DBRS Morningstar Confirms Sherritt International Corporation’s Issuer Rating at B, Recovery Rating at RR6, and Second Lien Notes at CCC (high), All with Stable Trends

DBRS Limited (DBRS Morningstar) confirmed Sherritt International Corporation’s (Sherritt or the Company) Issuer Rating at B, Recovery Rating at RR6, and Second Lien Notes rating at CCC (high), all with Stable trends. The confirmation of the Issuer Rating is based on Sherritt’s business-risk profile, which remains in the BB category and accounts for the Company’s (1) relatively long reserve life, (2) favourable operating cost structure at its nickel operations, and (3) constructive outlook for nickel and cobalt prices over the next three years (Bloomberg consensus as of November 4, 2021). The Issuer Rating is tempered by the Company’s smaller size and its material exposure to Cuba. The Issuer Rating and Stable trend consider the Company’s plans to allocate capital towards expanding its nickel and cobalt production with a relatively carbon-friendly, low-risk brownfield expansion of its Moa Joint-Venture (JV) and Fort Saskatchewan operations compared with pursuing riskier and more carbon-intensive oil and gas development activities in Cuba. The proposed nickel expansion highlights the integrated nature of Sherritt’s operations between Cuba and Canada. DBRS Morningstar notes that the U.S. embargo of Cuba remains in full effect, as the Biden administration has chosen to focus on tackling the Coronavirus Disease (COVID-19) pandemic plus its Buy American and infrastructure initiatives. As a result, Sherritt faces negative financial headwinds due to the embargo, including a high level of uncertainty around the timing of dividends from the Moa JV and payments on overdue energy receivables.

DBRS Morningstar’s Recovery Rating analysis was based on an enterprise valuation approach, which factored in environmental rehabilitation obligations. Based on the Recovery Rating analysis, DBRS Morningstar confirmed a Recovery Rating on the Second Lien Notes at RR6 and the corresponding instrument rating at CCC (high), two notches below the Issuer Rating. Refer to “DBRS Morningstar Criteria: Recovery Ratings for Non-Investment-Grade Corporate Issuers” for the full details of this approach.

The Company continues to have significant cash balances and outstanding unpaid receivables associated with its Cuban operations. At the end of the third quarter 2021, the Company reported a cash balance of $163.4 million, including $76.7 million of cash held at the Company’s Power operations in Cuba. Outstanding Oil and Gas and Power receivables held in Cuba were USD 152.5 million. That said, Sherritt has been receiving both dividends from its Moa JV and payments on the overdue energy receivables. In the third quarter, Sherritt received USD 6.4 million in overdue energy receivables. Subsequent to the end of the quarter, the Company also received USD 2.5 million under the enhanced June 2019 agreement with Energas S.A.

DBRS Morningstar notes that the receipt of higher-than-forecast dividends and overdue receivables or the formal approval of the proposed expansion of the Moa JV operations with attractive economic terms could result in a positive rating action. Conversely, a sustained suspension of either the repayment of the outstanding energy receivables or ongoing Moa JV dividends could result in a potential negative rating action.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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

The principal methodologies are Rating Companies in the Mining Industry (August 16, 2021; https://www.dbrsmorningstar.com/research/383106) and DBRS Morningstar Criteria: Recovery Ratings for Non-Investment-Grade Corporate Issuers (August 19, 2021; https://www.dbrsmorningstar.com/research/383238), both of which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262).

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 [email protected].

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

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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