Fitch Affirms Compania Minera Milpo's IDRs at 'BBB'; Outlook Stable

CHICAGO--()--Fitch Ratings has affirmed Compania Minera Milpo S.A.A.'s (Milpo) long-term Issuer Default Rating (IDR) at 'BBB' and its senior unsecured notes up to USD350 million at 'BBB'. The Rating Outlook is Stable. A complete list of ratings is provided at the end of this release.

KEY RATING DRIVERS

Low-Cost Polymetals Miner:

Cash flow generation at Milpo has historically been robust due to its competitive position on the cost curve. Milpo's consolidated cash cost of production improved to USD35 per metric ton (mt) of treated ore in 2013 from USD36.11 per mt in 2012 following an operational efficiency optimization program that included a streamlining of expenses. As a result, the company improved its EBITDA margin to 36% in 2013 from 29% in 2012. During the fourth quarter of 2013 (4Q'13) the average price of silver declined by 36.4% compared to 4Q'12, while prices of base metals such as zinc and copper decreased by 2.2% and 9.6%, respectively, over the same period. In contrast to this trend, lead prices demonstrated a price increase of 5.1% year-over-year.

The company is a diversified, low-cost polymetals miner majority-owned by Votorantim Participacoes S.A. of Brazil (VPAR, LT FC IDR 'BBB'/Negative) with zinc accounting for 41% of 2013 revenues, followed by copper 33%, silver 19%, lead 6% and gold 1%. These revenues were mainly generated by the company's three mines located in Peru, with the largest mine, Cerro Lindo, accounting for 66% of revenues during 2013 followed by El Porvenir 19% and Atacocha 14%. Two mines that produced copper cathodes matured reaching the end of their mine life and were suspended: Chapi (Moquegua-Peru) in 2013 and Ivan (Antofagasta-Chile) in 2012. Milpo's largest customer in 2013 was Glencore, accounting for 54% of revenues, followed by Votorantim Metais (29%) and Trafigura (16%). The company enters into five-year supply contracts that have historically been renewed.

Strong Cash Flow Generation to Partially Fund Capex Plan:

Reflecting the cost optimization program and more cautious approach to growth capex at a time of lower metal prices, the company generated positive free cash flow (FCF) of USD87 million in 2013 following modest capex with a focus on Brownfield projects of USD84 million, and no dividends paid from the prior year's net profit. This compared to FCF of negative USD70 million in 2012 following capex of USD248 million (of which approximately USD170 million related to expansion), and USD7 million of dividends. Milpo's investment plan of USD1.4 billion to expand production and modernize facilities has been extended further than the originally targeted completion date of 2017, due to lower commodity prices. The change in the company's growth strategy followed the appointment of the company's CEO, Victor Gobitz in June 2013. Mr. Gobitz previously held positions at Rio Alto and Volcan Compania Minera S.A.A. (Volcan, FC LT IDR 'BBB-'/Stable), and has a technical background in mining.

Going forward, under the lower price scenario, Milpo will be focused on Brownfield projects for its current operations and the development of Greenfield projects in phases depending on cash generation. Capex will continue to be partially funded by internal cash flows, with the shortfalls funded by additional debt but maintaining a conservative leverage level. Fitch's Base Case for Milpo uses the agency's conservative mid-cycle price assumptions and indicates that EBITDA will decline to around USD210 million in 2014 due to zinc prices at USD1,900 per mt and copper prices at USD7,000 per mt. This includes Fitch's expectation of an increase in volumes at the Cerro Lindo and Atacocha mines following the plants' optimization programmes. As a result, FCF is close to neutral in 2014, trending negative by around USD40 million in 2015 to 2016 as capex and dividend payments begin to increase.

Conservative Leverage Profile and Robust Liquidity:

Milpo exhibits a conservative capital structure with funds from operations (FFO) adjusted leverage of 1.9x and net debt-to-EBITDA of 0.2x at December 2013. These ratios compare to FFO adjusted leverage of 1.1x and net debt-to-EBITDA of 0.7x in 2012. Milpo's net debt-to-EBITDA ratio decreased in 2013 mainly as a result of higher EBITDA and cash post issuance of its USD350 million 4.625% senior unsecured notes due 2023 last year. Projected leverage remains strong for the rating category in the Base Case with total debt-to-EBITDA never exceeding 2.0x and net debt-to-EBITDA never exceeding 1.5x. FFO adjusted leverage is expected to be around 2.0x in 2014.

Milpo's liquidity position is strong. At December 2013, the company held USD342 million of cash and marketable securities versus short-term debt of USD20 million, a coverage ratio of 16.6x. A portion of the proceeds from the USD350 million senior unsecured notes issuance refinanced USD179 million of Milpo's bank debt in March 2013, extending its debt maturity schedule to 10 years, with the rest of the notes balance held as cash. The company relies primarily on strong internal cash flow generation to meet its operational requirements, but also benefits from good relationships with local and international financial institutions. In addition, Milpo benefits from access to commercial advances from its key clients.

