DBRS Comments on Sherritt Ambatovy Cost Increases

DBRS notes that Sherritt International Corporation (Sherritt or the Company, rated BB (high) with a Stable trend) today has announced a 16% increase in the cost estimate to complete its 40%-owned Ambatovy nickel mine construction project in Madagascar to US$5.5 billion (100% basis) from an estimate of US$4.76 billion announced in December 2010. In addition, first metal production from Ambatovy is now not expected until the first quarter of 2012. DBRS views the increased cost estimate and delay in start-up of Ambatovy as disappointing news, but given the Company’s healthy cash balances ($732 million at March 31, 2011) and solid operating cash flow from its existing operations, we expect the added cost is affordable for Sherritt and is a reasonable added investment for the Company if the expected scale, long life and competitive cost position of Ambatovy can be attained. Accordingly, we do not expect today’s news on Ambatovy to have a direct impact on the Company’s BB (high) with Stable trend rating.

Sherritt attributes the project delays to poor performance of contractors, which has led to the need to “rectify inadequacies” in the power plant and refinery portions of the project and added to costs to provide site support services and pre-production operational costs for an extended period. In addition, inaccurate estimates for materials including piping and electrical materials have added to project costs. Nonetheless, Sherritt indicates that the scope, technology, and capacity of Ambatovy remains unchanged but the project has yet to demonstrate it can achieve its design parameters.

Today’s announcement by Sherritt is the second in less than six months with the Company announcing a 5% increase in the cost estimate for Ambatovy in December 2010 from US$4.52 billion (see DBRS press release, DBRS Comments on Sherritt Ambatovy Update, December 17, 2010). DBRS continues to expect 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).

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. DBRS has expected Ambatovy to have its challenges given that it is a large scale, greenfield project in a remote location in a less-than-stable political jurisdiction. 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$10.00 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.

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.