Executives
Paula Myson – Managing Director for Investor Relations and External Communication
David Pathe – President and CEO
Mike Robins – our Chief Financial Officer
Brian Tiessen – Senior Vice President of Metals
Dean Chambers – Chief Operating Officer, Senior Vice President
Analysts
Matt Murphy – UBS Securities
Jason Shack – Heartland Advisors [ph]
Anoop Prihar – GMP Securities
Robin Kozar – RBC Capital Markets
Sherritt International Corporation (SHERF.PK) Q4 2011 Earnings Conference Call February 22, 2012 2:00 PM ET
Operator
Welcome ladies and gentlemen and thank you for standing by. Welcome to the Sherritt’s International Q4 2011 Analyst and Investor Call.
At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question and answer session and instructions will be provided at that time. If anyone has any difficulties hearing the conference, please press star followed by the zero for operator assistance at any time.
I would like to remind everyone that this conference is being recorded today, Wednesday, February 22, 2012 at 2 PM Eastern Time. I will now turn the conference over to Ms. Paula Myson, Managing Director for Investor Relations and External Communication. Please go ahead.
Paula Myson
Thank you, Ron. And good afternoon, everyone. Our results for release this morning, a copy of the release along with the MD&A and full financial statements are available on our website.
Today’s conference call is being webcast live on the Internet. And anyone may listen to the call by accessing the website homepage and clicking on the webcast link for the conference call. We’ll be posting a replay of the webcast on the website later today.
Before we begin our comments I’d like to remind everyone that today’s press release and some of the comments we’ll be making on the call today include forward-looking statements.
We’d like to refer everyone to the cautionary language included in the press release and to the risk factors described in our CEDAR filings. On the call today are David Pathe, our President and CEO, Mike Robins, our Chief Financial Officer and we also have Dean Chambers and Brian Tiessen on the line today.
So, just a quick run through the program of today’s call, Mike Robins will begin by briefly summarizing our financial results and then turn the call over to David Pathe. Following David’s remarks, we’ll open up the call for your questions.
So to begin, I’ll turn the call over to Mike Robins.
Mike Robins
Thanks, Paula. I will be providing a brief summary of the highlights of the performance for Sherritt and an overview of the business. But before I do that, I just like to point out that we completed our transition IFRS this year and to let everybody know that there’s one major difference between Canadian GAAP and IFRS under on our earnings. And that is the treatment of the Ambatovy loans.
Under Canadian GAAP, we capitalize the interest on the Ambatovy loans. And under IFRS, we do not. So as a result of that, there’s about $65 million worth of interest that affected our earnings this year that would not have affected our earnings last year. Offset by about $20 million worth of FX. So the net impact was about $35 million to our bottom line. So, in fact we’ll provide a little bit of context in terms of our results when you compare it against Canadian GAAP.
Now in terms of our performance, it was a good year. Our EPS was 37% higher than last year, up about $0.18. And it was driven primarily by our operating performance. EBITDA being almost $100 million higher than last year.
Our pricing in the oil business and our thermal coal were both very strong for the year. And our production in the metal’s business was at a record level.
Now, in our fourth quarter, we had a very strong operating performance, EBITDA being $14 million higher than last year. But our earnings were down by about 33%, down to $0.10 a share. That was primarily because of three one-time adjustments. The major item being a six-cent hit related to the make whole payments on an early redemption of our 2012 debentures.
In addition to that, we had a three-cent reduction in our earnings related to some management estimates associated with the depletion of coal and the reclamation of our coal properties in our Prairie operations.
And then we had a small right down in our oil business which caused about a penny. So the net impact of those one-time items was about $0.10.
So, the effective tax rate on an apples to apples basis was 31% this year as compared to 30% last year. And last year being normalize for the adjustments associated with our discontinued talc business and impairment to Turkish Oil Properties [ph].
So, finally in terms of a summary, I’d like to note that our cash balance ended up the year at a healthy $630 million, down slightly from 2010 primarily as a result of our continued investment in the Ambatovy operations offset by additional cash that we got from our debenture operating in the fourth quarter.
