Sherritt International (S.TO) is finally in the right place at the right time, according to the company’s departing CEO. The Canadian miner is counting on strong demand for electric vehicles to boost nickel prices as a global supply crunch looms for the key battery ingredient.
With automakers pouring billions into EV development, governments championing lofty climate goals, and more drivers looking to go electric, Sherritt is pinning its future on its open-pit Moa mine in Cuba. The joint-venture, half-owned by the Cuban government, sends mixed sulphides to Sherritt’s facility in Alberta to be refined into finished nickel and cobalt products.
“Things are all coming into alignment for us all at once after five, six, seven years of slogging in the wilderness of low nickel prices and dealing with debt,” David Pathe told Yahoo Finance Canada in an interview.
Board chair Richard Lapthorne called Pathe’s nine-years stint in the top job “as difficult to manage as any the company has faced in its over 90-year history” when Sherritt announced it was looking for new leadership last November.
He wasn’t kidding. Sherritt bought a mine in Madagascar in 2007 for $1.6 billion, just as nickel prices hit all-time highs. When Pathe took over as CEO in 2012, nickel consistently sold for about a third of peak prices, saddling the company with a money-losing project on top of hefty debts.
Pathe also led Sherritt as U.S. President Barack Obama took historic steps to normalize American-Cuban relations beginning in 2015. When Donald Trump took office in 2017, the U.S. reimposed restrictions, leaving the island nation without enough foreign currency to pay Sherritt’s utility arm. Trump recently put Cuba back on America’s list of state sponsors of terror, blocking newly-elected President Joe Biden from quickly reverting to Obama-era policies.
With Biden in the White House, a major balance sheet overhaul completed in August, and the costly Madagascar mine off the books, Sherritt is hunting for a successor to run the company as a tech-driven, low-cost nickel producer for the growing EV market.
Lithium ‘supply crunch’ looms
While Sherritt’s total nickel output is a fraction of mining giants like Vale (VALE), Russia's Norilsk Nickel and BHP’s (BHP) operations in Western Australia, Pathe said the focus among its larger peers has been producing cheaper grades of the metal for making stainless steel.
EV batteries are expected to command as much as 37 per cent of global nickel production by 2040, according to the consulting firm Wood Mackenzie, up from just seven per cent in 2020. Sherritt estimates more than 70 per cent of the total nickel supply in 2025 will be lower quality, and therefore useless to the EV battery market.
“For some metals, the energy transition could be like the Chinese economic boom on steroids,” Wood Mackenzie analysts said in a report released in September, predicting nickel demand will increase by two-thirds by 2040.
Pathe points to years of weak prices to explain why no new significant class one nickel capacity has been added since the financial crisis. His shortage prediction follows a public plea from the highest-profile executive in the automotive world.
“We think there is a coming supply crunch, particularly on the class one nickel side,” Pathe said. “We’re now well positioned to take advantage of that. If battery demand comes anywhere close to meeting some of the projections for the next five, 10, 15 years, there simply isn’t enough class one nickel production to meet demand.”
Automakers wary of upstream investment
The long-awaited shift to electric vehicles is gaining traction as governments in Canada and the United States build EV adoption into their respective plans for net zero emissions by 2050.
In Canada, General Motors (GM), Ford (F), and Fiat Chrysler (FCAU) each announced billion dollar investments to produce electric vehicles in Ontario in the last six months. Last week, GM said it plans to make all of its global operations and vehicles carbon neutral by 2040, and sell only zero-emissions vehicles by 2035.
The cash price for nickel on the London Metal Exchange pushed above US$18,300 per tonne in January, its highest level since February 2019, before retreating below US$18,000 to end the month. According to Wood Mackenzie, that’s too low to incentivize miners to produce enough battery metals for “a large number of EVs in a short space of time.”
Pathe expects automakers will forge closer ties with miners, either through long-term off-take contracts or financial stakes in companies, in order to lock in high-quality supply at a consistent price.
Wood Mackenzie notes Tesla, GM, Volkawagen (VOW.DE), Toyota (TM) and Honda (HMC) already have partnerships with battery producers. However, they said the auto industry is wary of investing too far “upstream” in mining assets.
“We have noted OEMs like Tesla and BMW signing off-take deals for metals directly with mining companies. However, with the exception of a few small examples, OEMs are yet to take the plunge in terms of investing in mining,” Wood Mackenzie analysts wrote in a report. “The relative scarcity of battery raw materials, and the potential scramble for them, may warrant a change in attitude.”
Don DeMarco, an analyst at National Bank who covers Sherritt, said it’s “certainly possible” that miners and automakers will team up to maintain a steady supply of battery metals and hedge against volatile commodity prices. Pathe said Sherritt does not name its customers publicly for competitive reasons.
“What I will say is we’ve seen an uptick in investor interest, and the number of meeting requests,” he said. “I think you’ll see the automakers generally doing interesting things in the next two to three years.”
Sherritt’s Toronto-listed stock has climbed more than 150 per cent in the past six months, against a backdrop of improving nickel prices. However, shares remains more than 95 per cent below their all-time peak in 2007, around the time of the company’s ill-fated foray in Madagascar.
Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.