Fitch Affirms Buenaventura IDRs 'BBB'; Outlook Stable
CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the long-term foreign currency and local currency Issuer Default Ratings (IDRs) of Compania de Minas Buenaventura S.A.A. (Buenaventura) at 'BBB'. The Rating Outlook is Stable.
KEY RATING DRIVERS:
Low Cost Producer:
Buenaventura's weighted average cash cost of production is in the second quartile of the cost curve. During 2013, it was as follows: gold USD650/oz, silver USD12/oz, zinc USD900/MT, copper USD1.25/lb. This compares to a realized price of USD1,392/oz for gold, USD22/oz for silver, USD2,105/MT for zinc, and USD3.24/lb for copper. The company's all-in sustaining cost (AISC) for gold was globally competitive at USD1,100/oz in 2013, with the global average being above USD1,600/oz. In response to declining metal prices, management stopped production at four non-profitable operations (Shila-Paula, Poracota, Recuperada and Antipite) and are focussing on high-grade, low cost projects. The company expects AISCs to decrease accordingly to around USD1,000/oz during the second half of 2014 and below that level in 2015.
Conservative Approach to Debt:
Buenaventura has a 60 year track record of mining operations across Peru. As of March 31, 2014, the company had a net debt-to-LTM EBITDAR ratio of 1.5x, and it has maintained low leverage levels through various stages in the gold cycle and indicates a conservative management philosophy. Projected leverage levels indicate modest debt ratios - peaking at around 1.3x net adjusted debt/EBITDAR in 2014 and declining thereafter - and robust coverage ratios with FFO interest coverage at 26x in 2015, improving thereafter. As of 2013 on a direct operations basis, gold accounted for 49% of revenues, silver 33%, and copper 9%, with lead and zinc at 4% and 5%, respectively. The sales mix is expected to be 60% precious metals and 40% base metals by 2017.
Buenaventura has fully-funded its 2014 capex plans and as a result, reported a modest cash and marketable securities balance of USD79 million as of March 31, 2014. This compares to USD62 million at year-end 2013 and USD187 million at year-end 2012. In addition, the company has a committed line of credit with Banco de Credito Peru totalling USD150 million, currently undrawn and renewed annually. Short term debt of USD31 million is manageable, and relates to the company's finance leases that account for the majority of the USD312 million of its reported debt in March, 2014. Fitch capitalizes the company's operating leases at a multiple of 7x for Peru to report a total adjusted debt figure of USD515 million.
Robust FCF Generation:
Buenaventura's FCF generation has been strong, with positive FCF during 2009, 2010, and 2011, turning negative in 2012 and 2013 due to elevated capex. FCF was negative USD177 million in 2013 following USD503 million of capex and USD92 million of dividends, compounded by the low gold price environment. In 2012, FCF was negative USD279 million due to large capex of USD443 million and dividends of USD198 million. Fitch expects positive FCF to turn positive in 2016 following the successful execution of Tambomayo, Alejandra and production increase at Brocal.
Low-Cost Standalone Operations and Significant Partnerships:
Buenaventura currently operates nine fully owned mining operations with production costs in the second quartile of the cost curve, and has controlling interests in three other low-cost mining companies that it also operates: Colquijirca-Marcapunta, Tantahuatay and La Zanja. 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.
Energy Self Sufficiency:
Fitch views Buenaventura's energy self-sufficiency positively at a time of rising fuel costs. The company successfully completed its Huanza hydro-electrical plant during March 2014, at a total investment of USD225 million. This plant generates over 90 MW of electricity, providing 100% of energy needs to Buenaventura's direct operations of around 70 MW with the excess sold to Peru's national grid. Following completion of Huanza, combined with a number of mine closures, other projects and cost efficiency measures, the company expects to achieve around USD100 million of potential annual savings beginning this year, benefitting EBITDA going forward.
Dividends from Investments:
Buenaventura received dividends from its equity stakes in minority investments that averaged USD235 million per year from 2005-2010. These equity stakes include 43.65% of gold mine Minera Yanacocha, the largest in Latin America, and 19.58% of copper mine Cerro Verde that is set to produce over 55,0000 MT per year by 2015-2016. During the large investments being made by these companies, dividend payments to Buenaventura have been temporarily frozen. Dividends are expected to commence in 2016 once the projects are finalized. Regarding the Conga Project, a decision regarding the viability of the mine will be taken in 2015. Should it be cancelled, Yanacocha is expected to record a significant asset impairment.
A continuation of negative FCF on a sustained basis combined with net debt-to-EBITDAR levels of more than 2.0x on average would result in a negative outlook or downgrade. A change in management's philosophy toward a strong capital structure would also be viewed negatively, as would a deterioration in the company's ability to raise funding in Peru. Adverse rating actions could also occur if the overall framework toward mining projects in Peru deteriorates and if taxes and royalties turn punitive and/or due to production stoppages as a result of long-term labor strikes.
Buenaventura is at the high end of the intrinsic rating range for companies that are heavily exposed to gold and have limited country diversification. As a result, a ratings upgrade is unlikely.
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