Fitch Ratings-London-July 18:
Fitch Ratings has affirmed Canada-based First Quantum Minerals Ltd.'s (FQM) Long-Term Issuer Default Rating (IDR) and senior unsecured rating at 'B'.
The Outlook on the Long-Term IDR is Stable. The Recovery Rating for its senior unsecured issues is 'RR4'. The affirmation reflects that FQM is approaching commercial production at its greenfield project in Panama, continues to report solid operational performance and benefits from a benign copper price outlook coupled with a mid-ranking cost position.
At the same time, fiscal measures in Zambia have delayed the deleveraging path and we now expect the group's credit metrics could remain above our negative sensitivity of FFO gross adjusted leverage of 5.0x until end-2020 (instead of end-2019). The rating is constrained by material exposure to the operating environment in Zambia and high leverage, following a prolonged period of high capital investment.
Key Rating Drivers Cobre Panama Commissioned: The large greenfield project Cobre Panama (90% ownership), with a total capital spend of USD6.3 billion and an annual design throughput capacity of 85m tonnes of ore per annum, expanding to 100m tonnes throughput in 2023, was commissioned earlier this year. First ore was introduced into the milling circuit in February, with the first copper concentrate shipment in June. Output is increasing to plan and FQM's management has guided that they may declare commercial production towards end-2019.Production guidance for 2019 indicates 140,000 to 175,000 tonnes, rising to 270,000-300,000 tonnes in 2020, a 50% increase in copper production for the group.
Reduced execution risks and more certainty over the near-term production from Cobre Panama, which will help re-balance the group's geographical presence starting from 2020, largely mitigates the negative developments in Zambia.
Positive Free Cash Flow from 2020: Fitch expects free cash flow (FCF) to turn positive towards end-2019, after a number of years of heavy investment; Fitch forecasts FCF from 2020 of USD400 million-500 million per annum for the following years. The business should be able to start repayment of some of its gross debt and follow a deleveraging path towards the target of net debt/EBITDA of 2x (as reported by the company), with normalized capex representing mostly regular maintenance, and all existing assets progressing production to full capacity.
Mid-Point Cost Position: CRU estimates that FQM's mining operations are, on average, close to the mid-point of the business cost curve. CRU expects that production at Cobre Panama will lower the cost position over time. Even reasonable growth assumptions for electric vehicles are forecast to create an increase in demand for copper and a rise in prices (as indicated by our copper price assumptions).
As a result, the increasing production profile together with the cost position will boost cash flow generation over the next four years. Zambia Challenges Investor Confidence: Royalty rates for copper increased by 1.5% from January 2019 and are no longer deductible for corporate tax, while the country has introduced an export duty on precious metals. The government has announced plans to replace VAT with a non-refundable sales tax, a process that has been delayed with the latest indication for a 1 September 2019 start. The combined measures (including sales tax) affect FQM's earnings by more than USD200 million (based on full-year impact) and have delayed the anticipated deleveraging path. These developments highlight the uncertainty that companies face in Zambia when committing long-term capital, and adds to operational challenges, such as coordinating production schedules with downtime of power supply, or regular disputes with local partners and government bodies over contract terms or tax calculations.
Zambia Downgraded:
Fitch downgraded Zambia to 'CCC' on 27 June 2019 reflecting the government's high external financing requirements, combined with a continued fall in official foreign-exchange reserves, constrained access to domestic and external financing, and a further rise in government debt in the context of an ambitious capex programme. Zambia faces material external debt-service repayments over 2019-2024, runs a current account deficit, and record high yields on outstanding Eurobonds indicate that new issuance is unlikely to be a viable route of refinancing. The government has been slow to scale down its ambitious capex programme and the current fiscal framework envisages several more years of high deficits.
Rating Above Zambia's Country Ceiling of 'B-': FQM derived 80% of earnings from its operations in Zambia in 2018, and this should decline to around 55% in 2020 and below 50% over the longer term. The company generally maintains sizeable liquidity headroom (with funding operations and receipt of export revenue taking place offshore/in major financial centres) and prudently refinances debt well in advance of legal maturities. We have calculated a hard-currency debt-service coverage ratio comfortably above 1.5x for 2019, 2020 and 2021.
Under Fitch's methodology for rating corporates above the country ceiling, the business would be required to achieve hard-currency debt service coverage of 1.0x-1.5x on a 12-month rolling basis to maintain its IDR one notch above the country ceiling of 'B-'.
