RPT-Fitch downgrades China Hanking to 'B+'; outlook stable
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Aug 14 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has downgraded China Hanking's (Hanking) Long-Term Issuer Default Rating (IDR) and senior unsecured rating to 'B+' from 'BB-'. The Outlook on the IDR is Stable. The downgrade reflects Hanking's persistently rising cost of iron ore production and exposure to heightened country risk for its investment in Indonesia.
Key Rating Drivers
Persistently worsening cost position: Hanking's irreversible cost surge was driven by its 2012 acquisition of Shangma mine which drove up cash production cost by 16% to CNY292/ton in the restated number in 2011. The rising cost of production was also caused by an accelerated transition of part of Hanking's mining operations to underground from open-pit, and by an increase in both raw material prices and the resource tax (22% higher cash cost in 2012 than in 2011). Fitch estimates that Hanking's iron ore production cost in 2014 will be 12% higher than in 2012.
Although Hanking's cost is still below the industry average, it is no longer near the industry's lowest, which had supported its 'BB-' rating. Coupled with the prevailing weak iron ore average selling price (ASP), Fitch forecasts Hanking's iron ore production EBITDAR margin will deteriorate further to below 40% after 2013, and to 20%-30% around 2015. Hanking's EBITDAR margin fell to 45.8% in 2012 from 64.2% in 2011. Iron ore ASP fell to CNY830/ton for Hanking in 2012, a 22% drop YoY.
Fitch expects global iron ore prices to continue falling to reach USD90/tonne in 2015 and thereafter, due to overcapacity of global iron ore production.
Heightened country risk: Hanking's newly acquired Indonesian nickel mines expose the company to significant execution risk and country risk, as evidenced in Indonesia's new foreign ownership restriction and raw ore export ban. Foreign ownership in Indonesian mines must be progressively reduced to no more than 49% by the 10th year after the license issue.
Indonesian raw ore export ban, which takes effect January 2014, also presents material risk to Hanking's nickel mining operation, even though the company is investing in a refinery facility in Indonesia to secure approval for export quota.
Metal diversification, capacity expansion: Hanking is actively diversifying its mining portfolio by acquiring nickel and gold mines, partly to mitigate the profitability deterioration due to the iron ore price drop. The company plans to spend CNY1bn for the next five years on nickel ore mining and refinery capacities. Meanwhile, it is also ramping up iron ore production, with the aim to increase its iron ore concentrate production to 2.9mt in 2015 from 1.6mt in 2012. The production volume growth could partially mitigate the adverse effect of falling EBITDAR margin and improve Hanking's future cashflow generation.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
-EBITDAR margin being sustained below 20%; or
-Funds flow from operations (FFO) adjusted net leverage being sustained above 2.0x (2012: 0.52x); or
-Sustained material adverse developments in overseas mining operations
Positive: No positive rating action is envisaged over the next 18 to 24 months.
However, future developments that may collectively lead to positive rating action include:
-EBITDAR margin being sustained above 40%, and
-FFO adjusted net leverage being sustained below 1.0x, and
-Sustained success in overseas mining operations
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