So why don’t I now move on to our commentary in our four main businesses. The metals operation ended up with the production records for the year for our mix sulfides, our finished nickel and our finished cobalt products.
This is the function of the continued management focus on optimizing production levels. Prices were stable over the year and a year-over-year and as a result, our revenue was up slightly for the year compared to last year.
Offsetting that however was an increase in our net cash cost amount which is about $1 higher than last year or about 33%. This is primarily a function of increased input cost or sulfur, sulfuric acid and diesel cost which make up about half of our input cost were about 40% higher year-over-year. And as a result, the net cost increased by about 33%.
Now the good news is in the fourth quarter, the cost were lower by $0.05 partially because of higher fertilizer prices which was an offset to the net cost but our input cost were also stabilized during the quarter.
Now, moving on to our coal business, our production was back to normalize levels. If you recall in our Prairie business, we had experienced some flooding at our boundary down line in the second quarter and early third quarter at one of our contract mines and there is a removal of two older generating plants and there’s some unscheduled maintenance at another of our contract mines earlier in the year.
And in the fourth quarter, the Prairie operations got back to 2010 levels and the production was quite strong. Our mountain operations produced at record levels in the fourth quarter. Those two things led to a fairly significant improvement in our EBITDA for the coal business.
In the fourth quarter alone, we were up by 62% or $34 million and that high production in the mountain business coupled with the higher prices for thermal export prices made a very, very significant growth on our mountain EBITDA. And about half of the EBITDA for the mountain business was earned in the fourth quarter alone.
The Prairie business was up year-over-year by about $15 million. And mountain was almost double what it made last year partially because of the acquisition of the remaining 50% share of the mountain business mid-2010. Our cost per unit were up about 10% but that is partially because the production levels were down and therefore the cost per unit went up as a result of that.
Our royalties were stable. They were up slightly in the aggregate by about 2% but the mix changed a little bit, our potash royalties increased by almost half and our coal royalties were down by about 10%.
And finally on the coal business, our capital spending increased fairly significantly in part because of the long lead time that we have for our mobile equipment, up to two years it takes to – lead time in order to get many of our large moving equipment in our coal business.
In addition to that, we did increase our investment in capacity in our Paintearth [ph] and our mountain mines.
So now I’ll move on to our oil business. Revenues were very, very strong in oil. The realized prices were up about 30% year-over-year. But the good news here is that our production was steady, up about 1% on the net production levels and gross production was pretty much flat with last year.
Now, our natural reservoirs our declining year-over-year and that was offset by our drilling programs and our work over programs. So, EBITDA also was up by comparable 29% as a result of the production levels and our unit cost were up slightly over the year in part because of those one-time charges that I referred to earlier.
Capital increased slightly to by about 13% year-over-year because we had a drilling program that had seven wells that we’re drilled and four producing this year. And most of our capital spending was in Cuba, however we did have about $3 million worth of exploration in the North Sea for new properties.
So our fourth business is the power business where our production was down by about 10% leading to a comfortable reduction in our electricity sales partially because they reduce availability of gas, but also because of some equipment failures, turbine went out of production in the second quarter.
And as a result of the lower production level, our unit cost went up as well as because the cost, the maintenance associated with those failed turbines.
And finally with respect to our power business, we’re about 50% of the way through our expansion of the Boca facility for where we’re building 150 megawatts of combined cycle capacity.
We’ve recently increased our estimated cost of that project from $247 million up to $271 largely because of some delays that were incurred mid-project to re-valuate the economics of the project.
So before I pass it over to David, I’d like to summarize some of the highlights. EPS was up 37% for the year, largely because of the higher operating income which was a function of improved pricing for our oil and our coal operations, and that record production levels of our metals business, and these improvements were offset by one time charges in the fourth quarter which dropped the fourth quarter earnings by about half.
And then finally, before I drop it off to David, our liquidity is very strong at over $1 billion, and we’re well positioned for it for the future. So David?
David Pathe
Okay, thanks very much, Mike and thank you everybody for taking the time to join us this afternoon. In addition to the summary of the financial results there from Mike, I just wanted to take a few minutes and touch on some of the events of the fourth quarter and take a quick look at where our businesses stand today and where we think we’re going.
