(The following was released by the rating agency)
— Mirabela Nickel Ltd., an Australia-based nickel miner with operations in Brazil, completed a US$120 million equity raising in June 2012, which removed any immediate liquidity concerns.
— The company’s half-year results are materially better than our expectations and it has achieved a unit cash cost of production of US$6 per pound during the second half of 2012, which is slightly earlier than our expectations.
— As a result, we are revising our rating outlook on Mirabela to stable from negative, and affirming the issuer credit rating at ‘CCC+’.
— In the medium term, the company’s financial stability would depend on cash costs further reducing toward US$5.50 per pound, a level that would generate surplus cash flow after capital expenditure.
On Sept. 26, 2012, Standard & Poor’s Ratings Services revised its rating outlook on Mirabela Nickel Ltd. to stable from negative. We also affirmed the ‘CCC+’ issuer credit rating on the company, ‘CCC+’ issue rating on the company’s US$395 million bonds due 2018, and issue recovery rating of ‘4’.
The outlook revision reflects our view that Mirabela has removed potentially high liquidity pressure in early 2013 with its US$120 million equity raising in June 2012 and recent improvements in key operating ratios. The company has to repay US$25 million of its working capital facility in early next year.
Although the immediate risks have been removed, the company’s current cash costs constrain the ratings and will cause its cash flow deficits to continue in the short term. Mirabela’s first-half ended June 30, 2012, results have significantly improved. Cash costs dropped during the period to US$6.68, or about 10% below the corresponding period in 2011. A number of cost-saving measures and Mirabela’s internalization of some mining activities have boosted the results.
Furthermore, better ore grades and early signs of the benefits from its recently completed upgrade works have contributed to the improved figures. Although realized nickel prices were more than US$8 per pound for the first half, prices recently fell to about US$6.80, though they have recovered since to about US$8. The volatility in nickel prices underscores the importance for Mirabela to rein its cash costs.
Indeed, we believe that Mirabela’s cash costs could reduce further. As the company’s desliming plant becomes fully operational, it should improve nickel recovery. We note, however, that Mirabela’s large production costs will remain exposed to exchange rates as they are denominated in Brazilian real. We also believe that operating costs could fluctuate quarterly, until the company has established a strong track record.
As a result, we have assumed in our forecasts that Mirabela’s cash costs will remain at about US$6 per pound into 2013. We also expect the company will spend no more than US$20 million in capital expenditure, including stay-in-business capital expenses and exploration costs primarily for the purpose of tenement maintenance. Our forecast further assumes nickel prices reaching US$7.50 for the second half of 2012, before increasing to US$8 in 2013.
Nevertheless, we believe nickel prices would remain volatile in the coming months, similar to trends affecting a number of commodities. The ‘CCC+’ corporate credit rating on Mirabela continues to reflect our view of the company’s highly concentrated operations. The company only has one site and a single product. Other weaknesses include its exposure to the volatile nickel market and its relatively high unit cash costs of production.
We assess Mirabela’s liquidity as “adequate”. Relevant aspects of our assessment of the company’s liquidity are as follows:
— We expect that the combination of cash on hand and marginally positive funds from operations to remain substantially above capital expenditure and debt repayment over the next 12 months.
— The company will face a repayment of US$25 million under its working capital facility in early 2013.
— The company has sufficient cash on hand to sustain nickel price dropping during 2013 to about US$6.80 experienced in 2012. Important in our assessment of the company’s liquidity is the fact that the bond indenture does not contain any covenants linked to financial ratios and also prevents the company from paying dividends to shareholders in certain circumstances.
The stable outlook reflects our opinion that the company has sufficient liquidity to support its operating expenditure and financing requirements. We expect the company will continue improving its operations toward a more sustainable cash cost level, even if nickel prices were to persist at less than US$7 per pound during the next 12 months. The outlook is further reflective of the completion of the processing plant upgrade works and the progress of the desliming plant toward full production, with positive results to date.
The rating is likely to be higher within the next 12 months once the company sustains surplus free operating cash flow, even if nickel prices become depressed or the exchange rate is unfavorable. We would need to see Mirabela’s cash costs reducing to the range of US$5.50 to US$5.75 on a sustained basis, while liquidity continues to remain adequate, for the rating to be higher. Given Mirabela’s large cash balance, we believe there is limited downward pressure on the rating in the near term.
Related Criteria And Research
— Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
— S&P Lowers Its Nickel And Aluminium Price Assumptions For The Rest of 2012; Other Metals Price Assumptions Unchanged, July 12, 2012
— Methodology and Assumptions: Liquidity Descriptors for Global Corporate Issuers, Sept. 28, 2011
— Key Credit Factors: Methodology and Assumptions on Risks in Mining Industry, June 23, 2009
— 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
— 2008 Corporate Criteria: Ratios and Adjustments, April 15, 2008
— 2008 Corporate Criteria: Rating Each Issue, April 15, 2008
Mirabela Nickel Ltd.
Senior Unsecured CCC+
Ratings Affirmed; CreditWatch/Outlook Action
Mirabela Nickel Ltd. Corporate Credit Rating
Mirabela Nickel Ltd.
Local Currency CCC+
Recovery Rating 4 4