Revenues, EBITDA and Margin Improvements in 2013 vs 2012:

Milpo's revenues for 2013 increased to USD720 million from USD696 million in 2012 due to the increase in metal production off-setting the price decline. EBITDA increased to USD257 million in 2013 from USD204 million in 2012 due to higher production levels at the Cerro Lindo unit at a lower production cash cost. Fitch expects Milpo to improve its EBITDA margins closer to historical levels of around 40% when new, more profitable projects come into production in 2017. The erosion in the company's 2012 EBITDA margin when compared to 2011 (29.5% vs. 43.2%) was due to a 10% price decline for the metals that Milpo produced over the past two years, and the negative EBITDA contributions from the closure of the copper mines Chapi and Ivan. The cost associated with the closing of operations at Chapi and Ivan had a negative impact on EBITDA in 2012 of USD40 million.

As of 2013, Milpo had six years of mine life and 19 years of reserves and resources according to the Joint Ore Reserves Committee (JORC) Code, considered relatively low for the rating category as per Fitch's metals and mining Sector Credit Factors. Offsetting this, the company has a strong track record of replacing the reserves mined each year, and is growing its resources. Milpo has been granted a total of 352,969 hectares of mining concessions in Peru (89%) and Chile (11%), of which 53% are 28 prospects in the initial exploration stage, 31% are 12 targets in the scoping study, resources definition, and drilling stage, 9% are three key advance projects - Hilarion, Magistral and Pukaqaqa - under pre-feasibility, and 7% are the main three operating mines, Cerro Lindo, El Porvenir and Atacocha.

Rating Linkage Supported by Strong Legal and Operational Ties:

Milpo is listed as a 'Material Subsidiary' for the cross-default and acceleration provisions on approximately BRL11.4 billion of Votorantim debt as of Dec. 31. 2012. Accordingly, Fitch links Milpo's credit strength to that of its parent. Parental support from VPAR to Milpo is considered very strong, as financial weakness at Milpo could trigger cross-defaults for VPAR. Operationally, Milpo supplied 45% of total zinc concentrate volumes to Votorantim Metais' Cajamarquilla zinc refinery and contributed 37% of Votorantim Metais' EBITDA during 2012. Votorantim Metais consolidates 100% of Milpo because of the majority ownership.

Milpo is a key component of VPAR's metals and mining strategy to significantly grow their metals and mining division, Votorantim Metais. Milpo's location in Peru and its position as a local mining company provides VPAR with favorable access to Peru's abundant geological resources and vibrant market. Milpo is a low-cost producer of zinc, ranking 10th in size on a standalone basis globally in 2011, with broad asset diversification in Peru and Chile. Combined, Milpo and Votorantim Metais ranked as the world's fifth largest producer of zinc in 2011. Votorantim Metais has invested USD720 million in Milpo since 2005.

RATING SENSITIVITIES

Milpo's ratings benefit from its majority ownership by VPAR because of its strong operational and legal ties, based on Fitch's Parent and Subsidiary linkage criteria. Should the current level of operational and legal ties change as a result of Votorantim divesting its ownership stake in Milpo, then a rating action based on Milpo's standalone credit profile could follow.

If Milpo encountered operational and financial difficulty, Fitch would expect Votorantim to take steps to demonstrate support of its subsidiary. Precedents for Votorantim assisting companies where it has a significant investment stake exist, such as with the recapitalization of Fibria (VPAR owns 29.34% of common stock) with BNDES during 2010. Should such support not be forthcoming, a rating downgrade could take place.

Milpo's ratings would also be downgraded following a rating downgrade of VPAR.

Fitch affirms the following ratings of Milpo:

--Local currency IDR at 'BBB';

--Foreign currency IDR at 'BBB';

--USD350 million, 4.625% senior unsecured notes due 2023 at 'BBB'.

The Rating Outlook is Stable.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (Aug. 5, 2013);

--'Evaluating Corporate Governance' (Dec. 12, 2012);

--'Parent and Subsidiary Rating Linkage' (Aug. 5, 2013);

--'Initiating Mid-Cycle Metals Price Assumptions, (Sept. 14, 2012).

Applicable Criteria and Related Research:

Initiating Mid-Cycle Metals Price Assumptions
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=681333

Parent and Subsidiary Rating Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685552

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

Additional Disclosure

Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=822106

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Contacts

Fitch Ratings
Primary Analyst
Jay Djemal, +1-312-368-3134
Director
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Josseline Jenssen, +51-999-108-046
Director
or
Committee Chairperson
Joe Bormann, CFA, +1-312-368-3349
Managing Director
or
Media Relations, New York
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Jay Djemal, +1-312-368-3134
Director
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Josseline Jenssen, +51-999-108-046
Director
or
Committee Chairperson
Joe Bormann, CFA, +1-312-368-3349
Managing Director
or
Media Relations, New York
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com