalt agreed with the Cuban part, plus additional cash dividends as payment for settle accounts receivable until an annual dollar limit is reached, including collecting any shortfall from the prior year.
This agreement will begin to be implemented on January 1, 2023 for five years until the debt is paid. In this way, the Cuban government has had to cede practically all of its cobalt production for five years, which means that its income from cobalt exports for the next five years will be practically nil. In other words, Sherrit would benefit doubly from this solution because, on the one hand, she would recover the full amount of her accounts receivable and at the same time take advantage of the golden opportunity that exists in the market right now, given the increase in demand in the manufacture of batteries for electric cars that has been produced worldwide. Instead, Cuba will stop receiving income for five years and will not be able to take advantage of this opportunity to increase income from exports of the mineral in demand.
In the midst of the multi-systemic crisis that the country is going through, this agreement leaves the Cuban government very badly off because it cuts off one of the main few sources of income that are still operational in the Cuban economy. Although in the last five years (2016-2020) the dividends from the export of nickel and cobalt had decreased considerably compared to the previous five years (2011-2015) due to the drop in the price of the mineral in the international market and the decrease of production on the island, the opportunity for a rebound was always expected in the face of the possibility that electric cars would burst onto the market in masse. This great opportunity has been given at this time; however, the Cuban government will not be able to take advantage of it because it is a poor payer.
Figure 1. Income obtained from the export of Nickel + Cobalt, 2008-2020 series.
Source: Prepared by Havana Consulting Group based on data published by the National Office of Statistics and Information (ONEI).
In the last four years, the production levels of Nickel + Cobalt in the Cuban market have increased by 25.95%. However, they are still very far from the production volumes achieved in the 2006-2015 period. See Figure 2.
Figure 2. Nickel + Cobalt production, 2006-2020 series.
Source: Prepared by Havana Consulting Group based on data published by the National Office of Statistics and Information (ONEI).
Production is expected to increase in the coming years due to increased demand for the product generated by the green energy revolution in the world market.
This agreement is irrevocable and has harsh penalty clauses in case of non-compliance. If outstanding accounts receivable are not paid in full by December 31, 2027, retroactive interest will accrue at 8% as of January 1, 2023 on the unpaid principal amount, and unpaid principal and interest amounts. are due and payable by GNC to Sherritt.
The agreement requires the Moa joint venture to distribute a maximum of 2,082 tons or approximately 60% of current production (100% basis) of finished cobalt annually to the joint venture partners. In this sense, Sherritt would receive a maximum of 1,041 tons of finished cobalt dividends per year with respect to its 50% participation in the joint venture and GNC will redirect to Sherrit its 50% participation of the total dividends up to 1,041 tons of finished cobalt. per year, as reimbursement of outstanding accounts receivable, provided that the total volume of redirected cobalt has a value of at least US$57 million. This operation will be conditioned by the following: if the total annual dividend of finished cobalt redirected by GNC has a value of less than US$57 million, GNC's part of any cash distribution corresponding to its participation in the joint venture in said year will redirect to Sherritt until the value of the physical cobalt and cash distributions in total $57 million. If the maximum volume of cobalt distributed (1,041 tons) is not reached in a given year, the deficit volume will be added to the threshold in the following year; and any shortfall in the annual minimum payment will also be added to the following year. So full repayment is expected within five years[1].
The agreement further provides that all finished cobalt will be transferred immediately to Sherritt and the physical product will be moved to a Sherritt warehouse in Fort Saskatchewan, from where it will sell the finished cobalt on the international market.
Demand will increase the price of cobalt for the next three years.
The transformation that is taking place in the world economy due to the rise of the green economy will mean that the raw materials most used in the technology to produce clean energy will increase their value in the market. In this case, cobalt is one of the minerals that will benefit from this new trend. Its market price could increase up to three times its current value.
There are several factors that lead us to this scenario:
- Currently the use of cobalt predominates in the electronics industry and in automobiles. For example, 36.3% of cobalt produced annually is used in portable electronics (smart phones, laptops, etc.). About 23% is used in car manufacturing. The increase in demand for electric cars will cause cobalt consumption to increase. Both markets, electronics and automotive are two sectors that will trigger the demand for cobalt worldwide in the coming years.
- In the short and medium term, the demand for cobalt sulfate will increase due to the accelerated production of electric vehicles in China, the US and Europe.
- Cobalt mining is highly concentrated geographically in a few countries. The Democratic Republic of Congo (DRC) is the main market, which concentrates 75% of world production among the top 12 producing countries. Cuba occupies the 5th place.
- Historically used as a pigment due to its luminous blue color, the metal's main current use is in rechargeable battery precursors and cathodes, accounting for 56% of total consumption as of 2021.
- The use of cobalt as the cathode of rechargeable batteries efficiently improves their energy density, power and performance compared with batteries that do not contain cobalt. 56% of the rechargeable battery precursors and cathodes manufactured in the world use cobalt.
