March 13, 2017 / 12:45 PM / a year ago

Fitch Rates First Quantum Minerals' Bonds 'B(EXP)'

(The following statement was released by the rating agency) LONDON, March 13 (Fitch) 'Fitch Ratings has assigned Canada-based First Quantum Minerals' (FQM) proposed USD1.6 billion senior notes due in 2023 and 2025 an expected 'B(EXP)' rating. The proceeds from the new notes are planned to be used to tender FQM's existing senior notes due 2019 and 2020 by way of a tender offer and redemption, repay certain other senior debt and pay fees associated with the offering. The proposed notes are rated at the same level as the Issuer Default Rating (IDR) to reflect the fact that they will be a senior unsecured obligation of FQM and will rank equally in right of payment with all existing and future senior unsecured and unsubordinated obligations. The notes are guaranteed by various group entities, which together represented 43% of consolidated group revenues for 2016. The assignment of a final rating to the notes is contingent on the receipt of documents conforming to information already received. Fitch believes that FQM's operational profile remains consistent with a 'BB' category rating. However, the rating is being driven by the company's financial profile and credit metrics, including expected leverage of about 6.5x in 2017. KEY RATING DRIVERS Improving Credit Metrics Fitch expects FQM's gross leverage (total debt/funds from operations (FFO)) to remain at about 6.5x in 2017, before materially declining to about 4x in 2018. We do not expect any improvement in leverage in 2017, as the company has hedged prices for 89% of its copper production at USD4,960/tonne. While this prevents downside price risk, which is important given the company's high capex needs, it limits the benefit FQM can receive from the increase in copper prices. The main improvement in leverage is set to be in 2018, which reflects a higher projected absolute EBITDA, from the ramp-up of projects completed in the past year (the Kansanshi copper smelter and Sentinel mine, both in Zambia), together with copper price increases. Refinancing Improves Maturity Profile Until end-2018, we project that FQM will have aggregate negative free cash flow (FCF) of about USD1.2 billion and scheduled debt repayments of USD837 million, which primarily reflect the development of the Cobre Panama mine (scheduled to begin production by end-2018). As a result, we expect the company to refinance near-term debt maturities and project gross debt to increase over this period, before decreasing in 2019. The refinancing of the 2019 and 2020 notes is positive as it improves the company's maturity profile over the rating horizon and reduces the risk of the steep bullet maturity payment in 2019 and 2020, which follows a period of high capex. Large Project Pipeline In recent years, FQM has worked through a large project pipeline, including the construction of the Kansanshi smelter and Sentinel, as well as Cobre Panama. Sentinel started commercial production in 2016, the full benefit of the new mine will be seen in 2017 and 2018. We still expect gross capex, before third-party contributions to remain high at USD1.5 billion and USD1.2 billion for 2017 and 2018, respectively, as FQM completes Cobre Panama (at 31 December 2016 the overall progress was 46%). Large Zambian Operational Exposure Assets in Zambia contributed over half of group revenues and EBITDA in 2016 and this share is expected by Fitch to increase in the short term as the Sentinel mine reaches full output. In our opinion, the business environment for miners operating in Zambia has become more uncertain over the past two years. The reasons for this include dealings with the government (enactment of new legislation for the mining sector) as well as some operational considerations, such as power shortages. Recently, however, FQM has indicated that the environment for miners has improved and the availability of power supply from Zesco has stabilised. In February 2017, Fitch affirmed Zambia's Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at 'B' with a Negative Outlook. Zambia's IDRs reflect a combination of the country's persistent fiscal deficits, which have led to a doubling of the general government debt ratio over the past five years, and structural constraints that keep economic growth below potential. These weaknesses are balanced against an improving fiscal and external outlook, enhanced monetary policy credibility and the potential implementation of a fiscal and economic adjustment agenda, which is likely to be supported by the adoption of an IMF programme. DERIVATION SUMMARY FQM has a marginally weaker competitive position in terms of scale, diversification (estimated revenue in 2017 from Zambia: 65%-70%, although this will decrease when Cobre Panama starts production) and size of mining operations compared with that of major global peers, such as Anglo American plc (BB+/Negative) and Freeport-McMonRan Inc. (BB+/Negative). However, FQM has been working through a large project pipeline in recent years, including the Sentinel mine, which started commercial production in 2016 and Cobre Panama, which will lead to an improvement to its business profile. FQM's financial profile is weaker than that of its peers; it has been affected by lower commodity prices in recent years. However, unlike its peers the company did not have the capacity to cut back capex substantially. This has led to a large debt burden for FQM. In addition, FQM will not receive the full benefit of improved copper prices in 2017 as it has hedged 89% of 2017 copper production KEY ASSUMPTIONS Fitch's key assumptions within the rating case for FQM include -Fitch's copper price assumptions: USD5,500/tonne in 2017 (89% of copper production hedged at USD4,960/tonne) USD6,000/tonne in 2018, USD6,200/tonne in 2019 and USD6,500/tonne thereafter -Volumes as per management guidance -Total capex (including third-party contribution to Cobre Panama) of about USD1.5 billion in 2017 and USD1.1 billion in 2018, decreasing to USD400 million in 2019 -Additional cash inflows from the Franco-Nevada streaming facility and the KPMC contribution as planned RATING SENSITIVITIES Positive: Developments that may, individually or collectively, lead to positive rating action include: - FFO gross leverage below 4.0x - Return to positive FCF generation Negative: Developments that may individually or collectively lead to negative rating action include: - FFO gross leverage failing to fall towards 5.0x by 2018 -Significant problems or delays at key development projects, delaying the expected improvement in EBITDA generation and credit metrics -Measures taken by the Zambian government materially adversely affecting cash flow generation or the operating environment LIQUIDITY Liquidity is Adequate: At end 2016, FQM had USD365 million of unrestricted cash (Fitch treats USD200 million of cash as restricted as it is needed to maintain the minimum level of operations), USD713 million of undrawn credit lines, USD534 million available to drawn down under the USD1 billion precious metals streaming agreement with Franco Nevada Corp, and about USD400 million from Korea Panama Mining Corp for its share of development costs for Cobre Panama. Additionally, FQM is negotiating a project finance facility for up to USD2.5 billion in respect of Cobre Panama, which the company expects to finalise towards end-2017 (we have not, however, included this facility in our base rating case). The combination of all these liquidity sources will help address the negative FCF in 2017 and 2018. Contact: Principal Analyst Roma Patel Associate Director +44 20 3530 1465 Supervisory Analyst Maria Yakushina Associate Director +44 20 3530 1315 Fitch Ratings Limited 30 North Colonnade London E14 5GN Committee Chairperson Alex Griffiths Managing Director +44 20 3530 1033 Date of Relevant Rating Committee: 13 July 2016 Summary of Financial Statement Adjustments - -USD462 million prepayment from Franco-Nevada was classified as debt and added to the total debt amount. -USD200 million cash was restricted to maintain the minimum level of operations. -USD70 million cash restricted as of end-December 2016 to secure the letters of credit issued by the company, reclassified from the long-term assets to the "restricted cash" balance-sheet line. 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