CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the long-term foreign- and local-currency Issuer Default Ratings (IDRs) of Cobre del Mayo S.A. de C.V. (CdM) at 'B', and the rating for its senior unsecured 10.75% notes due 2018 at 'B/RR4'. The Rating Outlook is Stable.
KEY RATING DRIVERS
CdM's parent companies, Frontera Copper Corporation, S.A.P.I. de C.V. (FCC) and Frontera Cobre del Mayo Mexico S.A. de C.V. (FCDM), demonstrated commitment to preserving CdM's sound capital structure by purchasing 100% of the equity of Kupari Holdings S.A. (KH) for USD220 million on Oct. 13, 2014 and contributing this asset to CdM. KH is the parent company of Kupari Metals S.A.'s (KM) flotation plant adjacent to the Piedras Verdes mine. This transaction fully integrates KM into CdM and will enhance the company's profile as a combined entity through a variety of operational synergies while also diversifying operational risk across two processes and two different copper products.
CdM exhibits a robust capital structure for its rating category. The integration of the flotation plant into CdM will increase total debt to around USD320 million from USD244 million on June 30, 2014, and will decrease total debt to EBITDA to around 3.0x from 3.2x for the LTM to June 30, 2014, on a pro forma basis. Fitch's Base Case indicates this ratio will reduce to around 2.4x in 2015 once the full-year's production of copper concentrates of around 50,000 metric tons is realized. Fitch expects CdM to generate EBITDA of around USD90 million in 2014 including incremental benefit during the last quarter from KM, and USD137 million in 2015 that fully incorporates the copper concentrate sales from the flotation plant. Fitch's Base Case projections for CdM use its mid-cycle commodity price assumptions for copper of USD3.08/lb in 2014, USD2.95/lb in 2015 and 2016, and USD2.72/lb thereafter. Cash flow from operations (CFFO) is expected at around USD45 million in 2014, although free cash flow (FCF) is expected to turn negative due to higher capex of around USD50 million for the year.
No Upstream Dividends to Service Acquisition Debt:
Historically, CdM has not paid dividends. No dividend payments are required going forward to service any acquisition-related debt at the parent company level. The funds to buy KM were provided by the group's ultimate parent, Invecture Group, S.A. de C.V., and allowed FCC and FCDM to purchase KM on CdM's behalf. FCDM previously committed to sell copper ore to KM and KM committed to purchase and process copper oxide ores for an initial fixed term of 10 years in February 2012. This required KM to build and operate a flotation plant adjacent to Piedras Verdes, which CdM now fully owns and operates as a result of its parent companies' transactions. KM began operating the flotation plant in March 2013, producing an average 37.6 metric tons per day (tpd) of copper in the form of a concentrate.
CdM conducts its mining operations entirely out of Mexico's third largest copper mine, Piedras Verdes. This heightens the risk of production stoppages due to accidents, labor unrest and weather events. On a normal basis, the mine operates 24 hours a day, 365 days a year. The mine is closely located to two main towns in the state of Sonora, Alamos and Navojoa. The Piedras Verdes mine is rich in copper deposits, but does not have any significant by-products to offset the volatility of copper prices. As a result, its fortunes are directly linked to the dynamics of copper demand. CdM had a cash cost (C1) of USD1.99/lb of copper during 2013 and USD1.97/lb in the second quarter of 2014. This calculation places CdM in the second quartile of the cash curve when excluding by-product credits, and third quartile when including by-product credits.
Stable FCF Generation:
CdM's performance in 2013 exceeded Fitch's Base Case expectations with revenues of USD252 million and EBITDA of USD92 million, compared to expectations of USD247 million and USD85 million, respectively. This was achieved despite the operational difficulties in the copper leaching process encountered during the last quarter of 2013 that lowered copper output, exacerbated by heavy rains. These heap leach issues were resolved during April 2014. CdM has continued to generate positive FCF since 2010, with FCF of USD17 million in 2013 compared to USD37 million in 2012. Copper prices were higher at around $3.60/lb in 2012 compared to around $3.34/lb in 2013. This level of FCF generation was the result of the company having invested heavily in the capex-intensive start-up years of 2009 and 2010, at USD82 million and USD76 million, respectively. Total capex was manageable in 2013 at USD42 million, with maintenance capex expected at around USD10-USD15 million a year.
CdM's cash balance as of June 30, 2014 was USD21 million compared to short-term debt of USD6 million, providing headroom. Total debt was USD244 million for the period, with the majority consisting of the company's USD225 million 10.75% notes due 2018. The remaining debt mainly relates to capital leases with Caterpillar. The company's stable operational track record since 2010 and increased sales volumes over the next few years as a result of the flotation plant acquisition should allow for a successful refinancing of CdM's 10.75% senior unsecured notes due 2018. Anticipated higher interest rates may possibly complicate the refinancing process, but should not pose an obstacle if the company continues to perform satisfactorily and continues to replenish and extend its mine life, currently at 16 years. CdM also has a committed credit line of USD100 million with Banco Azteca, to be used as a guarantee for debt service payments to creditors, should the company require it.
Single Commodity and Asset Exposure:
Events such as prolonged strikes or mine closures that would halt or significantly lower copper production, without sufficient business interruption insurance, could lead to a downgrade. Large debt-funded acquisitions may also pressure the ratings. CdM's ratings could also be downgraded if copper prices decline significantly below Fitch's long-term price of USD2.72/lb and net debt to EBITDA increases above 4.5x on a sustained basis.
Risk Diversification is Key:
Manageable, equity-funded acquisitions of other mines to dissipate single-mine risk and diversifying CdM's commodity profile could lead to an upgrade, should leverage ratios remain consistently at around 2.5x total debt to EBITDA on a pro forma basis.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (May 28, 2014);
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage