CHICAGO--(BUSINESS WIRE)--Fitch Ratings has downgraded the Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) of Compania de Minas Buenaventura S.A.A. (Buenaventura) to 'BBB-' from 'BBB'. The Rating Outlook has been revised to Negative from Stable.
Factors leading to Buenaventura's downgrade include its consistent negative FCF generation, lower than initially expected dividends from its participation in Yanacocha and Cerro Verde going forward, risks associated with its cost structure reverting to higher levels as experienced during 2015, and that the company performed well below Fitch's base case. Fitch projects Buenaventura will have a much more profitable year in 2016 compared to 2015 due to exceptional dividends received from Yanacocha, a rebound in commodity prices, and new low-cost production coming from the Tambomayo project in the fourth quarter 2016 (4Q16).
The Negative Outlook reflects the company's need to preserve liquidity, successfully ramp-up the operations at its fully owned Tambomayo mine, and have its USD125 million loan repaid from Cerro Verde in a timely manner. An inability or unwillingness to generate positive free cash flow by 2017 and maintenance of cost reductions following a 35% decline in all-in sustaining costs throughout the year are also factored into the Negative Outlook.
KEY RATING DRIVERS
Consistent Negative FCF Generation:
Buenaventura's FCF has been negative since 2012 due to the various expansionary capex programs embarked upon just before metal prices began to decline. Fitch expects the company's FCF to remain negative in 2016, as capex requirements will remain high because of its expansionary capex plan. An ability to generate positive FCF by 2017 and on a consistent basis would be viewed favorably. EBITDA from direct operations in 1Q16 increased to USD60 million from USD45 million in 1Q15, and the USD134 million extraordinary dividend received from Yanacocha in 1Q16 restored Buenaventura to more manageable credit metric levels. Net debt-to-Adjusted EBITDA improved to 1.9x as of March 31, 2016.
Return to Low-Cost Production:
Buenaventua's cash cost of production returned to historical levels in 1Q16 following a period of higher costs amidst weak commodity prices during 2015. Costs applicable to sales at Buenaventura's direct operations in 1Q16 were as follows: gold $675/oz, silver $10.73/oz, zinc $1,525/tonne, copper $2.19/lb ($1.24/lb cash cost for Cerro Verde) and lead $1,364/tonne. The company's AISC for gold returned to being among the lowest globally at $728/oz in 1Q15 compared to its AISC of $953/oz in 4Q15 and $1,032/oz for 2015. The global average AISC was $1,564/oz during 2015 for South American producers according to the GFMS Gold Survey 2015. Buenaventura's ability to maintain its low cost of production going forward is a key consideration in revising the Outlook to Stable.
Increased Gross Debt Levels:
Buenaventura's debt levels rose steadily to USD643 million as of March 31, 2016, compared to USD423 million in 2014 and USD235 million in 2013. The company successfully concluded the re-profiling of a significant portion of its short-term debt through a new syndicated loan facility on June 30, 2016. Buenaventura's earnings are highly sensitive to gold and silver prices, which can cause volatility in cash flow generation and fluctuations in capital structure, reinforcing the importance of maintaining a low cost of production.
Leverage to Decline, but Remain Above Historical Levels
Fitch projects the company's net debt-to-adjusted EBITDA will remain below 2.0x by year-end 2016, driven by higher volumes from its fully owned mines at lower cost. Net leverage will likely remain above 1.5x the next several years. Buenaventura's credit metrics deteriorated rapidly during 2015 as weak commodity prices, the closure of its Breapampa mining operations, and higher all-in sustaining costs at several of its consolidated mines had a negative impact on profitability. These factors resulted in negative operating profits and coincided with a USD200 million increase in debt, with USD125 million of the proceeds being transferred to Cerro Verde during 4Q15 as part of the shareholder agreement with Freeport-McMoRan Inc. ('BBB-'/Negative). This exacerbated deterioration in the company's net debt-to-adjusted EBITDA, which climbed to 5.5x in 2015 from 1.3x in 2014.
