Fitch Downgrades Cobre del Mayo's Ratings to 'C'

CHICAGO--()--Fitch Ratings has downgraded the long-term foreign and local currency Issuer Default Ratings (IDRs) of Cobre del Mayo S.A. de C.V. (CdM) to 'C' from 'CCC', and the rating for its senior unsecured 10.75% notes due 2018 to 'C/RR4' from 'CCC/RR4'. Fitch also downgraded CdM's national rating to 'C(mex)' from 'CCC(mex)'.

KEY RATING DRIVERS

Restructuring Announced:

CdM announced it has hired Jefferies LLC and BCP Securities LLC to restructure the company following a prolonged period of low copper prices combined with a number of operational difficulties that have decreased production levels. The company announced cash cost guidance of between $2.10/lb-$2.35/lb for 2016 that remains elevated above Fitch's prior expectations of between $1.80/lb to $2/lb, following a high cash cost of $2.69/lb in 3Q15, a level at which the company was loss making.

No Further Shareholder Support Expected:

Frontera Copper Corp. (FCC), the parent company of CdM, provided a $13 million secured loan with an interest rate of 10.75% to CdM to enable it to meet the coupon payment on its $217 million notes due 2018 on Nov. 13, 2015, as expected by Fitch. This secured loan has a tenor of one year. CdM announced that no further shareholder support should be assumed during its 3Q15 conference call on Nov. 24, 2015. Should copper prices remain close to CdM's production cash cost level, with Fitch's copper price assumptions at $2.50/lb in 2016 and $2.72/lb in 2017, the company will be unable to meet its next coupon payment due in May 2016 from internal cash flow generation.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for CdM include:

--Copper price of $2.50/lb in 2016;

--C1 cash cost of $2.41/lb during 2016 resulting in a cash burn of over negative $20 million absent debt restructuring;

--Copper cathodes sold of approximately 25,000 tonnes in tonnes in 2016.

RATING SENSITIVITIES

A default on the company's debt obligations during 2016 is considered high. Fitch's base case indicates that CdM will likely experience a continued challenging operating scenario next year due to its third-quartile cost of production, combined with a continued period of copper prices remaining around CdM's cash cost of production.

A ratings upgrade is considered unlikely prior to the possible restructuring that may take place.

LIQUIDITY

CdM's liquidity position is insufficient with cash and marketable securities of $5.5 million as of Sept. 30, 2015. The company received a $13 million secured loan from FCC on Nov. 3, 2015 to allow it to meet the coupon payment for its 10.75% senior unsecured $217 million notes due 2018. The next coupon of approximately $12 million is due in May 2016. Fitch's base case assumptions, absent a debt restructuring, indicate this next payment will not be met by CdM from its internal cash flow generation. Additional shareholder support is not expected.

FULL LIST OF RATING ACTIONS

Fitch has downgraded the following ratings:

Cobre del Mayo S.A. de C.V.

--Long-term foreign currency IDR to 'C' from 'CCC';

--Long-term local currency IDR to 'C' from 'CCC';

--Senior unsecured 10.75% notes due 2018 to 'C/RR4' from 'CCC/RR4';

--National long-term rating to 'C(mex)' from 'CCC(mex)'.

Date of Relevant Rating Committee: Nov. 24, 2015.

Additional information is available on www.fitchratings.com.

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=995354

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=995354

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Jay Djemal
Director
+1-312-368-3134
Fitch Ratings, Inc.
70 West Madison St.
Chicago, IL 60602
or
Secondary Analyst
Alberto Des los Santos
Associate Director
+52 81 8399 9100
or
Committee Chairperson
Joe Bormann, CFA
Managing Director
+1-312-368-3349
or
Media Relations:
Hannah James, +1 646-582-4947
hannah.james@fitchratings.com
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Jay Djemal
Director
+1-312-368-3134
Fitch Ratings, Inc.
70 West Madison St.
Chicago, IL 60602
or
Secondary Analyst
Alberto Des los Santos
Associate Director
+52 81 8399 9100
or
Committee Chairperson
Joe Bormann, CFA
Managing Director
+1-312-368-3349
or
Media Relations:
Hannah James, +1 646-582-4947
hannah.james@fitchratings.com
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com