(The following statement was released by the rating agency)
Sept 13 - Fitch Ratings has assigned Switzerland-registered Iberian Minerals Corp (Iberian) a Long-term Issuer Default Rating (IDR) of ‘B’ and an expected senior secured bond issue rating of ‘B+(EXP)’ with a Recovery Rating of ‘RR3’. The Outlook on the Long-term IDR is Stable.
The rating factors in Iberian’s limited scale and diversification, with total sales in FY11 of USD245m, and high historical leverage of over 8x at end-2011. Fitch believes the company is exposed to geographical diversification risks as it operates only three key mines, and notes that almost 70% of production relates to a single commodity, copper. The ratings also factor in likely support from Iberian’s shareholder, Trafigura Beheer B.V. (not rated).
The Stable Outlook reflects Fitch’s expectation of a gradual improvement in Iberian’s financial profile from FY12 onwards, supported by hedge contracts concluded at higher prices than the FY09 to FY11 period. This is expected to lead to a moderation in the leverage profile below 3x in 2012 and will boost cash generation. The company has hedged the majority of sales in 2012 to 2015, providing some short-term transparency.
The mining industry depends on market prices and most miners remain price-takers, as such, Iberian’s medium to long-term operating profile is exposed to the inherent volatility associated with global market conditions. The company is affected by price and demand fluctuations in copper, zinc, silver and lead, which are mainly driven by global construction (residential and commercial) and industrial demand.
Demand for copper and zinc is expected to remain muted in 2012 and 2013 on the back of growing sovereign debt and liquidity concerns in the eurozone. Fitch estimates a conservative copper market forecast of USD7,500 per tonne in both 2012 and 2013. However, these levels are lower than the 2011 average due to lower investment demand and expectations of lower growth in China. In the longer term (2014-2017), new mine production is likely to exceed demand growth, resulting in a mid-cycle price assumption of USD6,000 per tonne. The longer-term price outlook for zinc will depend upon the timing of planned mine closures and the introduction of new capacity, with some rebound in prices expected in 2013, in line with other commodities.
Iberian is planning significant mine and processing plant expansion at its Spanish operations, with output capacity at the Aguas Tenidas plant increasing to 4.4mtpa by early 2015 from 2.2mtpa currently. This expenditure will lead to negative FCF over the expansion phase, although cash costs are expected to improve as output ramps up over coming years. Fitch notes that some execution risk remains despite the low risk nature of the expansion.
Fitch believes that Iberian’s liquidity position remains tight but that it will be acceptable following the successful refinancing of existing debt obligations through the issue of a new senior secured bond of USD200m and new RCF of USD100m. This follows the waiver of the debt covenants at end-2011 and extension of existing debt maturities to 2013.
Proceeds from the bond issue are also expected to be partially applied to financing the mine expansion in Spain, with the remainder coming from expected positive cash generation over 2012 to 2014. The final issue rating will be assigned once Fitch receives final documentation that conforms to information already received.
Negative: If FFO gross leverage is sustained above 3.5x, this would reflect a significant increase in Iberian’s cost position, i.e. the failure to control rising domestic cost increases and limited financial flexibility constrain the ratings. A failure to successfully execute the planned bond, debt refinance and mine expansion may also lead to negative rating action.
Positive: An upgrade is considered unlikely, but may be considered if gross leverage is maintained at below 2x over the medium-term and the company sustains cash costs well within the second quartile of the global cost curve.
Iberian is a global base metals company with operating mines and exploration targets in Spain and Peru, where it operates three key mines. The company primarily produces copper, but also smaller quantities of zinc, silver, gold and lead.