Fitch Affirms Magnesita's IDRs at 'BB'; Outlook Stable

  Fitch Affirms Magnesita's IDRs at 'BB'; Outlook Stable  Business Wire  RIO DE JANEIRO & CHICAGO -- February 28, 2014  Fitch Ratings has affirmed the local and foreign currency Issuer Default Ratings (IDR) of Magnesita Refratarios S.A.'s (Magnesita) at 'BB' and National Scale Ratings at 'A+(bra)'. Fitch Ratings has also assigned an 'A+(bra)' rating to Magnesita's debentures issuance of BRL400 million due 2018. The issuance proceeds will be used to refinance existing debt. The corporate Rating Outlook is Stable.  A full list of ratings is provided below.  KEY RATING DRIVERS:  Solid Business Profile; Vertical Integration:  Magnesita's ratings are supported by its low-cost and vertically integrated business model, allowing for an industry-leading EBITDA margin close to 15% on EBITDA of BRL376 million during the last 12 months ended Sept. 30 2013. The company's core business is refractory solutions, comprising 89% of BRL2.5 billion in revenues during the period, followed by its services business line (6%), and its minerals segment (5%). The ratings are also backed by the company's long-life mine reserves, geographical diversification, position as the world's third largest refractory manufacturer in a highly fragmented market, and strong liquidity profile. The company has strong long-term relationships with customers throughout the world, having exported their products to over 75 countries in 2013. As of Sept. 30, 2013, the company had approximately 850 customers, including the largest Brazilian steel producers, as well as leading Brazilian and international cement producers.  Resilient EBITDA Margins; High Exposure to Steel Sector  The company has a customer concentration in the cyclical steel industry, which accounted for 73% of consolidated revenues in 2013. Magnesita has been able to maintain stable EBITDA margins despite the volatile results of the steel sector since 2008, although its large exposure to this sector has resulted in modest organic growth with LTM EBITDA generation of BRL376 million at Sept. 30, 2013 compared to BRL339 million in 2011. Magnesita plans to diversify its revenues through its minerals segment by expanding into profitable graphite sales in order to increase sales volumes through geographical diversification. At present, the growth in cement and industrial refractories has not yet materialized enough to benefit operating cash flow generation. The global refractory industry remains highly fragmented and Fitch expects consolidation to take place in the future.  Working Capital Pressures Free Cash Flow (FCF) in 2013, Expected to Be One-Off Event  Changes implemented in the company's commercial strategy during 2013 pressured its working capital requirements. This was mainly related to building-up inventory levels at new points of sales in regions such as the Middle East and South East Asia. During LTM September 2013, working capital needs increased to BRL136 million compared to BRL16 million in 2012. As a result, cashflow from operations (CFFO) reached a very low BRL35 million in the LTM September 13, a significant decline from BRL175 million reported in 2012.  Fitch expects the low CFFO in 2013 to be a one-off event, improving to around BRL180 million in 2014 under its Base Case. Higher capex has also pressured Magnesita FCF generation in 2012 and during 2013. As of the LTM to Sept. 30 2013, Magnesita exhibited FCF of negative BRL181 million following capex of BRL199 million and dividends of BRL9 million. The company ended 2012 with FCF of negative BRL101 million after capex of BRL259 million and dividends of BRL17 million. This was a significant decline from FCF of BRL246 million in 2011. The company's dividend policy has remained conservative, at the minimum 25%.  Leverage Peak in 2013; Improvements Expected in 2014  Magnesita's cash balance eroded significantly during 2013 due to negative FCF, a number of small acquisitions, and the discontinuation of a joint venture operation in China. Compounding this was the BRL devaluation which led to further deterioration in Magnesita's net leverage ratios. As of Sept. 30, 2103, the company's total and net adjusted debt-to-LTM EBITDA ratios, on a pro-forma basis including acquisitions, were 5.3x and 4.2x, respectively, compared to 6.1x and 3.8x by year-end 2012. Fitch includes the company's post-employment obligations of BRL254 million in Magnesita's total adjusted debt and also BRL33 million as off-balance-sheet debt related to future obligations from acquisitions. Foreign exchange risk for the company is partially mitigated due to its geographic diversification, resulting in approximately 70% of its 2013 EBITDA being generated in foreign currency compared to 76% of its debt being denominated in USD and EUR.  