Fitch Affirms Samarco's IDRs at 'BBB'; Outlook Stable
CHICAGO -- August 16, 2013
Fitch Ratings has affirmed the 'BBB' foreign and local currency Issuer Default
Ratings (IDRs) of Samarco Mineracao S.A. (Samarco), as well as its 'BBB'
senior unsecured notes rating. Fitch has upgraded Samarco's National Rating to
'AAA(bra)' from 'AA+(bra)' to reflect the company's continued strong credit
profile during an intensive investment period. The Rating Outlook is Stable.
KEY RATING DRIVERS
Strong Ownership Supports Ratings:
Samarco's ratings and Stable Outlook are supported by its joint ownership
under two industry leaders, Vale S.A. (Vale; long-term IDR 'BBB+') and BHP
Billiton Limited/Plc (BHP Billiton; long-term IDR 'A+'), with each company
owning 50% of Samarco. Fitch believes Samarco's two strong shareholders, with
combined operating EBITDA in 2012 of over USD51 billion, would support Samarco
in the event of a sovereign-related liquidity crisis due to reputational risk.
Highly Profitable Operations:
Samarco has a long track record of consistent high profitability. The
company's latest 12 months (LTM) to March 31, 2013 EBITDA margin was 52%, and
has consistently remained above 50% over the last decade except during the
global credit crisis of 2009 when it recorded 42% and 2007 when it recorded
45%. The strong profitability during the more recent time period was due to
surging demand for pellets as steel mills sought more energy-efficient raw
material inputs to offset higher energy costs, which began during the second
half of 2009 and continued through to the first quarter of 2013. Samarco
regularly commits its entire production up to a year in advance through its
long-term contracts with customers.
Low Cost Producer of Iron Ore Pellets:
Samarco's credit profile benefits from its position as a low-cost producer of
iron ore pellets. The company continues to remain competitive during difficult
trading conditions due to its low cost iron ore transportation through its
slurry pipelines. Samarco's Board approved the P4P project in April 2011 with
total spending on this project in 2012 at BRL1.4 billion and expected to be
around BRL1.8 billion in 2013. Once this major investment project is completed
and operational by the start of 2014, the company's low cost position is
expected to improve further. This cost-effectiveness allows Samarco to remain
profitable even during periods of low prices and lower pellet demand.
Lower Pellet Prices:
Revenues in 2012 were BRL6.5 billion, a decline compared to BRL7 billion at
the end of 2011 due to lower average pellet prices of USD147 per dry metric
ton (DMT) in 2012 compared to USD193 per DMT in 2011. Fitch expects average
pellet prices to be around USD145 per DMT in 2013, with this product
benefitting from a price premium of around USD20 per ton when compared to lump
iron ore. For the LTM to March 31, 2013, Samarco generated net revenue of
BRL6.6 billion and LTM EBITDA of BRL3.4 billion, a slight decline to EBITDA of
BRL3.6 billion in 2012 and a significant drop from EBITDA of BRL4.1 billion at
Sufficient Liquidity Profile:
Compared to other investment grade Brazilian corporates, Samarco holds
relatively modest cash and marketable securities on its balance sheet. This
position is dictated by Samarco's dividend payout ratio target, under normal
operating conditions, of 100% of free cash flow (FCF) to Vale and BHP
Billiton. The company's cash and marketable securities as of March 31, 2013
were BRL238 million compared with short-term debt of BRL582 million.
Additionally, the company has one year credit lines from a number of different
banks available of USD1.8 billion, providing further liquidity headroom.
Liquidity is also strong when measured by cash + cash flow from operations
(CFFO)/short-term debt which indicates a ratio of 6.2x coverage for the LTM to
March 31, 2013.
Track Record of Low Leverage:
Samarco has exhibited low leverage ratios during the past five years. For the
LTM to March 31, 2013, the company had a total debt to EBITDA ratio of 1.6x.
