DBRS Confirms Sherritt International Corporation’s Issuer Rating, Removes Under Review – Negative Implications Status and Downgrades the Senior Unsecured Debt

DBRS Limited (DBRS) has today confirmed the Issuer Rating of Sherritt International Corporation (Sherritt or the Company) at B with a Stable trend. With this rating action, DBRS has changed the Company’s status of Under Review with Negative Implications, where it was initially placed on June 1, 2016. At the same time, DBRS has changed Sherritt’s Recovery Rating to RR5 from RR4, resulting in a one-notch downgrade to the Company’s Senior Unsecured Debt to B (low) from B. In preparing the Recovery Rating analysis, DBRS has used a moderately lower level of EBITDA as a starting point compared to 2015 as a result of the weak operating environment for the last 12 months ending September 30, 2016.

Sherritt’s key financial metrics remain weak for its rating, largely because of low commodity prices that only began to recover in H2 2016. Furthermore, the Company’s requirements under International Financial Reporting Standards to equity-account its investments in its 50%-owned Moa joint venture (JV) in Cuba and 40%-owned Ambatovy JV in Madagascar has further reduced these key metrics, effectively reducing the Company’s EBITDA and operating cash flow to the contributions from the Oil & Gas and Power businesses. As well, Sherritt has significant non-recourse debt from its Ambatovy Additional Partner Loans of $1,284 million as of September 30, 2016, or about 60% of the Company’s total debt that further depresses its key metrics.

That said, DBRS expects 2017 to be a year of recovery for the Company based on Bloomberg consensus nickel, reference oil and fertilizer price forecasts (DBRS expects that cobalt prices should remain relatively stable based on stable by-product supply). At the Sherritt corporate level, the higher reference oil prices are expected to result in approximately 20% higher oil price realizations in Cuba, resulting in the Company’s EBITDA increasing to the $100 million range. Adjusted operating cash flow is expected to be positive in the $50 million to $60 million range. Capital expenditure (capex) is expected to be approximately double compared to 2016 as the evaluation and development drilling on the Block 10 concession ramps up. A modest reduction in non-cash working capital in the $20 million range is not expected to completely offset the higher capex and should result in a modest free cash flow deficit.

Unless commodity prices decline to levels at least as low as the beginning of 2016, or Sherritt’s economic evaluation of its Block 10 concession in Cuba proves negative, DBRS does not anticipate a downgrade from the current rating.

APPLICATION OF MULTIPLE METHODOLOGIES
-- The applicable DBRS rating methodologies used were Rating Companies in the Mining Industry (September 2016) and Rating Companies in the Oil and Gas Industry (September 2016).
-- Sherritt is engaged in the exploration, development, mining and processing of nickel and cobalt deposits and in the sale of related products. These aspects of the Company led to the use of Rating Companies in the Mining Industry as a rating methodology.
-- Sherritt also explores for, develops and produces oil and gas deposits and sells these products, leading to the use of Rating Companies in the Oil and Gas Industry as a second methodology.
-- The Company’s Power unit produces electricity and Sherritt develops and sells various technologies mainly related to mineral processing (metallurgy), but these activities are considered of minor importance.
-- Over the five years ending December 31, 2015, the ratio of the average revenue from Sherritt’s Metals unit to its Oil and Gas unit has been approximately 1.7 times, but oil and gas production has been declining and has a short reserve life, whereas Sherritt’s metal production has been increasing and has a longer reserve life. Accordingly, Rating Companies in the Mining Industry and Rating Companies in the Oil and Gas Industry are given approximate 75/25 weighting in assessing the strength of Sherritt’s business profile.
-- DBRS Recovery Ratings for Non-Investment Grade Corporate Issuers.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.