Fitch Ratings has affirmed the long-term foreign currency Issuer Default Rating (IDR) and long-term local currency IDRs of Minsur S.A. (Minsur) at 'BBB-'. The Rating Outlook is Stable. Fitch has also affirmed the company's USD450 million senior unsecured 6.25% notes due 2024 rating at 'BBB-'.
KEY RATING DRIVERS
First Quartile Tin Producer:
Minsur's investment grade ratings are supported by its position as the world's third largest tin (Sn) producer with production of around 28,000 metric tons (MT) of refined tin per year. Minsur's cash cost of production is in the first quartile of the industry as verified by the International Tin Research Institute (ITRI). This low cost of production allows the company to generate positive CFFO during periods of low tin prices.
Minsur's main asset is the San Rafael underground tin mine in Peru, the largest underground tin mine in the world with an average Sn grade of 2.48% in 2014 - the highest in the industry according to ITRI. San Rafael exhibited a cash cost of USD8,119/MT Sn compared to an average tin price of USD22,567/MT for the nine months ended September 2014.
Low Leverage Historically:
Minsur has a historical track record of very low leverage. For the LTM ending Sept. 30, 2014, Minsur's total-debt-to-EBITDA ratio was 1.6x while its net-debt-to-EBITDA ratio was 0.3x on a consolidated basis including Cementos Melon (Melon), an entity in Chile that is ring-fenced from the mining group. Pro-forma for the mining operations, these ratios were 1.4x and -0.1x, respectively. Minsur's 2010-2013 average FFO adjusted leverage ratio was 1.5x on a consolidated basis.
Total consolidated debt as of Sept. 30, 2014 was USD719 million with approximately USD208 million of this figure related to Minsur's 73.9% owned Chilean cement business Melon, which has no recourse to Minsur's mining operations. Debt at the mining operations as of the same date was USD511 million, mainly comprised of the company's USD450 million senior unsecured 6.25% notes due 2024.
Modest Increase in Leverage Forecasted:
Fitch's base case for the standalone mining operations indicates total- and net-debt to EBITDA to be around 2.2x and 0.1x, respectively, at year-end 2015. Assumptions include a period of mining lower ore grades resulting in lower refined tin volumes of around 26,500 MT with prices for tin at USD21,000/MT. These leverage ratios are expected to peak in 2016, as the company begins to erode the balance of debt proceeds as it ramps-up its various projects. FFO adjusted leverage is expected to increase from around 1.8x in 2014 to 2.3x in 2015 and 2.6x in 2016, declining thereafter.
Net leverage ratios are projected to increase as a result of cash being spent on higher capex during the next few years mainly related to the Pitinga-Pirapora and Bofedall II (B2) projects and Fitch's projected dividends of around USD50 million per year. Fitch's key assumptions include average tin prices of around USD21,000/MT from 2015-2017 and lower average sales volumes of around 24,000 MT annually.
Strong Mining Cash Flow Generation:
Minsur's mining operations generated USD366 million of EBITDA with a 39% margin and USD222 million of CFFO as of the LTM to Sept. 30, 2014. At the consolidated level including the cement business, Minsur generated USD439 million of EBITDA with a margin of 34% and USD175 million of CFFO for the same period with FCF of USD76 million compared to USD126M in 2013. FCF is expected to have been about USD75 million for 2014.
Fitch's Base Case indicates negative FCF generation of around USD65 million on average per year during its investment ramp-up years to 2018 for the mining business, including the expectation of continued dividend payments at 2013 levels of around USD50 million.
Robust Liquidity Position:
Minsur has a robust cash balance and ready access to additional liquidity, if required. On a consolidated basis the company held cash and marketable securities of USD569 million and short term debt of USD99 million as of Sept. 30, 2014, corresponding to a cash to short-term debt ratio of 5.8x. Minsur also has highly liquid inventories of refined tin (Sn) ingots, concentrates and niobium and tantalum alloy that together amount to approximately USD55 million at current market prices that can be sold in the spot market very quickly.
The company has potential access to additional liquidity if required, from Inversiones Breca (Breca), its parent company. Breca has a substantial cash and marketable securities position, with no debt at the holdco level. Minsur also has uncommitted credit lines with a number of banks in Peru totaling USD150 million.
High Grade Tin Assets:
Minsur's leading cost position will be enhanced over the next few years through B2, a Brownfield expansion project that will process San Rafael mine's old high grade tailings that have Sn content of 1.1%, the highest grade undeveloped tin project currently in the global pipeline according to ITRI. B2 is due to ramp up production in 2H17 with annual tin production of around 6,300/MT per year. The expected cash cost of production for the project is very economical at USD1,800/MT with total capex of USD165 million. This project was initially expected to ramp-up during 2016 but has been delayed due to obtaining the required permits and plant adjustments required.
