Oct 062015
 

I might lose my entire bond

Bonds are usually safer than stocks. But it’s also possible to lose a lot of money in bonds if we’re not careful. Last year I blogged about buying $5,000 of Sherritt’s high yield bonds. I made this decision based on the attractive 8% annual yield! ๐Ÿ˜€ Sherritt International Corporation is a mining and energy company that operates in Canada, Cuba and Madagascar. Sherritt’s primary business is mining and refining nickel ore and similar base metals. ย I expected the bonds would mature in November 2018 and I’d get back my principal. However, a lot of things have changed since 2014.

Sherritt bonds plummet in value

As with all mining companies, the value of Sherritt’s business depends heavily on the price of the underlying commodity it sells, in this case, nickel. When I bought the bond last summer the spot price of nickel was roughly $9 per pound. And it appeared to have stabilized. However, 15 months later, the price has now dropped in half to just $4.5 a pound. ๐Ÿ˜• Below is a 5 year chart of the price of nickel.

15-10-sherrit-bonds-nickel-price-chart-5-year

Obviously this had a devastating impact on resource and mining stocks. Teck Resources and Freeport-McMoRan are both down about 50% year to date. And Sherritt is down 70%. I guess you can say these mining companies have hit rock bottom. ?ย Even though I don’t own any Sherritt stocks, I’m still a little concerned as a bond holder. With the common share price dropping this low, there’s a real chance that Sherritt could file for bankruptcy protection in the foreseeable future. And if the company’s board of directors choose to do that before my 2018 bonds are due then I may not get my $5,000 principal back. ๐Ÿ˜

When I purchased the Sherritt bonds they were actually trading at above par. But today the bonds are selling for way below par, meaning that if I wanted to sell my holdings now I would have to accept a loss. Here’s how the balance is shown in my brokerage account. I currently have a paper loss of $2,124.

15-10-sherritt-bond-value-drop

The “Price” refers to the current value of the bond out of an initial $100. As we can see, I’m currently losing 40.66% on this investment, lol. The reason it’s not worth the full value of $100 anymore is because other investors aren’t willing to pay as much for a bond that has a relatively high chance of defaulting. This means that the yield on this junk bond has gone through the roof. ๐Ÿ™‚ If any speculator strongly believes that this mining company will eventually pay back the $5,000 it borrowed, then buying this bond today would be a greatย trade. Based on the evidence above anyone can basically pay $3,100 now, and get back $5,000 in a few years, plus interest. That’s why the annual yield to maturity is 26%. ๐Ÿ™‚

15-10-bond-ladder-sherrit-high-yield-td

This means that if Sherritt continues to stay in business until November 2018, the bond buyer today would make 26% annual return on this investment. However, the fact that the market has bid up the yield to 26% should be a red flag to anyone. Higher yield usually means higher risk. Greek government bonds were yielding over 20% a few years ago which lead to a default of principal payment earlier this year and the country had to restructure. There’s often a lot of parallels between the macro economy and corporate finance.

But I’m not too worried about my Sherritt bonds. I plan to hold my position until maturity. I think selling them at a loss now would be a mistake for me. The most I can lose is only $5,000 so it’s not like I’d lose any sleep over this, haha. Even if the bonds default I’ll simply write off the investment at $5,000 face value, which is worth less than 1% of my entire assets so it’s no big deal. ๐Ÿ˜‰

Personally I think the chance of Sherritt going bankrupt before 2018 is still small. If the price of nickel drops to below $4/lb and stays there for a few years then that could be problematic for the company. Otherwise they should be able to meet all their debt obligations. ๐Ÿ™‚ The 5 year stock chart of Sherritt looks quite bleak.

15-10-sherritt-stock-performance-5-year

But Sherrit has a book value of $10.42 per share. This is the value of the company’s assets that shareholders would theoretically receive if a company were liquidated. Yet the stock is only trading at $0.82 per share. And financially speaking the business is not strapped for money either. It’s actually holding more cash right now than its total market cap is worth.

It’s too early to say how things will play out for my fixed income investment. Maybe I’ll be made whole, or maybe I’ll lose $5,000. Who knows? We’ll have to wait a few more years to find out. But in the mean time I’ll hang onto my bonds and continue to collect $400 of interest income each year. ๐Ÿ˜€

 

[Update] Sherritt has announced it will extend its debt to 2021. This means my bond is safe for now. Phew. ๐Ÿ™‚ ย http://www.freedomthirtyfiveblog.com/2016/08/sherritt-international-debt-extension.html

โ€”โ€”โ€”โ€”โ€”โ€”โ€”โ€”โ€”โ€”โ€”โ€”โ€”โ€”โ€”โ€”โ€”โ€”โ€”โ€”โ€”โ€”โ€”โ€”
Random Useless Fact:ย 

Honey never goes bad. It was reported that archaeologists found 2000 year old jars of honey in Egyptian tombs and they still tasted delicious!