Fair event for the fourth quarter actually, a number of events led primarily by the debenture issue that Mike made reference to when he spoke of the redemption premium that we paid and that had an effect on our earnings this quarter.
The purpose of that transaction was, we had a debenture, it was a scheduled maturity in later of 2012, we’ve always been prudent in managing our balance sheet and taking that very seriously, we were keen – when the opportunity presented itself in the market to eliminate the refinancing risk from 2012, we were able to complete a debenture offering that provided us a little additional liquidity as well as pushing off our maturity profile from 2012 out to 2018.
It left us with a balance sheet we’re very comfortable with now in terms of the cash and other liquidities available to us, we now don’t have a scheduled public maturity until 2014 and it’s a balance sheet that we’re now very comfortable with.
Also significant in the fourth quarter was the completion of construction with Ambatovy. Since that time, we’ve been busy getting with the pre-commissioning and commission activities and starting up the various components of the plant site, and we’ve update you on that in the past, and I’ll come back and talk a bit more about what’s happened in Ambatovy in the last few months and where we think we are today in just a moment.
The other obviously significant event in the Sherritt here has been the change over in management. I obviously, I’ve spoken to you in the last two or three analyst calls as the CFO, and I’m now back before you today as the present Chief Executive Officer.
Ian Delaney after almost 20 years in executive role at Sherritt is now retired, he continues with us as Chairman of the Board, and will continue to do that, but we now have quite a significant change in the management team here, and I wanted to bring them on the line with you today and you’ve already heard from Mike Robins.
Mike took over as our Chief Financial Officer just earlier this year. He joined us mid-year last year
He already made his presence felt here and then the finance function, and just going to continue to do that going forward. I’ve also asked Brian Tiessen and Dean Chambers to join us today. Dean and Brian are both probably well-known to you. Brian has been with us for 15 years or more now. Most recently before his present role running the – our metals business, Brian is now helping us as EVP of operations.
Brian has now the operational responsibility for all of our current businesses, and that including the Ambatovy Project and both performing an integral part of the senior management team here going forward as well.
Dean Chambers is also previously known to you, he’s now taking on a role as EVP of development. He’s not in the office with us today, but he is on the line. Dean’s areas of responsibility include our projects group, our technology group, our Sulawesi Project, as well as our corporate development function, so anything that’s geared to the future developments, and future prospects here at Sherritt (inaudible).
I’ve asked them both to join us on the call here along with Mike just so you could – so I could introduce them to you and you could have a sense of who they are and what their roles are going to be going forward because the group you’ve got here really does form the core of the senior management team that we have going forward here at Sherritt.
It’s a group that I have tremendous confidence in, and I’m really quite excited by in terms of what they offer for the prospects of the future here at Sherritt.
I said I’d come back to Ambatovy, and I’ll give you a bit of a sense of where we are there now. Basically, we are now getting into the really interesting part of the project where we’re able to bring our experience and expertise to bare in starting up and actually running the facility.
We are now very close to having the first mix sulfides and first metal. We’ve been saying since we have announce the last budget in the timeframe that we’ve had first metal in first quarter of Q1, we are still working towards that schedule.
In the past, we’ve given you indications of some of the factors outside of our control that can affect that schedule, one of which has always been weather, and we’ve got a perfect example of that now.
About this time last week, a major cyclone hit the east coast of Madagascar just south of where our plant site is, cyclone Giovanna made landfall some time last Tuesday.
Madagascar is obviously a cyclone prone area, that plant site has been engineered and built to withstand that, and we obviously have experience in hurricanes and from our operations in Cuba, but this was a pretty major cyclone and we had to take various preparations to get ready for that more than – you know several days in advance of the cyclone, we started batting down all the hatches so the non-essential personnel were evacuated to higher ground.
The good news out of all that is, the plant came through the cycle, just fine, there were no major damage, all the evacuation procedures worked according to plan, and we are fortunate that we had no injuries amongst any of our staff and contractors that are on the site.
