DBRS Confirms Sherritt International at BB (high), Stable Trend

DBRS has today confirmed the Issuer Rating and Senior Unsecured Debt rating of Sherritt International Corporation (Sherritt or the Company) at BB (high) with Stable trends. In addition, the recovery rating for Sherritt’s Senior Unsecured Debt under a hypothetical default scenario remains at RR4.

Sherritt’s credit metrics remained stable in 2011 and are adequate for the rating, with gross leverage at year-end at 35%; cash flow-to-total debt of 20% and EBITDA interest coverage at 5.0 times. Operating income of $420 million in 2011 continued to recover from a 2009 recessionary low, but failed to match the record level of $583 million set in 2007. Mixed production results since 2009 have been matched by generally higher commodity prices and higher costs. Sherritt’s credit metrics continue to remain stable as solid operating cash flow and the financing self-sufficiency of operating units has led to positive net free cash flow in 2010 and 2011. Sherritt’s cash contributions to the Ambatovy project via partner loans have driven debt increases. These non-recourse loans represented 40% of the Company’s December 31, 2011, gross debt.

The RR4 recovery rating for Sherritt’s Senior Unsecured Debt corresponds to an estimated 30% to 50% recovery of principal amounts of the senior unsecured debentures under a hypothetical default scenario. The RR4 rating, in turn, results in no change (notching) to the rating of Sherritt’s Senior Unsecured Debt.

Sherritt’s diverse operations allow it to generate steady operating earnings and cash flow in comparison with many other mining companies. Nonetheless, 2012 and 2013 are expected to be challenging years for the Company as it seeks to fund the completion of its 40%-owned Ambatovy project in Madagascar in an environment of weakening commodity prices and ongoing political and economic uncertainties in Cuba (a major source of Company’s earnings) and elsewhere.

Sherritt faces potentially significant capital outlays in a period of constrained financial flexibility as it completes the Ambatovy project. The Company’s short-term liquidity is currently provided by approximately $630 million in cash and short-term investments complemented by $288 million in unutilized non-Ambatovy specific credit capacity, all under facilities that require renewal in 2012. DBRS estimates that Sherritt will require approximately $250 million to complete Ambatovy in addition to capital and dividend needs of existing operations and other growth opportunities. It is DBRS’s view that Sherritt will be able to source the funding required to bring Ambatovy to completion such that the project financing will become non-recourse, but that the Company’s flexibility to face any unforeseen demand for funds could be strained.

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

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