Medium-Term Horizon for Large Projects:
FQM continues to undertake advanced-stage exploration for copper deposits at Haquira in Peru and Taca Taca in Argentina, both of which require substantial capital investment. However, the environmental, social and feasibility studies will take time to complete and a final investment decision for both projects is a few years away. The management has said that upon completion of Cobre Panama, they will prioritise deleveraging (with a target of net debt/EBITDA of 2x as reported by FQM) rather than undertake further expansion. We do not factor the above projects into our rating case. Derivation Summary FQM is focused on copper and ranks among the top 10 global producers. FQM is smaller and less operationally diversified than its major peers, Freeport-McMoRan Inc. (BB+/Stable) and Southern (NYSE:SO) Copper Corporation (SCC, BBB+/Stable). FQM has a mid-ranking cost position for business costs. Around 80% of EBITDA came from Zambia in 2018, which we view as a challenging operating environment for mining companies, whereas its country exposure will improve as production in Panama increases, with the relative earnings contribution from Zambia declining towards 55% in 2020 and below 50% over the longer term. FQM's financial profile is weaker than its peers. FFO adjusted gross leverage was 6.1x in 2018 due to high capital spending for Cobre Panama. We forecast that leverage will moderate towards 5.0x over the next 18 months, with Sentinel in Zambia contributing at capacity and Cobre Panama increasing production in line with guidance.
The company's ratings are constrained by its weak financial profile and high exposure to the operating environment in Zambia.
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Issuer include:- Fitch's copper price assumptions of USD6,400/tonne in 2019, USD6,500/tonne in 2020, USD6,700/tonne in 2021 and USD7,000/tonne thereafter; gold price flat at USD1,200/oz;- volumes in line with the management's guidance;- gross capex of about USD1.1 billion in 2019, decreasing to USD850 million in 2020 and thereafter; - increasing dividend pay-out from 2021/once gearing has reduced well below 5.0x FFO adjusted gross leverage;- tightening tax regime in Zambia. RATING SENSITIVITIES Developments That May, Individually or Collectively, Lead to Positive Rating
Action:
- FFO gross leverage sustained below 4.0x;
- Return to sustainable positive FCF generation together with reduction of gross debt;
- Successful ramp-up of the Cobre Panama project.Developments That May, Individually or Collectively, Lead to Negative Rating Action:
- FFO gross leverage failing to fall below 5.0x by 2020 and exceeding this metric over the longer term;
- Operational issues in Panama or Zambia further delaying the expected increase in cash flow generation and improvement in credit metrics;
- Measures taken by the governments of Zambia or Panama that adversely affect cash flow generation or the operating environment, including a further downgrade of the country ceiling of Zambia.
Liquidity and Debt Structure Adequate Liquidity:
At end-March 2019, FQM's unrestricted cash balances were USD850 million and the group had available USD520 million of committed undrawn revolving credit facilities (with a maturity in December 2022). Fitch's rating forecast expects FCF to turn positive towards end-2019. In subsequent years, we expect FCF to be around USD400 million-USD500 million a year.
Our rating forecast indicates that the business is funded until end-2021. On 27 March 2019, FQM redeemed USD821 million of the senior notes due February 2021 including accrued interest.
Summary of Financial Adjustments Summary of Financial Statement Adjustments at end-2018:
- A USD1.36 billion prepayment from Franco-Nevada was classified as debt and added to the total debt amount in 2018;
- A USD946 million interest-bearing shareholder loan from KPMC was considered as hybrid instrument with 100% equity credit;
- USD17 million of finance leases have been adjusted to total debt amount and reclassified from non-current liabilities;
- A USD467 million bank overdraft was offset against USD1,255 million cash and cash equivalents, resulting in a net cash balance of USD788 million;
- USD78 million of cash was restricted at December 2018 to secure the letters of credit issued on behalf of the company, reclassified from long-term assets to 'restricted cash' balance sheet line;
- A USD300 million deferred purchase price relating to the acquisition of a 50% interest in KPMC from LS-Nikko Copper was capitalized as debt by Fitch as an adjustment; total consideration was USD664 million, of which USD364 million was paid in 2017 and 2018.
First Quantum Minerals Ltd.; Long Term Issuer Default Rating; Affirmed; B; RO:Sta
----senior unsecured;
Long Term Rating; Affirmed;
B Contacts: Primary Rating Analyst Oliver Schuh, Senior Director +44 20 3530 1263 Fitch Ratings Ltd 30 North Colonnade, Canary Wharf London E14 5GN Secondary Rating Analyst Yulia Buchneva, Associate Director +7 495 956 6904 Committee Chairperson Dmitry Marinchenko, Senior Director +44 20 3530 1056
Media Relations: Adrian Simpson, London, Tel: +44 20 3530 1010, Email: adrian.simpson@thefitchgroup.com. Additional information is available on www.fitchratings.com Applicable Criteria Corporate Rating Criteria (pub. 19 Feb 2019) https://www.fitchratings.com/site/re/10062582 Country-Specific Treatment of Recovery Ratings Criteria (pub. 18 Jan 2019) https://www.fitchratings.com/site/re/10058988 Non-Financial Corporates Exceeding the Country Ceiling Criteria (pub. 17 Jan 2019) https://www.fitchratings.com/site/re/10059284 Additional Disclosures Dodd-Frank Rating Information Disclosure Form https://www.fitchratings.com/site/dodd-frank-disclosure/10082726 Solicitation Status https://www.fitchratings.com/site/pr/10082726#solicitation Endorsement Policy https://www.fitchratings.com/regulatory
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