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