DBRS Downgrades Sherritt’s Senior Unsecured Debt and Recovery Rating, Confirms Issuer Rating, Trends Stable

DBRS Limited (DBRS) downgraded the Senior Unsecured Debt of Sherritt International Corporation (Sherritt or the Company) to CCC (high) from B (low) and confirmed the Issuer Rating at B. The Senior Unsecured Debt was downgraded two notches below the Issuer Rating as a result of changing the Recovery Rating to RR6 from RR5, due largely to DBRS, on a consistent basis across sectors, including environmental and reclamation obligations into Sherritt’s recovery analysis. All trends are Stable. The confirmation and downgrade take into account higher nickel price forecasts that are expected to be offset by a lower cobalt price forecast for 2019, as the price recovers from recent lows in the USD 14 per pound (lb) range to reach USD 28 per lb by the end of 2019, or an average 2019 price of USD 23.50 per lb. Longer term, DBRS expects cobalt prices to remain in the USD 30 range as both global electric vehicle and lithium ion battery production ramp up. As well, lower Cuban oil production due to natural field decline is expected to continue until the Company brings its Block 10 concession into commercial production, potentially as soon as H2 2019.

DBRS expects 2019, similar 2018, to be a transition year for the Company as the exploration/evaluation of the Block 10 concession progresses with management’s goal of providing the latest results in Q2 2019 and hopefully advancing to production later in the year. At the Sherritt corporate level, the lower Cuban oil production is expected to be more than offset by higher forecast oil prices and result in a recovery in EBITDA to the $35 million to $40 million range. Adjusted operating cash flow is also expected to recover to the $20 million range, while capital expenditures (capex) are expected to be in the $21 million range, as per management guidance, 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 $50 million range. As well, a modest usage of non-cash working capital in the $5 million range is expected to result in a net free cash flow deficit in the $5 million to $10 million range. As such, unless commodity prices decline to levels at least as low as at the beginning of 2016, or Sherritt’s economic evaluation of its Block 10 concession in Cuba proves negative, DBRS does not anticipate a downgrade from the current rating. Conversely, barring a significant, sustained increase in commodity prices above consensus or oil exploration results that exceed expectations, DBRS does not see a catalyst for a rating upgrade at this time.

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

The principal methodologies are Rating Companies in the Mining Industry (September 2018) and DBRS Criteria: Recovery Ratings for Non-Investment Grade Corporate Issuers (October 2018), which can be found on dbrs.com under Methodologies & Criteria.

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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