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Feb 18 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has affirmed Canada-based First Quantum Minerals Ltd’s (FQM) Issuer Default Rating (IDR) and senior unsecured ratings at ‘BB’ and removed them from Rating Watch Negative (RWN). Fitch has also assigned the exchange notes due in 2020 and 2021 a ‘BB’ final rating. The Outlook on the IDR is Stable.
The rating actions follow the execution of the exchange offer and consent solicitations launched by FQM on 28 January 2014. With the early settlement of the exchange offer on 12 February 2014, the potential liquidity risk associated with the notice of default served by some of FQM (Akubra) Inc’s (Akubra, formerly Inmet) bondholders has disappeared. The group’s capital structure has also been simplified and the potential subordination risk has reduced with all bonds now ranking pari passu at the holding company (FQM) level.
The resolution of the RWN assumes that the USD2.5bn revolving credit facility (RCF) maturing in June 2014 will be successfully refinanced with a five-year USD2.5bn term loan and RCF at FQM’s level for which a mandate letter was signed on 24 January. We also assume that the USD1bn secured facility to Kansanshi will be replaced with a USD350m unsecured credit line.
The assignment of the final rating on the exchange notes follows the receipt of documents conforming to information already received and is in line with the expected ratings assigned on 30 January 2014.
Simplified Capital Structure
As of 12 February 2014, FQM had issued new 6.75% senior notes due 2020 and 7.0% senior notes due 2021, each for a principal amount of USD1,115m, to eligible holders of Akubra’s 8.75% USD1.5bn senior notes due 2020 and 7.5% USD500m senior notes due 2021. The exchange offer and solicitation expires on 24 February 2014 and any amendments under the notes are now binding for any remaining bondholders at Akubra’s level.
Concurrently, FQM completed the consent solicitation and executed a supplemental indenture on its USD350m 7.25% senior notes due 2019, aligning their terms and conditions with those of the exchange bonds. The notes now constitute a senior unsecured obligation of FQM and rank equally in right of payment between themselves and with all existing and future senior unsecured and unsubordinated obligations. They benefit from guarantees from subsidiaries representing 52% of pro forma consolidated revenues for the 12 months to September 2013 (LTM9/13).
Structural Subordination Risk Non Material
Kansanshi Mining accounted for 48% of LTM 9/13 pro forma consolidated revenues but does not guarantee FQM’s senior unsecured debt. The potential structural subordination risk is mitigated by the expected replacement of the existing USD1bn secured debt facility to Kansanshi with a new USD350m unsecured facility. We also note that with the approaching completion of the major capex projects in Zambia, Kansanshi’s external funding requirements are expected to reduce materially over the coming three years.
The group is also in the process of replacing Akubra’s USD2.5bn RCF maturing in June 2014 with a USD2.5bn five-year facility split between a USD1bn term loan and a USD1.5bn RCF at FQM level. The ‘BB’ rating assigned to the senior notes reflects our expectation that the ratio of secured or structurally senior debt to EBITDA will remain below 2.0x.
In Fitch’s opinion, successful signing of the RCF will provide sufficient funding to FQM to finance its revised capex schedule. Under Fitch’s base rating case, liquidity is supported by the new USD2.5bn facility and cash balances of about USD500m. The base case also assumes that Korea Panama Mining Corporation and Franco-Nevada will continue to contribute their proportionate shares to the funding of the Cobre Panama (CP) project.
Capex Spend and Timing
Our base case assumes capex to have peaked in 2013 at USD2.7bn, and we estimate that annual capex will remain in excess of USD2bn until 2016. FQM now plans to produce around 20% more copper from CP than originally planned by Inmet at a total cost of USD6.4bn, including USD913m incurred prior to the acquisition. This compares with Inmet’s original estimates of USD6.2bn but the increased capacity translates into reduced capital intensity. Commissioning and first concentrate production are expected in 4Q17 (2016 under Inmet’s plans).
Fitch forecasts leverage will peak in 2014, with funds from operations (FFO) gross adjusted leverage of 2.7x. With three major projects targeted for completion from mid-2014 to 2017, FQM’s development pipeline is large and challenging for its size and extends to regions in which the company has not previously operated. The associated execution risks are partly mitigated by the progress to date on the group’s projects in Zambia (Kansanshi and Sentinel).
Large Zambian Exposure
FQM’s large operational exposure to the higher-risk Zambian operating environment represents a key rating constraint. On 28 October 2013, Fitch downgraded Zambia’s Long-term foreign and local currency IDRs to ‘B’ from ‘B+’ with a Stable Outlook and its Country Ceiling to ‘B+’ from ‘BB-'. The sovereign’s expected budget deficit could translate into pressure on the mining sector, although no measures in this regard are obvious to date. The increased rating differential between FQM and Zambia is partly mitigated by the increased geographic diversification provided by the Inmet acquisition.
Negative: Future developments that may individually or collectively lead to negative rating action include:
- Sustained (two consecutive years) FFO gross leverage in excess of 2.5x, (end-2013: forecast 2.2x) indicating a move away from the company’s historically conservative financial approach.
- Significant problems or delays at key development projects resulting in a material weakening of credit metrics.
- Measures taken by the Zambian government materially adversely affecting miners’ cash flow generation or operating environment
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- Increased geographical diversification and scale from new projects.