In 2012 and 2011, Samarco had total debt to EBITDA ratios of 1.7x and 1.1x,
respectively. LTM funds from operations (FFO) adjusted leverage is also low at
1.6x when compared to the peak of 3.5x in 2009. As of 2012, the company's five
year rolling average total debt and net debt to EBITDA ratios were 1.4x and
1.3x, respectively. The five year rolling average FFO adjusted leverage ratio
Leverage Ratios Expected to Peak in 2013:
Samarco's total debt to EBITDA ratio is expected to peak at around 1.8x in
2013 as a result of the company's final year of heavy investment for its P4P
project. Funding for these projects has been achieved through cash freed-up by
lower dividend payments to Vale and BHP Billiton during the investment period
and a senior unsecured USD1 billion notes issuance in October 2012. These
investments will see Samarco's production capacity increase from 23 million
DMT per year currently to around 30 million DMT per year by 2014 - 2015.
Samarco's total debt as of March 31, 2013 was BRL5.6 billion, a decrease from
almost BRL6 billion at the end of 2012. Debt is expected to peak at around
BRL7.7 billion in 2014 as the P4P project reaches completion, declining
Cash Flow Generation Strong; Flexible Dividend Policy:
Fitch views Samarco's cash flow generation as robust due to its low cost
structure, with the company's annual FCF position dictated by the amount of
dividends paid to its parent companies. Fitch would expect BHP Billiton and
Vale to continue to scale down dividends if operating conditions required
additional liquidity, as seen both recently and historically. In 2012, the
company's FCF was negative BRL839 million after record large capex of BRL3.2
billion and relatively modest dividends of BRL745 million when compared to
other years. FFO was BRL3 billion and CFFO benefited from a small working
capital inflow to end up at BRL3.1 billion. This performance compares to FFO
of BRL3.6 billion and CFFO of BRL3.61 billion in 2011. Fitch expects FFO of
approximately BRL2.5 billion during 2013 in its Base Case projections,
improving back to BRL3.6 billion in 2014.
Significant Contingent Liabilities:
Samarco is subject to a large number of pending judicial and administrative
proceedings in various courts and with government agencies. They have arisen
as a result of the company's normal course of operations and include tax,
civil, labor and environmental issues. Management has made a provision for
these contingencies to an amount considered sufficient to cover cases
considered as probable losses. They amounted to BRL340 million in 2012 and are
not considered material in the context of the rating. Samarco also has other
contingent liabilities that amount to BRL4.3 billion related to tax issues and
social contributions on net income (CSLL) for which no provisions have been
made. This is due to the company's legal assessment that losing is not
probable, but that it is possible. The company only makes provisions for
probable loss. Should Samarco lose some or all of these cases, the expected
outcome would be a payment scheme similar to REFIS that would take place over
a long time period, hence mitigating any rating impact. Fitch considers these
contingent liabilities as an event risk.
Dependency on Iron Ore Pellet Demand:
Samarco is a one-product company, a policy dictated by its parent companies.
Iron ore pellets are susceptible to substitutes during troughs in the industry
cycle. A prolonged period of low demand for iron ore pellets could lead to a
negative rating or outlook action. Ratings could also be downgraded if
Samarco's credit ratios significantly weaken, in particular if its net
debt-to-EBITDA ratio exceeds 2.0x on a sustained basis. Additionally, the
company's ratings could be pressured if the ratings of BHP Billiton and Vale
were to be downgraded. Rating upgrades could follow if Vale's ratings were to
be upgraded, although the single-product nature of the company caps its
current ratings at one notch below that of its Brazilian joint parent.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 5, 2013);
--'National Ratings Criteria' (Jan. 19, 2011);
--'Evaluating Corporate Governance' (Dec. 13, 2011);
--'Parent and Subsidiary Rating Linkage' (Aug. 8, 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent and
National Ratings Criteria
Evaluating Corporate Governance
Parent and Subsidiary Rating Linkage Fitch's Approach to Rating Entities
within a Corporate Group Structure
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