The bad news out of that process, even with the delay, with all those procedures and the fact that there wasn’t a significant damage, the end result is that we still probably lost 10 days or two weeks just in the amount of time it takes to shut everything down and get everybody out, and get them back in and get everything started back up again.
So as just an example of the factors there that are outside our control that we ultimately have to deal with.
In terms of where we are today, we’re not back after the cyclone and making good progress toward first metal, we now have our acid plant up and running and producing acid.
Today as we speak, we’re warming up the autoclave, the first of the autoclaves and expecting to be feeding slurry into the autoclave, the first of the autoclaves in the coming days if that all goes according to plan, we should be days or a week or two away from mix sulfides, and as I say, we’re still working on a schedule that would contemplate first metal before the end of the first quarter.
Given the timing impact of the cyclone, there really isn’t any wiggle room left in that schedule now so we’ll see how we do against that, we’ll certainly keep you updated and let you know when we’ve got first mix sulfides, and we’ll let you know when we got first metal.
We’ve also for the first time in the press release you would have seen this morning provided a little guidance in terms of what we’re anticipating for production this year. We’ve provided a range just because of the various uncertainties in terms of starting up a plant like this, and then we try to highlight a few of those in the press release specifically, but the various uncertainties mean that it’s difficult to be tremendously specific in terms of what production is going to be, but we’re giving you and idea there of what we’re aiming for.
And we will keep you updated of the course of the year how we’re doing against that. I think Mike mentioned that the capital cost remains at 5.5 billion and we’re feeling more and more confident in that now. That number as it has it always has still excludes other items like financing cost, foreign exchange, working capital and the like, all in, we estimated that, and those other elements are probably another $900 million.
In terms of what we’ve got left to spend in 2012, we’ve got about $250 million I think out of the 5.5 left to spend and that’s the guidance you got towards the end of the press release there in the outlook.
There’s probably another between $300 million and $400 million of that $900 million remaining to be spent, we’ve got around six altogether if we manage to reach, continue on our schedule here to get through to the point where our cash flow are neutral, our share of that will be around $240 million.
Obviously, that is an estimate at this point and it’s a function of how well we can ramp up the project as well as some extraneous factors like the nickel price and what kind of revenue out of the production as we’re able to produce it.
Again, on that, we’ll keep you updated as how we’re doing against that as the year unfold. The nickel market more generally – 2011 was a year of pretty high volatility in the reference price, we saw reference prices over the course of the year from under eight to over 13 bucks a pound.
Overall it was a little higher than 2010, we saw some weakness at the end of 2011, we’ve had a little bit of a rally again at the 2012 last I look I think nickel is around the $9 a pound mark, and we’re – so it’s a good start to 2012 overall.
Ambatovy, we’re very pleased with where we stand today, we’re coming into the most interesting part of the project from our perspective now, but we’re optimistic of where we stand and we’ll keep you informed as to how we’re doing.
Mike touched on the coal business, and some of the production challenges we had there over the course of the year, Prairie operations did suffer from some flooding at one of our – at Boundary Dam, and we had some new units come offline that was – offset later I the year by at least, partially offset by a new unit that came online later in the year.
As a result, we were back to more of less where we’re hoping to be by the fourth quarter. Prairie operations has a similar story for different reasons and that we had some equipment problems and parts availability issues over the course of 2010, sorry, 2011.
Overall though, those were largely resolved by 2011, we had good strong performance in our mountain operations by 2011, and we’re hoping to see that continue in 2012, and so far, we’re off to a good start there production wise as well.
Pricing on our mountain operations has been pretty strong. New caster [ph] pricing has remained consistent – now I think it’s in the $115, $120 range, we are coming into the pricing season where some of our coal production for the year will be getting locked in at the negotiated rates in the spring.
We’re hoping to see new caster prices remain where they are. We traditionally get around 94%, 95% of new caster for our coal based largely on just for the energy content of the coal.
But at the moment, with prices where they are, it’s a pretty good time to be in the coal business.
Mike spoke to you as well about where we are in the oil and gas business and the strong performance we have there in 2011 both from a production and a pricing environment. A couple of things I just wanted to highlight in the oil and gas business there.
