CHICAGO & SANTIAGO, Chile--(BUSINESS WIRE)--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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