TEXT-Fitch rates Yancoal 'BBB-'; Proposed Notes 'BBB-(exp)'
(The following was released by the rating agency)
April 27 (Fitch) Fitch Ratings has assigned China-based Yanzhou Coal Mining Company Limited (Yancoal) a Long-Term Foreign-Currency Issuer Default Rating (IDR) of 'BBB-' with a Stable Outlook. Simultaneously, Fitch has assigned Yancoal's proposed senior unsecured notes an expected rating of 'BBB-(exp)'. The final instrument rating is contingent upon the receipt of final documents conforming to information already received.
Yancoal's ratings reflect its position as one of the largest coal mining companies in China, with 10 operational coal mines. Its operating scale and reserve base and life statistics are in line with peers rated in the high 'BB' and low 'BBB' categories. Its geographically diversified production base reduces the risk of business interruption, such as due to poor weather. Proximity of its mines to end-users also reduces transportation costs.
Yancoal's Australian subsidiary, Yancoal Australia Limited, is in the process of merging with Gloucester Coal Limited (Gloucester), a listed coal mining company in Australia. Post-merger, Yancoal Australia Limited would become the largest listed pure-play coal mining enterprise in Australia with nine operational coal mines (up from six). The transaction is subject to certain approvals and Yancoal expects the deal to be closed by mid-2012.
As a single commodity mining company, Yancoal's credit profile is tempered by potential coal price volatility. This risk is, however, mitigated by the Chinese government's 12th 5-year plan to consolidate the coal mining industry and Yancoal's efforts to diversify its cash flow sources.
Fitch views Yancoal's links with its 53% majority shareholder, Yankuang Group Corporation Limited (Yankuang, an entity owned by Shandong State-owned Assets Supervision and Administration Commission), as only moderate to weak. Despite Yankuang's controlling stake, Yancoal's sizeable number of international minority investors are a counteract to Yankuang's influence.
Yancoal's credit metrics are strong at the current rating level, with funds from operations (FFO) gross interest coverage of 17.9x and FFO-adjusted net leverage of 1.1x for 2011. However, Fitch expects these metrics to weaken both on the company's planned capex for 2012 and 2013 and on the proposed merger with Gloucester, for which Yancoal is responsible in funding a special dividend and capital return.
Negative rating action may result from FFO-adjusted net leverage rising above 2.5x on a sustained basis or from any strategic decision from Yankuang Group leading to an impairment of Yancoal's credit risk profile. Positive rating guidelines include FFO-adjusted net leverage improving to 1x or below on a sustained basis.
The proposed senior unsecured debt instrument is rated at the same level as Yancoal's IDR, reflecting the adequacy of unencumbered assets and the fact that secured debt accounts for less than 2x of 2011 EBITDA. The proceeds from the proposed notes are to be used for refinancing and funding development costs of new projects.