Fitch Rates Samarco's Proposed Senior Unsecured Notes Due 2023 'BBB(EXP)'
CHICAGO -- October 21, 2013
Fitch Ratings has assigned Samarco Mineracao S.A.'s (Samarco) proposed senior
unsecured notes of benchmark size maturing 2023 an expected rating of
'BBB(EXP)'. The notes will be issued directly through Samarco and the proceeds
will be used to partially fund capital expenditures and for general corporate
purposes. A full list of ratings follows at the end of this release.
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 June 30, 2013 EBITDA margin was 51%, and
has consistently remained above 50% over the last decade except during the
global credit crisis of 2009, when it was 42% and 2007 when it was 45%. The
more recent strong profitability 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 because of 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 BRL2.7 billion, expected to be
around BRL2.2 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 USD154 per dry metric
ton (DMT) in 2012 compared to USD191 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 June 30, 2013, Samarco generated net revenue of
BRL6.6 billion and LTM EBITDA of BRL3.3 billion. This compares with BRL3.6
billion of EBITDA in 2012 and BRL4.1 billion in 2011.
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 June 30, 2013
were BRL470 million compared with short-term debt of BRL955 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 plus cash flow from operations
(CFFO)/short-term debt which indicates a ratio of 4.0x coverage for the LTM to
June 30, 2013.
Leverage Increasing due to Investments:
Samarco has exhibited low leverage ratios during the past five years, but debt
has increased recently as a result of the P4P and third pelletizing plant
project, as expected. For the LTM to June 30, 2013, the company had a total
debt-to-EBITDA ratio of 2.1x. 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 relatively low at 1.9x 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 was 1.8x.
Leverage Ratios Expected to Peak in 2013:
Samarco's total debt-to-EBITDA ratio is expected to peak at around 1.8x-2.0x
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 USD1 billion senior unsecured notes issuance in
October 2012. These investments will see Samarco's production capacity
increase from 22 million DMT per year currently to around 30 million DMT per
year by 2014-2015. Samarco's total debt as of June 30, 2013 was BRL6.9
billion, an increase from almost BRL6 billion at the end of 2012. Debt is
expected to peak at around BRL9 billion in 2014 as the P4P project reaches
completion, declining thereafter.
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 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 in 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 vulnerable 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 weaken
significantly, in particular if its total debt-to-EBITDA ratio exceeds 2.5x 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.
Samarco's Ratings are as follows:
--Local currency IDR 'BBB';
--Foreign currency IDR 'BBB';
--National long term rating 'AA+(bra)';
--Senior unsecured rating 'BBB'.
The Rating Outlook is Stable.
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
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Fitch Ratings, Inc.
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