We’ve had issues in the past in collectability of receivables in that business, some of you may recall from two or three years ago, we had quite a large overdue receivable there that was ultimately restructured into a series of notes from the Cubans that were backed by the insurance of the Central Bank, the initial balance of those in 2009 was about $160 million.
Since we made that – restructuring of that receivable, those notes have been paid off like clock work on a declining balance basis, the 160 million note is now down to something just under $60 million.
And that balance continues to decline each week as those payments are made on that. Since that time, the receivables have been in good shape, we had $45 million with overdue receivables at the end of the year.
Those were all collected in January, and we’ve been able to stay relatively close to current on the receivables balance with the Cubans there. And we’re optimistic that we’re going to be able to continue that performance going forward.
In terms of the future of the oil and gas, Mike mentioned that we are working away to try and stem some natural declines in the reservoir base there. We do have a drilling program again for 2012, we will be drilling some additional holes, and between that, and we’re hoping to maintain production pretty consistent with where we are today.
Longer term, we are in discussions with the Cubans on a couple of new blocks, and we’re hoping to make some progress there pretty quickly this year when we get those blocks signed up though then some work will need to be done in terms of development before we can then get to the point where we can get out there and get some exploration drilling, but that will be the next step as we can work to maintain and enhance that business.
Lastly on the power business, again, Mike spoke of some of the production issues we’ve had there in 2011 both from a gas availability issue and a maintenance issue.
I’m hoping that the challenges on the maintenance front are now behind this in terms of gas capacity, we continue to work with the Cubans on the – on how can we analyze some data from some well work-overs that they’re working on, some of the fields where the gas comes off now are the fields that are controlled by Cubans so we’re working with them to get more information on those.
There’s some other possibilities that some gas – in some other areas that we’ll be continuing to explore this year, and hoping to have some good news on that over the course of 2012 as well.
Where that leaves us overall, at the moment, I’m quite happy with where we sit. We’re very pleased with where we stand with Ambatovy as I said, and it’s a – by any measure. But overall, we stand with a very strong balance sheet, our operations across the board are performing well with good strong performance, and we’ve seen growth in strength still in commodity prices, we’re hoping we’ll see that continue through the course of 2012 but ultimately we got the balance sheet to withstand whatever the circumstances the world may throw at us.
We’ll continue to work forward on Ambatovy and look forward to speaking to you over the course of the year. That is the kind of the quick overview of where I want to give you a sense of in terms of where stand today.
And with that, we’re happy to take your questions. So I will turn it back to you Ron and if there are any questions, we’re happy to entertain them.
Question-and-Answer Session
Operator
Thank you. (Operator instructions). One moment please for your first question. Your first question comes from Matt Murphy from UBS Securities. Please go ahead.
Matt Murphy – UBS Securities
Hi, I was just wondering on the discussion at Ambatovy, where that – you know, what is the time stamp on that progress? You talked about the autoclaves being run through three days, did that happen in December? Or is that sort of the latest in February on the progress?
David Pathe
Yes, the three day run was late last year actually. And that went from a Chemistry and from a science perspective, we are very pleased with the way the story was reacting to that, the autoclaves were performing frankly beyond our expectations for our first test.
And after that test was completed, there were some leaky – valves, there was a bit of replacement work being done on that, but overall it was the test that went quite well. And there was the – working we’ve done following that, and it was really getting to the point where we’re ready to start things up and start feeding in to the autoclave for a continuous run when the cyclone appeared in the horizon.
So we lost a couple of weeks there. But in terms of your question on timing, that three day run test was late last year, and we’ve made the alterations that have been required coming out of that and with the starting up of the acid plant and the warming of the autoclave for the injection of slurry, is as bad current as it can get.
Matt Murphy – UBS Securities
Okay. And on the sort of mention of the refinery construction quality risks, just wondering how concerned you are. Obviously, there’s been some known issues you know, internally just from your disclosure that you’re addressing. How confident are you that there’s not some unknown issues?
