TEXT-S&P assigns Iberian Minerals Corp 'B+' rating

Wed Nov 14, 2012 11:51am EST

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Overview
     -- Mining company Iberian Minerals Corp. decided not to proceed with a 
planned $200 million bond issue, but successfully completed a $100 million 
revolving credit facility and used it to refinance existing debt.
     -- We expect the company to attract alternative financing or delay its 
discretionary investment program if additional financing is not available.
     -- We are assigning a 'B+' long-term rating to Iberian Minerals.
     -- The stable outlook reflects our view of Iberian Minerals' anticipated 
strongly improved profitability metrics in 2012-2013, and factors in that the 
company will maintain adequate liquidity despite the cancellation of the bond 
offering. 

Rating Action
On Nov. 14, 2012, Standard & Poor's Ratings Services assigned its 'B+' 
long-term corporate credit rating to Iberian Minerals Corp., a mining company 
that is registered in Switzerland and has assets in Spain and Peru. The rating 
is in line with the 'B+' preliminary rating assigned Sept. 13, 2012. The 
outlook is stable.

Rationale
The rating reflects our view of Iberian Minerals' "weak" business risk profile 
and "aggressive" financial risk profile, as our criteria define the terms. 

Iberian Minerals is a base metals mining company which is 98.1% owned by 
Trafigura Beheer B.V. (not rated), a global physical commodities trading 
group. The rating is based on Iberian Minerals' stand-alone credit quality and 
does not factor in extraordinary timely support from Trafigura. Although we 
see Trafigura's credit quality as stronger than Iberian Minerals', we perceive 
Iberian Minerals as small and not the core of Trafigura's main trading 
activities. Trafigura's strategy is primarily focused on accessing metal to 
trade and as such it buys 100% of Iberian Minerals' production.

Our assessment of Iberian Minerals' business risk profile as "weak" is based 
on the cyclical and capital intensive nature of the mining industry. Iberian 
Minerals is a small player operating one underground mine in Spain and two in 
Peru. The share of the Spanish contribution to EBITDA is set to rise over the 
next several years. Key risks are operating challenges related to underground 
mining, the limited scope of operations, and narrow product diversification. 
We expect copper concentrate production to remain the main revenue contributor 
--in 2011 it contributed 208,000 dry metric tons, or 68% of sales.

Our assessment of the company's business risk profile is further constrained 
by the short reserve lives of the Raul and Condestable mines in Peru of, 
respectively, 4.6 and 3.6 years despite a track record of full reserve 
replacement in these two mines over recent years. Supportive rating factors 
include modest geographic diversification of assets and overall perceived 
moderate country risks. The reserve life of Iberian Minerals' Spanish mine, 
operated by Minas de Aguas Tenidas S.A. (MATSA) is considerable at 18 years. 

In our assessment, Iberian Minerals has a mid-cost-curve position, which 
should support its future profitability, as should its copper price hedges 
that are much higher than in previous years. Moreover, we expect cash costs to 
further improve in Spain in the next two to three years as production expands 
and by-product credit from zinc, silver, and lead increases.

We assess the company's financial risk profile as "aggressive," constrained by 
its limited track record given low historic cash flow generation owing to low 
price hedges. Higher copper price hedges should ensure a significant 
improvement in cash flows in 2012-2013, however. We also expect free operating 
cash flow to be negative in 2013 if the company executes its capital 
expenditure (capex) program as planned. These weaknesses are partly offset by 
the company's limited exposure to volatile copper spot market prices, thanks 
to hedging contracts that cover 60% of production in 2012-2013, and a 
comparable part in 2014-2015. Iberian Minerals' financial risk profile also 
benefits from its current moderate debt.

Our base-case scenario points to markedly stronger EBITDA in 2012 of $160 
million-$180 million because the low-priced copper and zinc hedges came to an 
end in the first quarter of 2012. This compares with EBITDA of only $21 
million in 2011, when low-priced hedges were in place, and $75 million 
achieved in the first half of 2012. Our base-case assumptions factor in 
supportive contracted copper prices between $3.0/lb and $3.6/lb for the rest 
of 2012 and 2013, supportive zinc and silver prices, and the following 
Standard & Poor's pricing assumptions for unhedged volumes:
 
     -- Copper at $3.4/lb for the rest of 2012 and $3.0/lb in 2013;
     -- Zinc at $0.83/lb for the rest of 2012 and $0.80/lb in 2013; and
     -- Gold at $1,400/oz for the rest of 2012 and $1,200/oz in 2013.

