DBRS Confirms Sherritt International Corporation’s Issuer Rating at B and Senior Unsecured Debt at B (low) with a Recovery Rating of RR5, All with Stable Trends

DBRS Limited (DBRS) confirmed Sherritt International Corporation’s (Sherritt or the Company) Issuer Rating at B and Senior Unsecured Debt rating at B (low) with a Recovery Rating of RR5, all with Stable trends. This rating action takes into account higher cobalt and nickel prices as well as cost improvements at the Company’s Moa joint venture (JV) nickel/cobalt operations in Cuba, offset by lower Cuban oil production following the expiration of the Varadero West production-sharing contract (PSC), the extension of the Puerto Escondido/Yumurí PSC and natural field decline. The lower oil production in Cuba will likely persist until the Company brings its Block 10 concession into commercial production, potentially as soon as Q1 2019. DBRS expects cobalt prices to remain in the USD 30- to USD 35-per-pound range in the medium term, as both global electric vehicle and lithium ion battery production ramp up. DBRS has used the 2.0 times multiple of the EBITDA interest coverage debt incurrence test set out in the Senior Unsecured Debt in its Recovery Rating analysis.

Sherritt’s key financial metrics appear weak for its ratings, largely because of declining Cuban oil production as well as low oil prices that only began to recover in mid-2017. This weakness is, in part, a consequence of the application of International Financial Reporting Standards, which require Sherritt to equity-account for its investments in its 50%-owned Moa JV in Cuba and 12%-owned Ambatovy JV in Madagascar, and thus Sherritt does not benefit from these earnings in calculating its financial metrics, effectively reducing the Company’s EBITDA and operating cash flow to the contributions from the Oil & Gas and Power businesses. However, DBRS notes that the recent Dutch auction (see the press release “DBRS Comments on Sherritt International Corporation’s Dutch Auction and Equity Issue” dated January 17, 2018) resulted in a $121 million, or 17%, reduction in the principal value of the Company’s outstanding senior unsecured debentures, which has improved the debt-to-capital metric to the BBB range from the B range.

DBRS expects 2018 to be modestly better than 2017 as higher commodity prices, especially cobalt, offset significantly lower Cuban oil production. At the Sherritt corporate level, the lower Cuban oil production is expected to be largely offset by higher forecast oil prices and result in moderately lower EBITDA in the $35 million to $40 million range. Adjusted operating cash flow is expected to remain modestly negative and capital expenditures (capex) are expected to be in the $50 million range as the evaluation and development drilling on the Block 10 concession progresses. Capex at the equity-accounted Metals operations is expected to be in the $70 million range. As well, a modest contribution from non-cash working capital in the $10 million range is still expected to result in a net free cash flow deficit in the $40 million to $45 million range. As such, unless commodity prices decline to levels at least as low as at the beginning of 2016 or if Sherritt’s economic evaluation of its Block 10 concession in Cuba proves negative, DBRS does not anticipate a downgrade from the current ratings.

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

The principal methodologies are Rating Companies in the Oil and Gas and Oilfield Services Industries, Rating Companies in the Mining Industry and DBRS Criteria: Recovery Ratings for Non-Investment Grade Corporate Issuers, which can be found on dbrs.com under Methodologies.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at info@dbrs.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

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