DBRS Comments on Sherritt Ambatovy Update

DBRS notes that Sherritt International Corporation (Sherritt or the Company, rated BB (high) with a Stable trend) today released an update on its 40%-owned Ambatovy nickel mine construction project in Madagascar, indicating that the budget for the project (100% basis) has increased to US$4.76 billion, which includes a US$50 million contingency provision from the previous budget of US$4.52 billion. Sherritt has reported that cumulative project expenditures to September 30, 2010, were US$4.16 billion, excluding financing charges, foreign exchange and working capital requirements. The Company also reports steady progress on project construction with mining that began in July 2010 in order to build an ore stockpile in anticipation of start-up of the ore preparation plant in early 2011. Once the Ambatovy project is commissioned, DBRS expects that it will take more than a year for Sherritt to achieve annual projected nickel output capacity of 60,000-tonne-per-year (100% basis). DBRS views the increase in the Ambatovy budget as minor given the scale of the project, its greenfield nature and its remote location hence no rating action is contemplated at this time.

Ambatovy is a major project for Sherritt, although the project’s finance structure insulates the Company from much of the financial risk associated with it. Recent political instability in Madagascar and some labour unrest do not appear to have had a significant negative impact on the project to date, but will nevertheless remain an ongoing concern. Nickel laterite projects have proven difficult for other mining companies to develop successfully, but Sherritt’s existing nickel laterite operations have given it decades of experience in mining and processing nickel laterite ores. Nonetheless, with nickel prices near US$11.00 per pound and the anticipated long-reserve life of Ambatovy, successful development of the project would be a very positive addition to the Company’s business profile.

Sherritt’s existing businesses in coal, nickel, oil and gas, and power generation have performed well in 2010 on the basis of good commodity prices and steady production performance. Year-to-date September 30, 2010, operating cash flow of $331 million was more than adequate to cover the Company’s investing and dividend needs of approximately $219 million before consideration of Ambatovy expenditures. At mid-year, Sherritt acquired the outside 50% interests in its export coal (Mountain) operations for $45 million, providing greater control over the operation of those assets. A covenant breach in a three-year non-revolving term facility associated with the Mountain operations was eliminated during third quarter 2010.

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.