Fitch Ratings has affirmed Molibdenos y Metales S.A.'s (Molymet) foreign
and local currency Issuer Default Ratings (IDRs) at 'BBB' and national
scale ratings at 'A+(cl)', 'AAA(col)', and 'AA+(mex)'. The Outlook is
Stable. A full list of rating actions is shown below.
KEY RATING DRIVERS:
Strong Through-the-Cycle Credit Profile: Molymet's investment-grade
ratings reflect the company's strong capital structure demonstrated by
its average net debt-to-EBITDA of 0.9x from 2009-2013. The company
benefits from stable tolling and by-products business lines, which
accounted for about 70% of 2013 EBITDA and provided cash flow stability
and visibility from long-term contracts. Molymet's ratings are also
supported by its global leading market position and geographic
diversification.
Significant New Contract: Molymet announced a new 10-year term tolling
agreement with KGHM International Ltd on Aug. 29, 2013. The contract
begins in 2014 for 100% of the molybdenum concentrate produced at the
Sierra Gorda Project of KGHM, a mining project located in Antofagasta,
Chile, with an average estimated production of 25 million pounds of
molybdenum concentrate on average per year. Following the recent
announcement by Codelco to invest in its own Molybdenum plant, this
contract counteracts any potential reduction in volumes from Codelco in
the future (post 2018) should it occur.
Unwavering Shareholder Commitment: Molymet's shareholders' recent USD100
million capital increase to strengthen the company's capital structure
after a year of large investments combined with lower market conditions
indicates continued the owners' strong commitment to the company's
credit profile. As of December 2013, the company's net debt-to-EBITDA
peaked at 3.4x compared to 1.5x in 2012, deleveraging to 2.4x in January
2014. This occurred after the remaining USD84 million of the USD100
million capital injection was completed, with USD16 million being
injected in a first installment during the end of 2013.
Stable Financial Performance: Fitch forecasts Molymet's revenue
generation at around USD870 million during 2014, with EBITDA in the
range of USD125 million to USD130 million as a result of expected higher
processing volumes and resulting higher by-product sales. This
expectation follows actual revenues of USD892 million in 2013, a
decrease from USD1.2 billion in 2012. Molymet exhibited positive free
cash flow (FCF) over the last three years of USD14 million in 2013,
USD98 million in 2012 and USD21 million in 2011. Fitch expects cash
flows to improve further following the company's announcement to spend
only maintenance capex of around USD12 million starting from 2015 for a
few years between investment cycles.
Deleveraging Expected: Fitch's Base Case indicates that Molymet will
deleverage over the next three years due to the end of the current
investment cycle allowing for higher molybdenum processing volumes close
to 200 million pounds a year, with the additional capacity immediately
benefitting from the Sierra Gorda contract. Fitch does not expect any
further investment in Molycorp in the short term. As a result, net
debt-to-EBITDA and funds from operations (FFO) net adjusted leverage
ratios are projected to decrease to around 2.3x and 2.5x in 2014,
respectively, and 1.3x and 1.4x in 2015. These ratios are consistent
with Molymet's historical credit profile.
Comfortable Liquidity Position: Molymet has good liquidity, with a cash
position of USD225 million as of Dec. 31, 2013, and additional access to
available lines of credit totaling over USD1 billion. The company's cash
and marketable securities decreased from USD628 million at year-end 2011
due to the Molycorp (NYSE: MCP) equity purchases. The company's
liquidity ratios were solid for the period with cash-to-short-term debt
at 2.1x and CFFO plus cash-to-short-term debt at 2.9x. Molymet's
short-term debt of USD110 million as of Dec. 31, 2013 was paid during
the first quarter of 2014 with proceeds from the capital increase.
Leading Market Position: Molymet's ratings are additionally supported by
its leading market position with 35% of the global molybdenum processor
market and geographic diversification with production facilities in
Chile, Mexico, Belgium, Germany, and China. In January 2013, Molymet
announced that it had increased its equity interest in Molycorp to 21%
from 13%, becoming its majority shareholder. Molymet invested USD435
million during 2012 and a further USD160 million in 2013 to achieve this
majority ownership in Molycorp. This strategic acquisition has provided
the company with future growth possibilities as a processor of strategic
metals.
Long-Term Strategy on Molycorp: Molymet's combined investment in
Molycorp of USD595 million over the last two years has increased the net
leverage of the company, and is a very significant sum when considering
Molymet's overall size. China currently accounts for around 97% of rare
earths production and is set to impose export quotas, providing strong
long-term fundamentals for these minerals. While this strategic
acquisition has provided the company with future growth possibilities
within the rare earths market, the poor cash flow performance of
Molycorp since 2012 relating to the Mountain Pass Project could require
further investments from shareholders.
Equity Rating: Molymet's equity rating is based on its strong credit
profile, long history of trading on the Santiago Stock exchange with a
high market capitalization of USD1.8 billion as of April 2014. The
equity rating is limited by the shares' low liquidity with a market
presence at 29.4%, with last year's average volume estimated at
USD516,000 as of April 2014. Equity indicators position Molymet in the
level 3 category.
RATING SENSITIVITIES:
A Negative Outlook or rating downgrade could follow if further
investments are made from Molymet to fund Molycorp that result in a
significant increase in the company's net debt. In addition, a
combination of the following factors could also have negative rating
momentum: a loss of major processing clients and resulting pressure on
cash flows, net debt-to-EBITDA above 2.5x for a sustained period, a
substantial loss or weakening of existing tolling contracts, or a
long-term increase in leverage throughout the next business cycle.
A substantial increase in Molymet's base EBITDA level and greater
diversification of its client base and revenue stream could lead to a
Positive Outlook or rating upgrade, as would a substantial increase in
global market share. Diversifying further down the molybdenum processing
chain would also be a positive factor for the company, as it would
cushion Molymet from the risk of clients investing in molybdenum
processing facilities of their own.
Fitch affirms Molymet's ratings as follows:
--Foreign currency long-term IDR at 'BBB';
--Local currency long-term IDR at 'BBB';
--Unsecured debt due 2018 and 2023 at 'BBB';
--National scale rating at 'A+(cl)';
--National scale rating at 'AA+(mex)';
--National scale rating at 'AAA(col)';
--Senior unsecured rating at 'A+(cl)';
--Senior unsecured rating at 'AAA(col)';
--Certificados Bursatiles 'AA+(mex)';
--National Equity Rating Level 3.
The Rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 5, 2013);
--'National Scale Ratings Criteria' (Oct. 30, 2013);
--'Evaluating Corporate Governance' (Dec. 12, 2012).
Applicable Criteria and Related Research:
National Scale Ratings Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=720082
Corporate Rating Methodology: Including Short-Term Ratings and Parent
and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139
Evaluating Corporate Governance
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=694649
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