Fitch Affirms Volcan's IDRs at 'BBB-'; Outlook Stable
CHICAGO -- January 8, 2013
Fitch Ratings has affirmed the long-term Issuer Default Rating (IDR) of Volcan
Compania Minera S.A.A. (Volcan) at 'BBB-'. The Rating Outlook is Stable. Fitch
has also affirmed the 'BBB-' rating on the company's USD600 million senior
unsecured 5.375% notes due 2022. A complete list of ratings is provided at the
end of this release.
Ratings Supported by Strong Capital Structure:
The ratings reflect Volcan's diversified mining operations, historical track
record of maintaining a conservative capital structure, strong cash flow
generation, and low cash cost of production. The company's operations are
located in Peru (rated 'BBB'; Outlook Stable by Fitch), which has vast mineral
resources. According to Wood Mackenzie and the Peruvian Ministry of Energy and
Mining production figures for 2011, Volcan ranks as the largest producer of
zinc, silver and lead in Peru and the sixth largest producer of these metals
globally. The company's size relative to its peers allows it significant
negotiating leverage due to its ability to provide large volumes of a variety
of metals. The company is listed on the Lima, Santiago and Madrid Stock
Modest Leverage and Strong Liquidity:
Volcan has historically maintained a very low leverage position with an
average total debt-to-EBITDA ratio from 2011 to 2007 of just 0.3x. As of the
LTM ended Sept. 30, 2012, Volcan's total debt to EBITDA and net debt to EBITDA
ratios increased to 1.6x and 0.2x, respectively, following the issuance last
year of USD600 million 5.375% notes due 2022 to fund its expansionary capex
program to 2015. The company has a good track record of making early
prepayments of debt and holding a comfortable cash position to maintain strong
liquidity, in addition to access to credit lines with banks. Volcan's cash and
marketable securities as of Sept. 30, 2012, was USD607 million.
Product and Mine Diversification Supports Ratings:
Volcan's revenues are diversified over eight mining operations and six
concentrator plants spread across the Cerro de Pasco, Yauli, and Chungar
regions of the Peruvian Central Highlands. Volcan has exhibited solid revenue
growth to USD1.1 billion for the LTM to Sept. 30, 2012 from the trough of
USD627 million in 2008. In 2011, zinc accounted for 42% of total sales, silver
48%, lead 7%, and copper 3%. The diversification by mine and product is
positive as it minimizes the company's exposure to labor strikes and provides
it with a relatively assorted end-customer base.
Revenue growth has been fuelled by robust commodity demand, especially from
China, and a sustained period of high prices. Volcan's sales are mostly made
through stable long-term contracts around four years in length, with the
contract prices adjusted annually based on average prices for the year. The
company's largest customer is Glencore, which is also a minority shareholder
in Volcan with 6.3% interest and holds a seat on the company's Board of
Directors. The structure of these contracts, as well as the company's
relationship with Glencore, the world's largest commodity trading house,
minimizes demand risk to a degree.
High Profitability due to First-Quartile Production Cost Position:
Volcan is well positioned at the bottom of the cost curve as a first-quartile,
low cost, polymetals producer. This allows it to generate positive operating
cash flows through troughs in the demand cycle. For the period spanning
January to September 2012, Volcan had a total cash cost for its overall zinc
ore production of USD54 per metric ton, or just USD0.02 per pound. Helping to
achieve this low production cost for zinc are the by-products of silver, lead
and copper. For silver, the by-products include zinc and copper. With the
production of fine zinc at 228,095 metric tons and fine silver at 16,348
thousand troy oz during the first nine months of 2012, the company is well
placed to achieve strong cash flows. Total production volumes for pure zinc
and silver during 2011 were 318,435 metric tons and 21,136 thousand troy oz,
Cash Flow Generation is Historically Strong but Negative FCF Expected
Volcan has generated positive levels of free cash flow (FCF) during 2009 to
2011, a period that included two years of great volatility. Fitch projects
that the company will generate cash flow from operations (CFFO) in the region
of USD350 million to USD375 million in 2012. Capex in 2012 is anticipated in
the USD450 million to USD500 million range, resulting in negative FCF of
between USD150 million to USD200 million. This compares to FCF of USD21
million in 2011, which followed CFFO of USD470 million, capex of USD328
million and dividends of USD122 million. Fitch expects FCF to remain negative
throughout the four year expansion capex program totalling USD1.1 billion and
turn positive in 2015.
