DBRS Comments on Sherritt’s Q1 Results and Ambatovy Project Progress

DBRS notes Sherritt International Corporation’s (Sherritt or the Company) today released its first quarter 2009 results, including an update on progress of the construction and financing arrangements of the Ambatovy nickel mine project in Madagascar. DBRS downgraded Sherritt’s Senior Unsecured Debt to BB (high) from BBB (low) and placed the rating Under Review with Negative Implications on February 27, 2009. The downgrade reflected the Company’s deteriorated credit metrics and increased financial risk due to heavy capital expenditure commitments and the severe downturn in the economy. The Under Review with Negative Implications status reflected Sherritt’s limited access to credit and a poor business outlook for 2009 combined with the Company’s need to resolve anticipated funding required for Ambatovy.

The Company’s operating results reported today were largely as DBRS expected with the Coal unit providing the bulk of operating earnings, which were down sharply from the first quarter 2008 results due to lower oil, nickel and cobalt prices. Sherritt also reported continuing discussions with its Ambatovy partners and lenders regarding a mechanism to fund its remaining share of the capital cost in order to maintain Sherritt’s balance sheet strength and liquidity. The Company expects that revised financing agreements will be finalized in the second quarter of 2009, hence the rating of Sherritt’s unsecured debentures remains Under Review with Negative Implications. Although the Company has been able to increase its cash and short-term investment balances to $789.6 million during the quarter ($607.3 million at year-end 2008), DBRS believes that if an alternate funding mechanism is not in place by mid-year, the cash resources on the Company’s balance sheet are likely to be required to fund project costs, which could lead to a further deterioration of the Company’s financial strength and possible negative rating action.

Sherritt’s Q1 2009 loss of $42.9 million (including a $57.4 million after-tax write off of a Cuban oil property) compared to net earnings of $89 million in the first quarter of 2008. Reported EBITDA for the quarter was $97.2 million versus $175.7 million for Q1 2008. Significantly lower prices for nickel, cobalt and oil led to sharply lower EBITDA generation by the Company’s Oil and Gas and Metals units, although they continue to make a positive contribution. The Company’s Coal unit provided a 30% increase in quarter-over-quarter EBITDA to $60 million on the strength of increased coal prices at export-oriented coal operations, steady performance by Canadian utility supply operations and full consolidation of coal assets acquired in the second quarter of 2008. EBITDA generation from the Power unit remained steady at about $30 million. Capital expenditures for the quarter of $416.9 million were dominated by an investment of $376.9 million in the Ambatovy project. Although Sherritt’s total debt increased by $180.8 million, Sherritt’s leverage was 32% at the end of Q1 2009, largely unchanged from December 31, 2008. The Company also reported it has reached agreement with lenders to renew approximately $200 million of short-term facilities set to mature in 2009.

DBRS expects that Sherritt’s Metal and Oil and Gas units will continue to provide minimal but positive EBITDA for the rest of 2009 and that the bulk of EBITDA will come from the Coal and Power units. Profitability from Sherritt’s Mountain coal operations (largely export-oriented) is expected to reduce as significantly lower 2009-2010 coal contract year prices come into effect, but Prairie coal operations are expected to maintain first-quarter levels of earnings. On the whole, DBRS expects Sherritt will generate positive net cash flow from its existing operations and that the only addition to debt levels will come from Ambatovy project financing provided from external sources, thereby preserving the liquidity of the Company’s balance sheet. Key to this expectation will be finalization of a suitable funding arrangement for Sherritt’s share of Ambatovy project costs.

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

The applicable methodology is Rating Mining, which can be found on our website under Methodologies.

This is a Corporate rating.