Has there been a fairly thorough audit of everything? And you know, if all goes well, you’re fine? Or is it you’re still sort of discovering things as you go along?
David Pathe
I think today I mean a lot of work has been done in the refinery in the last few weeks in terms of its commissioning activities and we feel pretty good about it today, it was a pretty good quality contractor on the refinery. And we’re as confident as we can be before we start feeding mix sulfides into it at this point. I think we made the disclosure there that you’re pointing to, just because we have had some issues in the past you know, the issues we’ve had in the power plant last year, I think are well-known. And it’s one of those things you really know for sure until you get it started up.
So we will see how that goes in the coming weeks, and it will be continued to be an issue as we get through first metal and as we start ramping up the operation and starting up the different parallel trains.
Construction quality is always going to be an issue until we get through up to commercial production. But we’re doing all we can in the interim period here to – and the pre-commissioning and commissioning process to catch all we can, but until you start putting, heat and pressure and steam, and natural acid into all these different components, you never know quite what you’re going to get.
So that’s one of the caveats we felt that was appropriate to give you on where we’re hoping to be over the course of 2012.
Matt Murphy – UBS Securities
Sure, okay. And then maybe just lastly where you mentioned you’re expecting to be cash flow neutral by year-end, just wondering what sulfur price and nickel prices assumed in that?
Mike Robins
$9.50 for nickel.
David Pathe
The nickel assumption on that is $9.50. I’m not sure what the sulfur assumption is on that. But it’s largely based on current rates today.
Matt Murphy – UBS Securities
Okay.
David Pathe
If we remain largely – if we’re consistent with where we are today, it shouldn’t differ materially from what we’re expecting. The other wildcard on that obviously is how well and how quickly we can ramp up the production.
Matt Murphy – UBS Securities
Got you. Okay, thanks, David.
Operator
Your next question comes from Jason Shack [ph] from Heartland Advisors. Please go ahead.
Jason Shack – Heartland Advisors [ph]
Hey good afternoon everybody, I guess given the bearish outlook from may of the market participants and observers have on nickel, I’d be curious to get maybe what your outlook is on nickel prices here for the near term, and then also, with the bearish outlook on nickel prices, change how you approach the development project in Indonesia or even how you look at your Cuban operations?
David Pathe
The short answer to your question is no, and I’ll give you a bit of context as to why. There’s been a fair bit written recently on potential supply surpluses in 2012 and 2013 and we’ve seen that as you have obviously. There’s two elements to it, one these are long-term projects, the Ambatovy project has a life span close to 30 years, any type of Sulawesi Project that we go forward, will have a similar lifespan.
We are certainly bullish on nickel over the long-terms as we are on pretty much with every commodity. And that’s the basis on which we make large scale development decisions. On a more short-term basis, in terms of what 2012, 2013 holds, the assumptions that they’re going to be surplus, is based on the number of different facilities all coming online.
We’ll see how well that pans out for us and other producers where we’d be quite keen on being part of that surplus in 2012.
The other factor that doesn’t go – and get as much play as we perhaps showed is the overall level of demand, and that’s going to be, there’s a lot of uncertainty there too, depending on the level of growth in China, and the strength of the recovery in the U.S., I don’t think anybody is anticipating any significant amount of growth out of Europe anytime soon, but there’s I think there’s a bit of uncertainty as to what the overall level of demand will be as well.
I think the upshot of that means is that you’ll see a lot of volatility continuing in the nickel price in 2012 and 2013 given that volatility, our strategy has always been to maintain a strong balance sheet, and to make sure you’re a low cost producer.
We’ve proven our ability to be a low cost producer in our Moa assets. And we remain confident that wherever we are on the cost curve, that Moa will be at a lower slot on Ambatovy when we get that up to full production.
So we don’t tend to get overly bugged down in short-term nickel forecast and speculation on that. The decisions that we’re making when we’re allocating cap of projects like that are much longer-term decisions.
Jason Shack – Heartland Advisors [ph]
Okay, thank you.
Operator
Your next question comes from Anoop Prihar from GMP Securities. Please go ahead.
