Fitch Affirms Codelco's IDR at 'A+'; Outlook Stable

CHICAGO--()--Fitch Ratings has affirmed its ratings on Corporacion Nacional del Cobre (Codelco), including the company's Issuer Default Rating (IDR) of 'A+' with a Stable Outlook. A full list of ratings is provided at the end of this release.

KEY RATING DRIVERS:

Sovereign Ownership:

The ratings reflect Codelco's 100% ownership by the government of Chile and its strategic importance to the country. Due to its status as a state-owned enterprise, Codelco is subject to a law that stipulates its entire net income be transferred to the Chilean Treasury, in addition to taxes and dividends paid. Chile's new administration announced a capitalization measure intended to finance part of Codelco's ambitious capex program for the next four years ending in 2018. The capex program is essential to maintain current copper volume output levels in light of declining ore grades at its aging mines, with a long-term aim of increasing annual output to above 2 million metric tons.

Increasing Pressure on Credit Profile:

Codelco exhibits a weakened standalone credit profile as a result of higher debt levels used to finance its large capex program. As of June 30, 2014, the company had USD13 billion of debt compared to USD11 billion as of June 30, 2013. Codelco's total debt-to-latest 12 months (LTM) EBITDA ratio for the same period was 2.5x compared to 1.4x in June 2013, and its net debt-to EBITDA ratio was 2.3x versus 1.3x. These leverage ratios include the debt used to acquire the 20% stake in Anglo-American Sur (AAS) with Mitsui that is non-recourse to Codelco. Excluding the non-recourse debt, these ratios stand at 2.2x and 2.0x, respectively, for the period. The higher leverage ratios have also been exacerbated by lower copper prices of around USD3/lb currently compared to USD3.16/lb in 2013. Fitch expects the government to continue to support the company during this critical period.

Rating Ties Reinforced following Capitalization Announcement:

Despite the company's standalone credit profile deterioration, rating fundamentals remain solid based on the strategic importance of Codelco to the Republic of Chile and recent government funding. The new bill recently approved by the Lower House of Congress for capitalization of USD4 billion from 2014 to 2018 demonstrates a level of commitment that reinforces Codelco's rating ties to the sovereign. This bill is currently in the Upper House of Congress for final discussion and approval. Fitch expects this measure to be approved in some, or all, of its entirety. Leverage ratios are expected to further deteriorate during the period of high investments. Fitch's Base Case indicates net debt-to-EBITDA ratios to increase from 2.5x LTM 1H'14 to around 3.5x in 2017 considering Fitch's mid-cycle copper price projections of USD3.08/lb, decreasing to USD 2.95/lb in 2015 and 2016, and USD 2.72/lb in 2017.

Key Strategic Asset for Chile:

Codelco possesses immense copper deposits, accounting for 9% of the world's known proven and probable reserves and holds a leading global position in the copper mining industry, accounting for 10% of the world's annual copper output with 1.8 million metric tons of production. This includes output from its share of the El Abra mine deposit during 2013. Fitch views Codelco's long-life reserves as a strategic asset, because it should allow the company to remain an important contributor to government revenues in the future. Fitch has witnessed financial support from the government in the form of lower dividends and the permitting of larger allocations of capital so that the company can improve its capital structure to fund its investment program. The pending approval of the largest capitalization for a state-owned company in Chilean history further signifies Codelco's strategic importance for the country.

Second-Quartile Cost Position:

The company's position as a second-quartile cash-cost producer of copper also provides a cushion against future volatility in copper price fluctuations. Codelco's cash cost of production including by-products for 1H'14 was USD1.58 per pound, an improvement on USD1.71 per pound during 1H'13, mainly as a result of savings in materials, energy, exchange rate differences and higher by-product credits mainly due to higher molybdenum production. Copper prices currently remain around USD3.00 per pound. As a result, Codelco's financial performance was resilient for the LTM to June 30, 2014, with USD14.3 billion of revenues. However, LTM EBITDA of USD5.2 billion is subject to large tax obligations, pressuring funds from operations (FFO), and debt is higher than historical levels due to the elevated capex.

Liquidity Remains Solid:

Due to the nature of Codelco's government ownership, the company historically held a comfortable cash and marketable securities balance in relation to its short-term debt. As of June 30, 2014, cash and marketable securities was USD933 million and the company's liquidity position was solid with cash + marketable securities + CFFO to short-term debt coverage at 2.3x. Codelco successfully issued EUR600 million 2.25% senior unsecured notes due 2024 in July 2014 to be used for a combination of corporate purposes including capex and refinancing of short-term debt obligations.

RATING SENSITIVITIES

Codelco's operational and financial challenges mainly concern its ambitious capital expenditure plans up to 2020. The capex plan relates to maintaining and increasing current volume output levels and improving average ore grades that are essential to maintaining the company's global position as a producer of copper in the future. The capitalization bill put forward by the government demonstrates commitment to the company during this period. Because of its 100% ownership by the government of Chile, sovereign rating actions on the country, in the form of an Outlook revision, or upgrade or downgrade, will be reflected in Codelco's ratings.

Continuing government support to Codelco in the form of lower dividends, capitalizations, asset sales and/or a combination of all three during the next five years are integral to maintain a standalone investment-grade profile for Codelco's capital structure. Should this support not be forthcoming to the level Fitch would expect in order to maintain the rating linkage between Codelco and the Republic of Chile, and credit metrics remain significantly elevated beyond Fitch's Base Case assumptions for an extended period, a decoupling of the ratings could take place.

Fitch affirms Codelco's ratings as follows:

--Foreign currency Issuer Default Rating (IDR) at 'A+';

--Local currency IDR at 'AA-';

--US$950 million 5.625% bonds due October 18, 2043 at 'A+;

--US$EUR 600 notes due July 2024 at 'A+'

--US$500 million 4.75% notes due Oct. 15, 2014 at 'A+';

--US$500 million 5.625% notes due Sept. 21, 2035 at 'A+';

--US$500 million 6.15% notes due Oct. 24, 2036 at 'A+';

--US$600 million 7.5% notes due Jan. 15, 2019 at 'A+';

--US$1 billion 3.75% notes due November 2020 at 'A+';

--US$1.15 billion 3.875% notes due November 2021 at 'A+';

--US$1.25 billion 3% notes due July 17, 2022 at 'A+';

--US$750 million 4.25% notes due July 17, 2042 at 'A+';

--US$750 million 4.5% notes due August 13, 2023 at 'A+';

--National scale rating at 'AAA(cl)';

--UF6.9 million 3.29% notes due April 1, 2025 at 'AAA(cl)';

--UF11 million Undrawn Line Program No. 608 at 'AAA(cl)'.

The Rating Outlook is Stable.

Additional information is available at 'www.fitchratings.com'

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (May 28, 2014);

--'National Ratings - Methodology Update' (Jan. 19, 2011).

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=749393

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=890354

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Contacts

Fitch Ratings
Primary Analyst
Jay Djemal, +1-312-368-3134
Director
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602 USA
or
Secondary Analyst
Alejandra Fernandez, +562-499-33-23
Director
or
Committee Chairperson
Monica Bonar, +1-212-908-0579
Senior Director
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Jay Djemal, +1-312-368-3134
Director
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602 USA
or
Secondary Analyst
Alejandra Fernandez, +562-499-33-23
Director
or
Committee Chairperson
Monica Bonar, +1-212-908-0579
Senior Director
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com