April 16 (The following statement was released by the rating agency)
Fitch Ratings has assigned Polyus Gold International Limited's (Polyus Gold)
proposed issue of notes an expected foreign currency senior unsecured rating of 'BBB-(EXP)'.
The final rating is contingent upon the receipt of final documents conforming to
information already received. A full list of ratings is at the end of this
Polyus Gold is a gold producer which exploits seven open-pit gold mines in
Eastern Siberia and Far East regions of Russia. The company is in the top 10
global gold producers. The company has a conservative capital structure and a
competitive cost position compared with its international peers.
KEY RATING DRIVERS
- Guaranteed Notes
The notes will be unconditionally and irrevocably guaranteed by CJSC Gold Mining
Company Polyus, Polyus Gold's largest operating company, which exploits the
company's largest Olimpiada gold deposit and is an owner of Polyus Gold's other
- High-quality Reserves, Comfortably Long Mine Life
At end-2012 the company had control of 87.5moz of gold reserves, the third
largest amongst gold mining companies globally. The company's average mine life
of greater than 50 years is also materially above gold industry average levels
(calculated based on annual output of 1.678moz of gold in 2012). Fitch also
notes the high quality nature of Polyus Gold's deposits, with an average gold
grade of 2.1g/t, which is higher than its key competitors with an average grade
in the range of 0.8g/t-1.2g/t.
- Competitive Cost Position
Polyus Gold has a strong operating cost position sitting on average in the
second quartile of the global cost curve. This in part reflects the open-pit
nature of the company's mines. In 2012, the company's average cash costs
equalled USD694/oz compared with an industry average of USD740/oz.
The gold industry globally is currently facing ongoing cost pressures due to a
combination of decreasing grades, appreciation of gold-mining country currencies
against the USD, and labour/energy cost inflation. Over 2009-12, average cash
mining costs increased at a compound average growth rate of 16%. With respect to
Polyus Gold, Fitch has a concern regarding Russian energy cost inflation, which
in recent years has exceeded the general rate of inflation.
- Increased Operational Diversification
The company has considerably strengthened its operational diversification over
the past three years through the launch of the Blagodatnoye, Titimukhta and
Verninskoye mines. As a result, the percentage share of the Olimpiada mine in
the company's total output decreased to 39% in 2012 from 67% in 2009. After
launching the Natalka mine, which is expected in 2014, the company's
diversification is expected to further increase.
However, based on current known development plans, all of the company's assets
will remain located in Russia. In Fitch's view, exposure to this country entails
higher than average political, business and regulatory risks.
- Strong Corporate Governance
Fitch assesses Polyus Gold's individual corporate governance profile as being
strong relative to other rated corporates based in Russia. Fitch notes that
Polyus Gold is incorporated in the UK, complies with the UK Corporate Governance
Code, and that the majority of the company's board consists of independent
Relationship agreements signed between the company and its shareholders
contribute to the independence of the company's board, in the agency's view, and
decrease the potential for shareholder actions to negatively impact the
company's financial profile and/or the position of creditors.
DEBT AND LIQUIDITY
- Conservative Capital Structure
For 2013, Fitch expects Polyus Gold to record negative free cash flow (FCF) of
around USD700m-USD900m due to historically high capex spending. While funds from
operations (FFO) adjusted gross leverage is expected to increase to around 0.8x
by end-2013 (0.3x at end-2012), leverage metrics will remain conservative
compared with similarly rated peers. In subsequent periods, a normalisation of
capex levels together with the planned launch of the Natalka mine is expected to
result in sustainably positive FCF and a decline in gross debt levels.
- Sound Liquidity
Liquidity is currently sound and expected to remain so. At end-2012, the company
had USD960m of cash on hand and USD642m of unutilised committed bank loans
compared with USD188m of short-term borrowings.
Positive: Future developments that could lead to positive rating actions
- Strengthening of the company's operational profile including increased
Negative: Future developments that could lead to negative rating action include:
- FFO adjusted gross leverage sustainably above 2.5x.
- EBITDAR margin sustainably below 30%.
FULL LIST OF RATINGS
Foreign currency Long-term IDR: 'BBB-'; Outlook Stable
Foreign currency Short-term IDR: 'F3'
Foreign currency senior unsecured rating: 'BBB-'
Expected foreign currency senior unsecured rating on the proposed notes:
assigned at 'BBB-(EXP)'