Anoop Prihar – GMP Securities
Good afternoon. In terms of your outlook for 2012, you specifically made mention of the lower grade ore at Moa accounting for some of the slight year-over-year decline in volumes. And I’m now wondering how much – how long do you think we’re going to incur that lower grade ore for – is it going to be for the balance of the year? And subsequent to that does it return to normal? Or does it go lower?
David Pathe
There’ll always be a bit of natural variation there, Anoop. I think going forward, a good assumption is probably that what we’re forecasting in 2012 will be the norm going forward for the next few years.
Anoop Prihar – GMP Securities
Okay. And then in terms of the start up at Ambatovy, can you just give a sense as to how you account for revenues and expenses during the commissioning period?
David Pathe
In the press release, we made reference to achieving commercial production. Commercial production really has no particular meaning apart from an accounting perspective and the significance of a commercial production from accounting it that that’s the point in time at which we’ll switch over from capitalizing both revenues and operating expenses to it being a – accounted for as more of an operating business.
And that revenue will be recognized in the revenue line at Ambatovy and operating expenses no longer be capitalized, but will be operating expenses, offsetting that revenue, you end up with a net income number.
Of course we charted off in our balance sheet and income statement, it will all just shows up ultimately in the investment and associates. But the transition from capital accounting to income and accounting will incur when we hit that commercial production level.
Anoop Prihar – GMP Securities
Okay. And then just finally, in terms of communicating the progress being made at Ambatovy, what you’re – what should we expect in terms of being – hearing from you in terms of how things are going?
David Pathe
You should look for a press release from us when we have mix sulfides and you should look for another press release from us when we have first nickel. And we’ll update you again as to how we’re doing when we speak to you in a few weeks time with Q1 results.
Anoop Prihar – GMP Securities
Great, thank you.
Operator
(Operator instructions). Your next question comes from Robin Kozar from RBC Capital Markets. Please go ahead.
Robin Kozar – RBC Capital Markets
Thank you and good afternoon everyone. I just had two quick question that don’t relate to Ambatovy. The first is in terms of the power expansion. There’s ongoing gas shortages with the existing operations, is there any solution in terms of the gases going to be used for the power expansions? Or how is that – how do you plan to deal with that.
And as a follow up question in terms of Moa, there was a mention again of ongoing discussions with the Cubans in terms of expanding the operations there. I’d be interested if you could just provide some additional color on those discussions. Thanks.
David Pathe
Sure, Robin. In power expansion in terms of gas availability, I touched on what we’re doing there to try and identify some more sources of gas and that applies equally to the expansion as it does to our existing operations, and that’s working with the Cubans on some field work they are doing to work over some wells that – that gas is coming off, there’s also some potential that we’re working with (inaudible) and other sources, and we’re continuing and try to progress that over the course of the year.
For a bit of background information in terms of the way that the power projects work, each phase of expansion that we’ve done there, and this current expansion is the eighth phase of the expansion of that business, there’s a couple of different components to have that.
We make a return on that investment, there’s the sharing in our share of the revenue from the electricity generation, but there’s also a return that comes to us from the financing cost of that since we’re the ones to put the capital upfront.
So there is a return to be made on that project even at current gas levels and then to the extent we can get higher gas levels that we’re hoping to be able to achieve in the future that just improves the return. But it’s – there’s a return on that project regardless of what the gas level is ultimately.
On the Moa expansion, discussion continue with the Cubans on securing the 25 years with the reserve life. That is upon which the expansion is contingent. Those were now in the process of evaluating some reserves that have been proposed to us in terms of how they would work economically, and we’re quite encouraged by the progress that we’re making there, and hope to have more on that over the course of this year as well.
Robin Kozar – RBC Capital Markets
Thank you very much.
Operator
Ms. Myson, there are no further questions at this time. Please continue.
Paula Myson
Thanks, Ron. We’d like to thank everyone for their time today, and remind you, we’re available if you have any further questions. We’ll speak with you again in April with our first quarter results. And in the mean time, have a great afternoon.
Operator
Ladies and gentlemen, this concludes the conference call for today, thanks for participating, please disconnect your lines.
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