15-10-bee-hive-honey-first-person

 

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16 Comments on "If Bonds Go Bust – Sherritt International"

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BeSmartRich
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The honey picture made me hungry and luckily it is my lunch time in Toronto. I share a similar feeling as you are on one oil &gas investment that I made in November 2014. It dropped 80% value since the purchase. Haha well… I will keep holding it as it is only valued at around $700 now so even if it becomes 0, I am not losing my sleep over. It still has great assets which is valued considerably higher than its market cap. This time will only make the company leaner and more efficient. Hope the storm passes soon! Thanks for sharing!

Cheers!

BSR

Finance Journey
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Thank you for sharing your successes and failures. We are human, we all make mistakes. Learn from mistakes is the key to success.

My biggest lose so far is due to investing in Energy produce companies such as COS and CVE.

Bought 75 stocks COS few years ago at $18 range because of high yield, and now it is trading around $9.40, almost 50% lost; however, when you sum up with dividend the lost is very minimal.

Bought 160 stocks CVE for $28 a couple of years ago, sold 50 units for profit when oil price was high, and holding the rest 110 CVE. It is now trading around $20. Again, when you sum up with dividend and the profit I made, the lost is very minimal.

I am still holding both companies and hoping that the oil price will recover soon. But, I am not loosing my sleep because they just less than 1% of my portfolio. ๐Ÿ˜€ . Yes, diversification is import to minimize risks in this financial world.

Andrew
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Andrew

I’m in the same situation as you with these bonds, I purchased them at $5,037. I’m going to ride this out and hopefully get all my money back. Except, I’m actually contemplating buying more. My thought process is, if I lose $5,037 or $8,037 (my initial 5,037 plus 3k to buy more bonds) I’m not that much worse off. However, if Sherritt repays the bonds in 2018 I’ll stand to get $10,000, plus $800 interest per year for two more years. Total profit of $3,600 on an $8,000 investment. Thoughts? Am I being greedy, or needlessly risky?

Anon
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Anon

Buy into weakness, sell into strength, as the saying goes.

But then again, Jesse Livermore said to “Buy weakness in a rising market, sell strength in a falling market.”

So your guess is as good as anyone’s!

Dan
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Andrew (and whoever else), before you buy more, I humbly (and respectfully) suggest that you tear the balance sheet apart and try and determine what the liquidation value of the assets vs. the liabilities are before committing another $.01 of your hard earned capital. Throw away the impulse to average down and think of this from a business perspective. At June 30, 2015, they reported $5.4B in assets. You need to go line by line down the balance sheet and ascribe the most conservative recovery percentage factor to each line. Cash, restricted cash, and st investments will likely bring 100% on the dollar. Advances of $2.2B (current and long term) are advances to the Ambatovy JV. You need to ask yourself what percentage of these advances are recoverable from Ambatovy. See Q2 report note 6 for a description of Ambatovy. Are there enough assets vs. debt at the Ambatovy JV level for Sherrit to recover 100% of the advances? Likely not. I’d ascribe a very conservative percentage to the advances. Next, Trade A/R, probably 75% collectible in a liquidation. Next inventory, maybe 25% to 50% in a liquidation. Next, PPE, probably consists of highly specialized smeltering machinery, not easily saleable,… Read more ยป
Jason
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Jason

I actually just doubled down on Sherritt earlier this week. I was averaging around $5.25 a share and as you said, Sherritt has gone to the toilet steadily for the past 3 years. I’m now in for around $1.75. Hopefully the US and Cuba come up with an official agreement and the stock will soar like it did temporarily a few months ago.

I personally want to get out since they cut their dividend. The demand for stainless steel (the main use for Nickel) has gone down steadily…and the down turn in O&G isn’t helping.

If I can get out at $3 I’ll be happy.

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[…] The following post was written in July 2015. I’ve posted an update in October aboutย my purchased Sherritt Bonds.ย It’s not doingย so well. […]

Su Green
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Su Green

are you still holding sherritt bond, if so how are you feeling about the bond extension?

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[…] plight of the mining company. I first realized Sherritt was in trouble when the value of my bond dropped 38% last year,ย and prepared myself or the worst.ย Sherritt’s profits are tied to the underlying commodity […]

J-Bone
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J-Bone

Just wondering what your thoughts are now and what your bond is worth? Would you buy some Sherritt bonds now with a 11.39% yield and a maturity date of 2021?

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