CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) of Hochschild Mining Plc (Hochschild), and $350 million 7.75% senior unsecured notes due 2021 issued by the company's 100%-owned subsidiary in Peru, Compania Minera Ares S.A.C. (Cia Minera Ares), at 'BB+'. The Rating Outlook is Stable.
KEY RATING DRIVERS
Swift Reduction in Net Leverage:
Hochschild successfully deleveraged over the last 12 months ended June 30, 2016 to net debt/EBITDA of 1.0x as the company benefited from the successful start-up of its Inmaculada mine, coupled with a strong rally in commodity prices. Hochschild has also benefited from the removal of taxes on exports and dividends in Argentina, with a positive impact on its San Jose mining operations which account for approximately 25% of the company's EBITDA generation. Fitch projects Hochschild's net leverage to be around 0.7x for 2016 and fall to below 0.5x by 2017, absent a material change in the company's cost structure, significant acquisitions, or increased dividends.
Realization of Cost Improvements:
Hochschild's focus on cost reductions over the last 12 months have also contributed to its strong cash flow generation, as the company's all-in sustaining cost of production of silver equivalents declined to USD10.9/per ounce as of June 30, 2016 compared to USD 12.9/per ounce in 2015 and USD 17.4/per ounce in 2014. The decline in Hochschild's all-in sustaining cost of production of silver equivalents was a result of the full contribution from its Inmaculada mine, which has a standalone all-in sustaining cost of production of silver equivalents of USD9 per ounce, lower fuel and input prices, coupled with the aforementioned tax reforms in Argentina. Hochschild's ability to maintain its mining operations at lower costs will be crucial, as Fitch projects commodity prices will decline over the coming months, reducing margins and cash flow.
Positive Free Cash Flow (FCF) Generation:
Fitch expects Hochschild to generate FCF of around USD125 million in 2016 and USD90 million in 2017 following FCF of negative USD91 million in 2015 as the company benefits from its low-cost Immaculada mine coupled with reduced capex over the next several years. The company's strong performance over the LTM June 30, 2016 has allowed it to announce a dividend of USD7 million for the year. Fitch projects Hochschild will increase dividends over the next several years as the company repays its shareholder following a USD95 million equity injection during November 2015. FCF was negative since 2012 as the result of a number of acquisitions and investments, exacerbated by declining precious metal prices.
Pablo Vein Progress:
Hochschild has completed portions of the infrastructure development necessary for access to the Pablo vein the company discovered near its Pallancata mine, which is expected to further bolster the company's production and credit profile. The exploration and drilling in the area surrounding the Pablo vein is in the preliminary stage; however, expectations are that the average ore grade of Pablo is higher than that of Inmaculada, its most profitable mine,. Existing production facilities at Pallancata are expected to process the new ore from Pablo resulting in extremely low AISC estimated at around USD12-USD13/oz of silver equivalents. The ramp-up period for production at the Pablo vein is pending environmental permits, but is expected to begin during 2017. Further studies by Hochschild also resulted in the discovery of an additional vein near Pallancata called Pablo Piso, which is also high grade and should increase capacity utilization at the Pallancata operations to treating 2,350 tonnes per day by the end of 2017.
-- Average silver price of USD18.00/oz in 2016, USD17.78/oz in 2017, USD 18.02/oz in 2018, USD18.23/oz in 2019;
-- Average gold price of USD1,168/oz in 2016, USD1,100/oz thereafter;
-- Consolidated silver equivalent production of 34 million oz in 2016, 38 million oz in 2017, and 40 million oz in 2019.
Deterioration of Cost Structure:
Hochschild's ratings could be downgraded or result in a Negative Outlook following a structural shift in the company's cash cost position that resulted in sustained low operating cash flow generation and persistent negative free cash flow, affecting its ability to satisfactorily weather a period of low commodity prices. Resulting financial performance consistently worse than Fitch's base case, such as sustained total debt/EBITDA leverage above 3.5x, could trigger a negative rating action. A change in the conservative capital structure philosophy to a more aggressive one by the company's management could also impact ratings.
Positive Rating Momentum:
Ongoing improvements in Argentina's operating environment in collaboration with continued reduction in production costs to remain profitable through precious metal pricing troughs could lead to a positive rating action for Hochschild. A sustained reduction in leverage with total debt/EBITDA ratios around or below 1.5x, sustained free cash flow generation, and a reinforced liquidity position are also prerequisites for a positive rating action.
Improved Liquidity Position:
Hochschild improved its cash position to USD103 million as of June 30, 2016 from USD84 million as of Dec. 31, 2015 due to stronger cash generation from its mines (+USD75 million from Inmaculada, +USD15 million from Arcata, +USD4 million from Palancata, +USD38 million from San Jose). Additional liquidity was made available from its shareholder during 2015 of USD95 million. Reinforcing Hoschchild's strong position within its rating level, the company repaid USD105 million of debt during 2015 and an additional USD70 million during the first six months of 2016. Net debt fell to USD267 million as of June 30, 2015 compared to USD351 million as of Dec. 31, 2015. Hochschild's strategic plan is to be net debt-neutral over the coming years.
FULL LIST OF RATING ACTIONS
Fitch affirms the following ratings:
Hochschild Mining Plc
--Long-Term Foreign Currency Issuer Default Ratings (IDR) at 'BB+';
--Long-Term Local currency IDR at 'BB+'.
The Rating Outlook is Stable.
Compania Minera Ares S.A.C.
--Senior unsecured debt rating at 'BB+'.
Date of Relevant Rating Committee: Aug. 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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