CHICAGO & SANTIAGO, Chile--(BUSINESS WIRE)--Fitch Ratings has affirmed CAP S.A.'s (CAP) foreign and local currency Issuer Default Ratings (IDRs) at 'BBB-' and national scale rating at 'A+(cl)'. Fitch has also affirmed CAP's National Equity Rating at First Class Level '2(cl)'. The Rating Outlook is Stable. A full list of rating actions is shown at the end of this release.
CAP's ratings reflect the company's resilience within its niche iron ore pellet and other value-added product segment amidst the global downturn for iron ore prices during a period of slowing demand and increased supply. The company has exhibited robust cost reduction initiatives, reducing its cash cost to USD33/tonne in 2015 from USD49/tonne in 2014. Fitch considers the lower cost position to be sustainable for the company going forward as it involves a streamlining of the business operations alongside a less competitive commercial environment for mining equipment and services.
Further supporting CAP's ratings is its robust liquidity position with cash on balance sheet of USD617 million in 2015 compared to debt interest service of USD60 million for the year, alongside the finalization of its large investment plan in 2014, just as iron ore prices began their steep decline. Capex in 2015 reduced to just USD60 million from USD450 million in 2014. Fitch expects capex in the region of USD50 million in 2016 and 2017, resulting in positive free cash flow (FCF) generation, and cash to be maintained above USD600 million. If the iron ore price deteriorates to an extremely low level for a prolonged period, Fitch expects that CAP would significantly reduce net debt through asset sales
KEY RATING DRIVERS
Product Mix Improvement
CAP's EBITDA per tonne for its combined iron ore products in 2015 was $16/tonne compared to CSN at $10/tonne and Vale at $21/tonne. CAP's overall profitability is diluted due to its product mix that includes relatively lower margin products, such as sinter feed and lumps. CAP is increasing its shipments of high margin pellets to account for around 25% of the sales mix in 2016 from 14% in 2014. CAP's EBITDA per tonne for pellets on a standalone basis was around USD34/tonne in 2015, higher than Vale's pellets at USD31/tonne during the same period. CAP plans to increase sinter feed sales to around 21% in 2015, despite the fact it is a low margin product, as it is able to produce it at a very low cash cost, thus improving the company's overall profitability.
Cash Cost Reduction
CAP reduced its cash cost to around $33/tonne in 2015 from $49/tonne in 2014 on a FOB basis, and is expected to remain at similar levels during 2016. The significant reduction has been achieved due lower outsourcing expenses, decreasing prices of raw materials and services, and the depreciation of the Chilean Peso compared to the dollar, with approximately 40% of CAP's COGS being denominated in local currency, combined with more efficient product mix and management focus on cost cutting measures. CSH's cost reduction followed a significant reduction in headcount mainly related to the exit from the flat steel business. CAP's steel processing subsidiary, Cintac, has also been reorganized to exhibit a streamlined group structure with lower costs.
Positive Free Cash Flow
CAP's FCF was robust in 2015 at USD101 million following capex of USD60 million and dividends of USD47 million, compared to FCF of negative US313 million in 2014 pressured by high capex of USD450 million and dividends of USD105 million. Fitch expects the company to continue exhibiting stable FCF generation notwithstanding any major new investments or aggressive dividends paid to shareholders. CAP generated cash flow from operations (CFFO) of USD208 million in 2015, following a working capital outflow of USD77 million from FFO of USD285 million, with the outflow mainly due to a decrease in receivables after the end of a sales contract. This compares to CFFO of USD242 million in 2014, a figure that benefited from a working capital inflow of USD86 million.
Deleveraging expected in Two Years
CAP's capital structure has weakened through-the-cycle following the completion of its large investment program coinciding with a period of a freefall in iron ore prices, as reflected in the downgrade of the company's ratings in September 2015. Fitch expects CAP's net debt/EBITDA ratio to be around 2.8x in 2016 and 2.5x in 2017, improving to around 1.5x in 2018 supported by maintained robust FCF generation and strong liquidity. CAP's mining unit accounted for 65% of its consolidated EBITDA during 2015; while its steel business accounted for 8%; steel processing, Cintac, for 7%; and the company's fledgling infrastructure division comprising 20% (from zero in 2014). In the event of a further sustained slide in iron ore prices, the company would be able to execute a number of significant asset sales, alleviating significant increases in net leverage.
