Debt Rating DBRS Downgrades Sherritt Senior Debt/Confirms Issuer Rating
2019-03-12 15:27:04.87 GMT
DBRS Downgrades Sherritt's Senior Unsecured Debt and Recovery Rating, Confirms
Issuer Rating, Trends Stable
Industry : Natural Resources
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.