Despite the company deciding not to proceed with the bond offering, under our 
base case scenario we expect it  will try to attract another source of funding 
and proceed with its substantial capex program in the next couple of years, 
which could drive mildly negative free cash flow.

We therefore expect the company's adjusted debt to increase to about $250 
million-$300 million. The adjusted ratio of debt to EBITDA should stay below 
2x in 2012-2013, however.

In a scenario where additional funding is not in place we would expect the 
company to limit capex to about $80 million financed from operating cash flow. 
Leverage will remain low under this scenario.

Liquidity
We view Iberian Minerals' liquidity as "adequate" under our criteria, after it 
issued the $100 million revolving credit facility (RCF) used to repay existing 
debt of about $70 million and increase cash balances. This is despite the 
company electing not to proceed with the planned $200 million bond issue that 
it initially envisaged to help finance expansion. We believe that the company 
will either attract alternative financing or postpone part of its 
discretionary capex, so that it can be financed from cash flow from operations.

The company will have no substantial maturities in the next two years. Under 
these assumptions the ratio of sources to uses of liquidity is above 1.2x for 
the next 12 months.

Sources of liquidity for the next 12 months as of June 30, 2012, included:
     -- Funds from operations (FFO) of $130 million-$150 million; and 
     -- Our expectation that the company will fully draw its RCF to repay $70 
million of senior debt maturing in 2013, and use the remainder to increase its 
cash balances for general corporate purposes. 

Potential liquidity uses over the next 12 months include:
     -- $20 million amortization of the new RCF; and
     -- Capex of about $80 million a year that the company can't delay, in our 
view.

The RCF documentation includes financial maintenance covenants, including:
     -- Tangible net worth of not less than $200 million;
     -- Current ratio of not less than 1x;
     -- Debt service cover ratio of not less than 1.35x; and
     -- Net debt to EBITDA not more than 4x until the third quarter of 2013, 
3x in the second year, and 2.5x thereafter.

We expect the company to have ample headroom under these covenants in 2013. We 
also factor in that future financing will contain similar or lighter covenant 
packages. 

Outlook
The stable outlook reflects our base-case expectation of strongly improved 
profitability in 2012-2013 as the company benefits from much-higher-priced 
hedge contracts. We also factor in that the company will manage its investment 
program to maintain adequate liquidity, namely through using long-term funding 
for its capex program. 

We might consider a negative rating action if we saw a substantial debt 
increase compared with our base-case scenario. Such an increase might be 
prompted by operational underperformance and/or higher capex in a weak price 
environment, a more aggressive financial policy that could include large 
near-term dividend distributions to Trafigura, or weakened liquidity. 

A positive rating action is unlikely in the next 12 months, given the 
company's small asset base, limited forecast free operating cash flow in view 
of its sizable capital spending plans, limited track record in terms of 
improved profitability, and the longer time that will be needed for the 
company to advance its capex program. Rating upside over the medium term could 
result from a better track record on sustainable profits and successful 
progress on Iberian Minerals' capital program in combination with a supportive 
financial policy. 

Related Criteria And Research
     -- Key Credit Factors: Methodology And Assumptions On Risks In The Mining 
Industry, June 23, 2009
     -- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, 
May 27, 2009
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 
     -- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008
     -- Methodology And Assumptions: Liquidity Descriptors For Global 
Corporate Issuers, Sept. 28, 2011

Ratings List
New Rating; CreditWatch/Outlook Action

Iberian Minerals Corp.
 Corporate Credit Rating                B+/Stable/--       

Not Rated Action
                                        To                 From
Iberian Minerals Financing
 Senior Secured*                         NR                 B+
 Recovery Rating                         NR                 3

*Guaranteed by Iberian Minerals Corp.


Complete ratings information is available to subscribers of RatingsDirect on 
the Global Credit Portal at www.globalcreditportal.com. All ratings affected 
by this rating action can be found on Standard & Poor's public Web site at 
www.standardandpoors.com. Use the Ratings search box located in the left 
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