Fitch's Base Case indicates adjusted EBITDA generation at around BRL428 million for 2014, with EBITDA margins around 15.5%. FCF is expected to be negative by around BRL30 million following capex and dividends for the year, with FFO interest coverage at about 1.7x and net adjusted debt-to-EBITDA improving to around 3.8x. Refractories are expected to continue to make up 88% of revenues, while services and minerals 6% of revenues each.  Strong Liquidity:  Magnesita's liquidity position indicates comfortable headroom for the rating category, ending Sept. 30, 2013 with BRL456 million of cash and marketable securities compared to short-term debt of BRL75 million. Short-term debt was just 4% of total adjusted debt of BRL2.1 billion for the period. Liquidity ratios are strong with cash-to-short-term debt at 6.1x and cash plus CFFO-to-short-term debt at 4.8x. Magnesita's debt amortization schedule is very manageable with BRL75 million of short-term and BRL568 million spread over the next four years. The company's cash position is enough to meet all current debt maturities through 2017.  Minerals Segment Expansion Still in Early Stages:  Magnesita's strategy to diversify its revenues by expanding its other business units, especially its minerals segment, should not materialize prior to 2017. The potential to develop graphite sales is considerable given the growing demand for this raw material for use in rechargeable batteries coupled with export restrictions from China. Graphite is a very profitable business opportunity for Magnesita in relation to the company's low-cost position for production. Magnesita's capex plan includes a project to develop its graphite output to 40,000 metric tons per year by 2017, after which Fitch expects the minerals segment to contribute 15%% of consolidated revenues.  RATING SENSITIVITIES:  A Negative Outlook or downgrade could take place following a prolonged downturn in the cyclical steel and cement markets that hampers production volumes globally to levels that severely affect the company's financial performance. Another potential negative driver would be a large debt-funded acquisition, increasing net debt-to-EBITDA above 4.0x on a sustained basis. Magnesita also operates in a highly fragmented market that makes acquisitions a likely event risk.  A positive rating action could be driven by sustained improvement in net adjusted debt-to-EBITDA to below 3.0x alongside stronger coverage ratios, such as FFO interest coverage above 4.0x, combined with growth in the company's scale as a global player in refractories.  Fitch has affirmed the following ratings:  Magnesita Refratarios S.A.  --Long-term IDR at 'BB';  --Local currency long-term IDR at 'BB';  --National long-term rating at 'A+(bra)'.  Magnesita Finance Ltd  --Long-term IDR at 'BB';  --Local currency long-term IDR at 'BB';  --Senior unsecured rating at 'BB'.  Additional information is available at 'www.fitchratings.com'  Applicable Criteria and Related Research:  --'Corporate Rating Methodology', dated Aug. 5, 2013  - 'National Scale Ratings Criteria', dated Oct 30, 2013  Applicable Criteria and Related Research:  National Scale Ratings Criteria  http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=720082  Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage  http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139  Additional Disclosure  Solicitation Status  http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=822115  ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.  Contact:  Fitch Ratings Primary Analyst Debora Jalles, +55 21 4503 2629 Director Fitch Ratings Brasil Ltda. Praca XV de Novembro, 20 Centro - Rio de Janeiro - RJ or Secondary Analyst Jay Djemal, +1-312-368-3134 Director or Committee Chairperson Ricardo Carvalho, +55-21-4503-2627 Senior Director or Media Relations Elizabeth Fogerty, +1-212-908-0526 elizabeth.fogerty@fitchratings.com  
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