DBRS Comments on Covenant Breach by Sherritt Subsidiary

DBRS notes that Sherritt International Corporation (Sherritt or the Company; rated BB (high)) today released its third quarter 2009 results and announced that Coal Valley Resources Inc. (CVRI), a subsidiary of the Coal Valley Partnership (in which Sherritt has a 50% interest), was not in compliance with a working capital covenant applicable to its $38.0 million (100% basis) three-year non-revolving term facility. Borrowings under the CVRI facility are in part subject to a guarantee by Sherritt. The lender has granted CVRI a waiver of the covenant breach for the third quarter of 2009. Although not a positive development, the covenant breach on the CVRI credit facility is viewed by DBRS as not material to Sherritt’s ratings. DBRS believes that the covenant breach will not affect Sherritt’s other borrowings. DBRS expects that with the help of its owners, CVRI will find a resolution to the covenant breach with the lender. If a resolution is not achieved, DBRS considers that the maximum exposure of the Company to any borrowings under the facility would be approximately $19 million, half of the maximum amount of the facility and not material to Sherritt’s overall financial profile.

CVRI re-opened the idle Obed Mountain export thermal coal operation in 2009, in part to supply a three-year contract for the increase in Mountain Operations thermal coal production resulting from the re-opening of the mine. The contract, signed in 2008, featured a guaranteed floor price for three years with a sharing of the price upside. The international price for thermal coal, similar to that of the Obed Mountain mine for the 2009-2010 contract year, dropped significantly in early 2009. Sherritt reports that the counterparty has refused to take delivery of coal under the contract beginning in September 2009 and Coal Valley Partnership has issued a Demand to Arbitrate the delivery contract to the counterparty. The dispute has resulted, at least in part, in the breach of the working capital covenant in CVRI’s loan agreement as outlined above.

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.