- Cobalt is also used in the manufacture of nickel-based alloys (13% of total consumption), which are widely used in the aerospace industry, and tool manufacturing (8% of total consumption), while larger amounts small are used in pigments, soaps and as catalysts.
Figura 3. Figure 3. Ranking of the main cobalt producing countries worldwide in 2021
Source: www.es.estatista.com
In the short to medium term, from 2022 to 2024, Fitch Solutions expects cobalt sulfate prices, and in turn cobalt oxide intermediates, to receive a strong boost from steadily rising demand, while production prospects are largely stable.
In December 2020, the firm noted that prices for cobalt sulfate (at 20.5% grade) were around $14,494/t, while cobalt oxide (72% grade) was about $52,491/t. While lower than the highs of $15,400/t and $53,631/t for sulfate and oxide, respectively, reached in March 2021, prices are significantly higher than levels seen in early 2021 and all of 2020. This was largely the result of a strong demand push from China, where 1.8 million new electric vehicles were produced during January to August 2021, a 193% increase over the same period in 2020.
Beyond 2024, Fitch Solutions expects cobalt sulfate prices to rise as demand for electric car batteries continues to rise[2]. The growth in demand for batteries for car manufacturing will be accompanied by a higher demand for cobalt.
Possible stock market impact for Sherrit
The high demand for cobalt generated by the impact of the rise of the green economy will impact the world market due to the accelerated production that is coming of electric cars and the growth that the cell phone industry will continue to have, the increase in the consumption of number of telephones smartphones, laptops, tablets, rechargeable batteries, etc.
Undoubtedly, this increase in demand that is foreseen in the market in the short and long term will impact the value of Sherrit's shares in the stock market. Last Friday, October 21, the company's shares closed at 0.395 cents per share. See Figure 4.
Figure 4. Sherrit's share value. October 21, 2022.
Source: https://money.tmx.com/en/quote/S
In March of this year, Sherrit's shares were quoted at 0.82 cents, but in the following months they were declining until reaching the mentioned 0.395 cents. This recent agreement to restructure the debt that the government of the island has with Sherrit will allow the Canadian company to increase its income in the next five years, given that the Cuban counterpart will have to cede its part corresponding to its participation in the company in finished cobalt. in the next 60 months, so it will have a greater volume of ore for sale on the international market. In addition to that, it will have the bonanza of the rise in the price of cobalt due to its high demand in the market generated by the green economy revolution.
Ten years ago, the company's shares were trading at more than $10 on the stock market. It is still too early to see a return to these figures soon. However, the high demand for cobalt, as a result of the accelerated impact of the green economy on the development of technology, in the automotive industry, in the consumption of goods and in the world economy, could change the dynamics of future scenarios and Sherrit could benefit from it with a return to these figures in the long term. In the short term, stocks could approach or even break through the $1 barrier before the year is out.
Figura 5. Sherrit's share value. October 2013-2022.
Source: https://money.tmx.com/en/quote/S
Conclusions
The Sherrit company has formalized an agreement with the Cuban government to be able to obtain payment of a debt in accounts receivable valued at 361.9 million Canadian dollars. The implementation of this agreement provides Sherrit with a double benefit because it will have full control of 80% of the current cobalt production for five years, which will increase its inventory of the mineral and will also benefit from the increase in the price of the mineral. in the international market due to the high demand for cobalt driven by the green economy revolution.
For the Cuban regime, this agreement is a tightening of the nuts that will deprive it of obtaining millionaire income from cobalt exports for five years. That agreement will have a negative impact on the recovery of the economy and on the multi-systemic crisis in which the island is currently immersed, which have plunged the country into deep shortages of food, medicine and long blackouts due to the collapse of its obsolete energy matrix, given the lack of financial resources to replace it. If the agreement is not fulfilled by the end of 2027, the Cuban government will accrue retroactive interest at 8% counted as of January 1, 2023 on the principal amount not paid.
For the Canadian company, however, it is a great opportunity to recapitalize and maximize the opportunities that are currently present in the market due to the high demand for cobalt and the rise in the price of the mineral on the international market. Which would bring great income for the company and a rebound in the value of its shares on the stock market. Consequently, thousands of shareholders could benefit from this new scenario in the short term.
REFERENCES
[1] BUSINESSWIRE. “Sherritt Finalizes Transformative Five-Year Payment Agreements with its Cuban Partners to Settle $362 million of Outstanding Receivables”. October 2022. https://www.businesswire.com/news/home/20221013005967/en/Sherritt-Finalizes-Transformative-Five-Year-Payment-Agreements-with-its-Cuban-Partners-to-Settle-362-million-of-Outstanding-Receivables
[2] ATEGI. “EL PRECIO DEL COBALTO AUMENTARÁ DURANTE LOS PRÓXIMOS 3 AÑOS”. Febrero 2022. https://www.ategi.com/2022/02/11/el-precio-del-cobalto-aumentara-durante-los-proximos-3-anos/?lang=en