Low-Cost Standalone Operations and Significant Partnerships:
Buenaventura currently operates four fully owned mining operations with production costs spread across the first and second quartile of the cost curve, and it has controlling interests in two other low-cost mining companies that it also operates: El Brocal and La Zanja. The company also possesses one associated mining operation that is not consolidated, Tantahuatay. Buenaventura is currently developing its fully owned Tambomayo mine which will ramp up production in 4Q16, and its San Gabriel project which has been delayed to preserve cash flow. A significant aspect of Buenaventura's business profile is that it has historically reached mining exploration agreements with affiliates of global mining companies. By doing so, Buenaventura benefits from access to the assets of the partners without the costs and risks of full ownership, increased exposure to new exploration technologies, synergies arising from staff collaboration, and a lower and more manageable investment burden.
Lower than Expected Dividends from Investments:
Buenaventura holds equity stakes of 43.65% in gold mine Minera Yanacocha, the largest in Latin America, and 19.58% of copper mine Cerro Verde, which is set to produce around 1 billion tons of copper during 2016. Cerro Verde is projected to begin dividend payments to Buenaventura in 2017 of approximately USD100 million or more, depending on copper prices. Buenaventura received a dividend of USD134 million from Yanacocha in 1Q16, its first dividend paid in seven years. Yanacocha reported gold production of 180,348 ounces, 27% lower than 1Q15, due to lower gold grade in 1Q16. As a result, Yanacocha's AISC increased to $994 per ounce in 1Q16 from $667 per ounce in 1Q15. The lower production levels and higher costs associated with Yanacocha could keep additional dividend levels to Buenaventura low going forward.
KEY ASSUMPTIONS
--Annual gold sales volumes decline to approximately 360,000 oz in 2016 before increasing to over 500,000 oz in 2017 and 2018.
--Silver sales volumes increased by around 18% in 2015 and should continue to grow through 2019 in-line with BVN's capex plan.
--Zinc and lead sales volumes increased 55% and 24%, respectively, and remain relatively flat thereafter.
--Copper sales increase by over 50% in 2016 and a further 8% in 2017, primarily due to high production levels at El Brocal.
--COGS increase in line with mined ore volumes grades.
--Fitch mid-cycle price assumptions used for gold, zinc and copper.
--Dividends from Cerro Verde of USD100 million starting in 2017
RATING SENSITIVITIES
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
--Deterioration in gold and silver prices and internally generated cash flow without an equal management response in the form of lowered costs, reduced spending, dividend cut, assets sales or the raising of equity.
--Net debt/Adjusted EBITDA greater than approximately 2.8x to 3.0x on a sustained basis;
--Overall regulatory framework for mining projects in Peru deteriorates and if taxes and royalties become punitive;
--Material disruptions or delays at major mine sites.
Positive: Future developments that may, individually or collectively, lead to a revision to a Stable Outlook include:
--Net debt/Adjusted EBITDA below approximately 1.5x on a sustained basis;
--Return to positive FCF generation;
--Successful start-up of new Tambomayo mine;
--Preservation of liquidity.
LIQUIDITY
Buenaventura's cash and marketable securities increased to USD181 million as of March 31, 2016, from USD78 million as of Dec. 31, 2015 due to stronger cash flow generation from direct operations coupled with USD134 million of extraordinary dividends. The company's liquidity position was negatively impacted by capex financing and a loan of USD125 million (USD600 million total from all shareholders) to its minority interest in Cerro Verde in order for Cerro Verde to comply with its 4.75x leverage covenant on its USD1.8 billion of debt outstanding at year-end 2015. Expectations are that Cerro Verde will repay most if not all of the loan back to Buenaventura in 2016 or early 2017.
FULL LIST OF RATING ACTIONS
Fitch has downgraded the following ratings:
Compania de Minas Buenaventura S.A.A. (Buenaventura)
--Long-term Foreign Currency IDR to 'BBB-' from 'BBB';
--Long-Term Local Currency IDR to 'BBB-' from 'BBB'.
The Rating Outlook has been revised to Negative.
Summary of Financial Statement Adjustments:
--No material adjustments have been made that have not been disclosed in public filings of this issuer.
Date of Relevant Rating Committee: June 30, 2016
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
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