Long Life Reserves and Resources, Vertically-Integrated Assets
CAP has 2.3 billion tonnes of iron ore reserves and 7.5 billion tonnes of resources, an improvement compared to 2.2 billion and 7.2 billion, respectively, reported in 2014. This equates to over 60 years of mine life at an expected production rate of 16 million tonnes per year. The company owns and operates four mines distributed across two regions in northern Chile. These operations are complemented by three ports at equal distances across the two regions, a pellet plant with current capacity of 5.2 million tonnes per year, a magnetite plant, a desalination plant, a power transmission line, and an 80 km iron ore slurry pipeline that results in low logistical costs for the company, comparable to the low costs exhibited by Samarco S.A. (Samarco, FC IDR 'BB-'/Rating Watch Negative) prior to its production stoppage in November 2015. CAP's vertical integration is further complemented by a long steel mill with one operating blast furnace, and a specialty steel company with operations in Chile, Peru and Argentina.
The company's equity rating in level 2 is based on its highly liquid equity indicators. CAP has a long trading history with over 30 years in the Santiago stock exchange market, standing out as a valuable company in the local market. As of March, 2016 the company's market capitalization was USD442 million. The company's shares show a market presence of 99% with last year's daily average volume estimated at USD 1,342 million as of March 2016.
Fitch's key assumptions within the rating case for CAP include:
--Improved product mix with self-fluxing and direct reduction iron ore pellets comprising around 25% of sales in 2016 and beyond;
--Iron ore volumes increasing incrementally from around 14 million in 2015 to over 18 million by 2018;
--$45/t iron ore in 2016 and 2017 with $50/t being the long-term price;
--Iron ore cash cost of around USD35/t in 2016 increasing to 37 in 2017 and beyond;
--Positive EBITDA from steel and Cintac amounting to around 50 million per year;
--Cleanairtech and Tecnocap EBITDA of around $50 million per year, on average;
--Capex of around USD 50 million for 2016 and 2017.
CAP is exposed to inherent risks within the mining and steel industries. A negative rating action (a downgrade, Negative Outlook, or both) could result from deterioration in the company's capital structure that is not addressed in the short term. A sustained period of depressed iron ore prices and/or a significant loss of sales volumes due to a more accelerated slowdown in Chinese iron ore consumption that prevents the company's net debt to EBITDA ratio from declining to 2.5x and below on a sustained basis could also result in a negative rating action, as could a significant and prolonged deterioration in CAP's liquidity position and persistent negative FCF.
Positive rating action on CAP is not anticipated in the medium term in light of current iron ore price volatility
CAP's robust liquidity will partly offset the risk of further price deterioration during the year. As of December 2015, the company held cash and marketable securities of USD618 million compared to total debt of USD1.5 billion. Cash to short-term debt coverage is comfortable at 1.6x. Total debt has increased from USD1.3 million in 2014 while conversely net debt decreased from USD969 million to USD861 million. The company decided to raise all the funds available from its committed line facilities to help achieve this aim. Part of the company's financial strategy is to maintain a significant cash balance during this period of instability for commodity prices. The high cash balance allows CAP to better negotiate terms from a position of financial strength for its various agreements. The company has restricted cash of USD49 million held in its subsidiary Cleanairtech, as part of its project finance structure.
The company's debt amortization schedule is comfortable. In 2016 the company has bank debt principal payments due of around USD 120 million. CAP has USD71 million due in 2017, and USD270 million due in 2018 and USD400 million in 2019 compared to cash of USD617 million and FFO USD285 million. Cash to short-term debt coverage is at comfortable 1.6x
FULL LIST OF RATING ACTIONS
Fitch has affirmed the following ratings:
--Foreign currency at IDR 'BBB-';
--Local currency IDR at 'BBB-';
--Yankee bonds due 2036 'BBB-';
--National-scale rating at 'A+(cl)';
--National equity rating at Primera Clase Nivel 2(cl);
--Local bonds No. 434 (serie F) at 'A+(cl)';
--Local bonds No. 435 at 'A+(cl)';
--Local debt issuance program No. 591 at 'A+(cl)';
--Local debt issuance program No. 592 at 'A+(cl)'.
The Rating Outlook is Stable.
Date of Relevant Rating Committee: March 31, 2016.
Additional information is available on www.fitchratings.com.
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)
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