CHICAGO & SANTIAGO, Chile--(BUSINESS WIRE)--Fitch Ratings has affirmed Molibdenos y Metales S.A.'s (Molymet) foreign and local currency Issuer Default Ratings (IDRs) at 'BBB' and national scale ratings at 'A+(cl)' and 'AA+(mex)'. The Outlook is Stable. A full list of rating actions follows at the end of this release.
KEY RATING DRIVERS
Strong Historical Credit Profile:
Molymet's investment-grade ratings reflect the company's strong capital structure, as demonstrated by its average net debt-to-EBITDA ratio of 0.3x from 2009 - 2012. The company also benefits from its stable Tolling and By-products business lines, together accounting for approximately 70% of 2012 EBITDA and providing considerable cash flow stability due to the long-term nature of its contracts. Molymet's ratings are additionally supported by its leading market position and geographic diversification as a processor of molybdenum ore and rhenium with production facilities in Chile, Mexico, Belgium, Germany, and China.
Diversification into Rare Earth Elements:
In January 2013, Molymet announced that it had increased its equity interest in Molycorp Inc. (Molycorp) to 19.73% from 13.64% in 2012, with the company being the largest shareholder. Molymet invested a total of USD435 million over four transactions during 2012 and a further USD90 million in 2013, funded by cash, to achieve this ownership stake in Molycorp. This strategic acquisition has provided the company with future growth possibilities within the rare earths market and underlines its leading position within strategic metals globally, although net debt has increased as a result of this cash acquisition. Dividends from Molycorp are not expected until 2017.
Net Debt Increase:
Molymet's total debt decreased slightly to USD494 million in 2012 from USD497 million in 2011, but its leverage ratios increased. This was due to the decrease in cash as a result of the Molycorp investments, and lower EBITDA generation due to a decrease in molybdenum prices to USD12.70 per pound in 2012 from USD15.50 per pound in 2011 affecting the 'Own Sales' business line. The company's net debt-to-EBITDA ratio as of 2012 increased to 1.5x from negative 0.7x at year-end 2011, although the lower ratios were a result of the company's capital increase in 2010.
Fitch expects Molymet to maintain a net debt to EBITDA ratio around 2.0x - 2.4x on average, taking into account the fifth Molycorp equity stake purchase made from cash in January 2013, to remain commensurate with the rating category. Molymet it is not exposed to the volatility that is inherent in other metals and mining companies, and benefits from a cash generative business model.
Comfortable Liquidity Profile:
Molymet has good liquidity, with a cash position of USD271 million as of Dec. 31, 2012 and additional access to available committed lines of credit. Molymet's cash balance decreased from USD628 million at year-end 2011 due to the Molycorp equity purchases. The company's liquidity ratios were solid for the period with cash to short-term debt at 1.8x and CFFO plus cash to short-term debt at 3.2x.
Molymet's short-term debt of USD146 million as of Dec. 31, 2012 was successfully refinanced during 1Q13 with two new bond issuances in Mexico (5th and 6th) totaling approximately USD158 million.
Stable Financial Performance:
Fitch forecasts Molymet's revenue generation at around USD1 billion during 2013, with EBITDA in the range of USD130 million-USD140 million as a result of a moderate decline in molybdenum and rhenium prices, offset by stable tolling contracts and by-product sales. This compares to actual revenues of USD1.2 billion in 2012, a decrease from USD1.3 billion in 2010, notwithstanding processing volumes similar to 2010 levels. EBITDA margins are expected to end the year at around 13%-14%.
Investments for Increased Production Capacity:
The company has a manageable investment plan relating to future processing capacity expansion, to be funded through a combination of internal cash generation and new debt over the next three years. In Chile, the projects include a USD38 million processing capacity increase of the Mejillones plant by an additional 33 million pounds per year and a new facility at Molynor for cleaning molybdenum concentrates for USD37 million to allow more efficiency recovery of moly and other minerals.
In Mexico, the company is going to invest in a new catalysts recycling plant at Molymex for USD90 million to allow for the recovery of molybdenum, cobalt, nickel and vanadium. This investment is targeted to improve the company's byproducts business line: Lower Molybdenum Oxide
Prices Expected; Working Capital to Benefit:
As a molybdenum ore processor, the company's working capital requirements increase dramatically in periods of rising prices, and correspondingly decline when prices fall. The company is only able to benefit from sizeable working capital inflows on the way down in the cycle and needs to fund working capital requirements in the upturn as prices go up exponentially. As a result, the company reported a working capital inflow of USD64 million in 2012 compared to an outflow of USD19.6 million in 2011 as molybdenum prices reduced to USD12.70 per pound on average in 2012 from USD15.50 per pound on average in 2011.
Fitch expects Molymet to generate positive FCF of around USD85 million after capex and dividends in 2013. The projected FCF benefits from an expected lower molybdenum price of around USD11 per pound in 2013 compared to USD12.70 per pound in 2013, resulting in a working capital inflow. The company's cash flow generation is directly linked to the fluctuation in molybdenum prices with large increases in working capital requirements as prices rise, and lower working capital when they fall. For every USD1 rise in the price of molybdenum, the company requires approximately USD15 million of working capital; high cash levels and availability of committed lines of credit totaling USD797 million are more than sufficient to support an increase in working capital needs.
RATING SENSITIVITIES
A Negative Outlook or rating downgrade could be triggered by a combination of some of the following factors: a large acquisition that increases net debt to above 2.5x for a sustained period, a loss of major processing clients, a substantial loss or weakening of existing tolling contracts.
A substantial increase in Molymet's base EBITDA level and greater diversification of its client base and revenue stream could lead to a Positive Outlook or rating upgrade, as would a substantial increase in global market share. Significantly diversifying the company's revenues would also be a positive factor for the company, as it would cushion Molymet from the risk of clients investing in molybdenum processing facilities of their own.
Fitch affirms Molymet's ratings as follows:
--Foreign currency long-term IDR at 'BBB';
--Local currency long-term IDR at 'BBB';
--National scale rating at 'A+(cl)';
--National scale rating at 'AA+(mex)';
--Senior unsecured rating at 'A+(cl)';
--Certificados Bursatiles 'AA+(mex)'.
--National Equity Rating Level 3;
--Unsecured debt due 2018 and 2023 at 'BBB'.
The Rating Outlook is Stable.
Additional information is available at www.fitchratings.com.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'National Ratings Criteria' (Jan. 19, 2011);
--'Evaluating Corporate Governance' (Dec. 12, 2012).
Applicable Criteria and Related Research
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460
National Ratings Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=595885
Evaluating Corporate Governance
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=694649
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=790409
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