Volcan has exhibited high EBITDA margins historically, averaging around 49%
for the last four years. EBITDA has grown at a CAGR of 15.1% to USD453 million
for the LTM to Sept. 30, 2012 from USD241 million in 2008. Fitch's base case
scenario for EBITDA generation in 2012 is conservative at around USD400
million, with total expected debt of around USD700 million. This equates to a
total debt to EBITDA ratio of 1.7x. Fitch's revenue and EBITDA base case
expectations for 2013 are around USD1 billion and USD480 million,
respectively, with a net debt to EBITDA ratio of around 0.4x. Key assumptions
are prices for zinc of USD1,900 million per tonne in 2013 and USD2,050 long
term, and copper of USD7,500 per tonne and USD6,500 long term (see Fitch's
Special Report: 'Initiating Mid-Cycle Metals Price Assumptions, published
Sept. 14, 2012, available at www.fitchratings.com).
Ambitious Investments to Diversify into Copper by 2015:
The company's ambitious expansionary capital expenditure project will more
evenly distribute sales of silver and zinc while expanding further into copper
and gold and will make the company over 100% self-sufficient in energy by
2015. The company's capital expenditure plan began in 2011 and is scheduled to
complete in 2015 at a cost of approximately USD1.1 billion over the period.
Funding for this investment will be met through the USD600 million 5.375%
notes issued in January 2012, combined with internal cash flow generation.
Volcan is positioned well for future growth in Peru. The company has 341,230
hectares of mining concessions across a region of significant geological
reserves and is currently exploiting 12%, with a further 11% currently being
explored. This equates to 18 years of reserves at current production levels or
37 years when including resources. As of Dec. 31, 2011, Volcan had over 136
million metric tons of proven and probable reserves, and over 224 million
metric tons of additional resources.
Steady Demand Expected for Silver, Zinc and Copper:
Fitch's long-term outlook for silver and zinc is favorable, with silver prices
correlated to gold as a less expensive investment, but also supported by its
industrial uses such as for batteries and electronic components, among others.
Zinc is well supplied at present, yet demand remains consistent. Stocks of
zinc are declining and long-term supply is constrained due to a lack of
projects in the pipeline. In addition to being an alloying agent for steel,
zinc also has uses as an additive to fertilizers and in health supplements for
human consumption. Volcan's expansion into copper, which also has good
long-term fundamentals, and as a by-product of gold, will further diversify
the company's revenues.
Location in Rating Scale:
Volcan's historical leverage and debt coverage ratios are strong within its
'BBB-' profile. The company's leverage ratios will increase during 2012 to
2015 compared to previous years as a result of its USD1.1 billion expansionary
capex program, but they are expected to remain consistent within the rating
category. Deterioration in the company's net debt to EBITDA ratio above 2.5x
over a sustained period and/or a decline in profitability due to increased
operating costs, could put negative pressure on the ratings. Swift
deleveraging of total debt to EBITDA below 1.0x combined with successful
execution of planned diversification of revenues substantially into copper
would put positive pressure on the ratings.
Fitch affirms the following ratings of Volcan:
--Long Term IDR at 'BBB-';
--Local Currency Long Term IDR at 'BBB-';
--Senior Unsecured 5.375% Notes due 2022 at 'BBB-';
The Rating Outlook is Stable.
Fitch affirms and withdraws the following rating:
--National Long Term Rating at 'AA+(per)'.
This rating is withdrawn as it is no longer considered analytically
Additional information is available at 'www.fitchratings.com'. The ratings
above were solicited by, or on behalf of, the issuer, and therefore, Fitch has
been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Parent and Subsidiary Rating Linkage' (Aug. 8, 2012);
--'National Ratings Criteria' (Jan. 19, 2011);
--'Evaluating Corporate Governance' (Dec. 12, 2012);
--'Initiating Mid-Cycle Metals Price Assumptions, Sept. 14, 2012.
Applicable Criteria and Related Research:
Evaluating Corporate Governance
National Ratings Criteria
Parent and Subsidiary Rating Linkage
Corporate Rating Methodology
Initiating Mid-Cycle Metals Price Assumptions
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