B2 is expected to increase the company's reserves and resources of tin by an additional 65,700/MT to a total of 676,000/MT for Minsur's combined tin assets. San Rafael's and B2's combined Sn mine life totals over 10 years, and Pitinga's mine life is 27 years, all at current production levels. Minsur's San Rafael mine is fully integrated through the company's smelter in Pisco. The tin produced from the San Rafael mine totals approximately 41,000/MT per year with an average grade of 60% in concentrate form. The Pisco smelter is classed as the third largest tin refinery in the world by ITRI with 28,344/MT of refined tin being produced in 2013.
Other Low Cost Assets:
Minsur's other mining assets include 100% ownership of Pucamarca, a gold mine with a low cash cost of production at USD345/Oz during 2014. Pucamarca has reserves of over 1 million metric Oz of contained gold and resources of 1.52 million Oz, with a mine life of 8 years. Minsur also owns other assets that together comprise the Minsur S.A. y Subsidiarias group. These consist of a 70% ownership of Marcobre, a Peruvian copper company and 99.9% of Taboca in Brazil that is comprised of the Pitinga mine and the Pirapora Tin Smelter.
In addition, the company owns 99.9% of Minera Barbastro, a subsidiary with exploration prospects in Huancavelica region of Peru, and 99.9% of Minera Andes del Sur that has exploration prospects in Chile for copper and gold. Minsur also owns 73.9% of Invesiones Cordillera del Sur (Cordillera), a holding company that in turn owns 100% of Melon, the largest cement and concrete company in Chile. This last business unit is ring-fenced financially and operationally from the rest of the group.
Ownership by Breca:
Minsur is 68.8% owned by the Breca group, owning 100% of Minsur's voting rights. Breca is one of Peru's largest family-owned conglomerates owning companies in the industrial, financial, mining, real estate, healthcare, insurance and services sectors. Breca also has a strategic 50/50 joint venture with BBVA from Spain in BBVA Banco Continental (Fitch LT FC IDR 'A-'/Outlook Stable), the second largest bank in Peru. Minsur is a key strategic unit for the group.
Diversification into other Commodities:
Tin accounted for 79% of Minsur's mining segment revenues for the LTM to Sept. 30, 2014, with gold accounting for 15%, niobium and tantalum for 6%. This is in contrast to tin accounting for 96% of revenues in 2013, as the company successfully ramped-up gold production at Pucamarca and increased production at Taboca. The company also plans to increase its investments into copper in the future with its Marcobre asset, currently at the feasibility stage. The company's long-term strategy is to grow copper to represent around half of its revenues by 2020.
Reserves and Resources:
Reserve life at core operations is adequate and geographically diversified. The group has a strong pipeline of new expansion projects to counter the ongoing depletion of reserves. As of Sept. 30, 2014, Taboca, located in Brazil, had resources of 420,000 tons with an average mine life of 27 years (open pit), while San Rafael's reserves and resources were 256,000 tons with average mine life of close to 10 years (underground). The B2 tailings project has an average reserve life of eight years. San Rafael has been operating for 40 years and has exhibited a track record of replenishing and extending reserves throughout that time with the company spending considerably on exploration activities annually. Exploration in underground mines differ from open-pit deposits as underground mines require the building of an infrastructure to pursue the geology of the ore deposit, whereas open pits have the ore easily accessible and close to the surface. As a result, proving reserves over 10 years for underground mines is not economical whereas it is very economical to prove reserves at open pit mines.
Sustainable, Conflict-Free Tin:
Indonesia, a major producer of tin, imposed a ban on exports during 2014 to control prices. The Indonesian government has also heavily cracked down on small-scale artisanal and alluvial tin miners, of which there are many. These players have dubious safety measures and environmental operating practices, and function illegally. This action has supported tin prices above USD22,000/MT on average during last year. Expectations are that Indonesia will continue to restrict exports and continue to close down its artisanal and alluvial miners during 2015. China continues to be a net importer of tin, further bolstering price expectations for tin at above USD20,000/MT on average this year, although consumption may slow down.
There is a growing importance from global tin consumers to source conflict free and environmentally responsible sources of tin, mainly as a result of the Dodds Frank Act. Large corporations with tin in their products, like Apple, Samsung and Intel, are placing pressure on their suppliers to source tin sustainably and from conflict-free zones. This will benefit Minsur as it complies with Dodds Frank.
RATING SENSITIVITIES:
High Dependency on Tin:
Minsur's financial performance is inextricably linked to the price and demand of tin. While tin fundamentals remain strong and the company is a low cost producer, profitability will be largely affected by price volatility.
An upgrade is unlikely in the near future as a result of decreasing ore grades at San Rafael due to mining a lower ore grade body that will continue to lead to declining tin volumes from the company's main asset over the next five years. A significant increase in reserve levels that would increase Fitch's comfort in the company's output significantly beyond 10 years would be viewed positively. Also key to a Positive Outlook or rating upgrade is consistently strong FCF generation.
Net leverage above 2.0x following completion of the company's various investment projects could be a concern leading to negative rating actions.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (May 2014).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=972055
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