Jan 8 - Fitch Ratings has affirmed the long-term Issuer Default Rating (IDR)
of Volcan Compania Minera S.A.A. (Volcan) at 'BBB-'. The Rating
Outlook is Stable. Fitch has also affirmed the 'BBB-' rating on the company's
USD600 million senior unsecured 5.375% notes due 2022. A complete list of
ratings is provided at the end of this release.
Ratings Supported by Strong Capital Structure:
The ratings reflect Volcan's diversified mining operations, historical track
record of maintaining a conservative capital structure, strong cash flow
generation, and low cash cost of production. The company's operations are
located in Peru (rated 'BBB'; Outlook Stable by Fitch), which has vast mineral
resources. According to Wood Mackenzie and the Peruvian Ministry of Energy and
Mining production figures for 2011, Volcan ranks as the largest producer of
zinc, silver and lead in Peru and the sixth largest producer of these metals
globally. The company's size relative to its peers allows it significant
negotiating leverage due to its ability to provide large volumes of a variety of
metals. The company is listed on the Lima, Santiago and Madrid Stock Exchange.
Modest Leverage and Strong Liquidity:
Volcan has historically maintained a very low leverage position with an average
total debt-to-EBITDA ratio from 2011 to 2007 of just 0.3x. As of the LTM ended
Sept. 30, 2012, Volcan's total debt to EBITDA and net debt to EBITDA ratios
increased to 1.6x and 0.2x, respectively, following the issuance last year of
USD600 million 5.375% notes due 2022 to fund its expansionary capex program to
2015. The company has a good track record of making early prepayments of debt
and holding a comfortable cash position to maintain strong liquidity, in
addition to access to credit lines with banks. Volcan's cash and marketable
securities as of Sept. 30, 2012, was USD607 million.
Product and Mine Diversification Supports Ratings:
Volcan's revenues are diversified over eight mining operations and six
concentrator plants spread across the Cerro de Pasco, Yauli, and Chungar regions
of the Peruvian Central Highlands. Volcan has exhibited solid revenue growth to
USD1.1 billion for the LTM to Sept. 30, 2012 from the trough of USD627 million
in 2008. In 2011, zinc accounted for 42% of total sales, silver 48%, lead 7%,
and copper 3%. The diversification by mine and product is positive as it
minimizes the company's exposure to labor strikes and provides it with a
relatively assorted end-customer base.
Revenue growth has been fuelled by robust commodity demand, especially from
China, and a sustained period of high prices. Volcan's sales are mostly made
through stable long-term contracts around four years in length, with the
contract prices adjusted annually based on average prices for the year. The
company's largest customer is Glencore, which is also a minority shareholder in
Volcan with 6.3% interest and holds a seat on the company's Board of Directors.
The structure of these contracts, as well as the company's relationship with
Glencore, the world's largest commodity trading house, minimizes demand risk to
High Profitability due to First-Quartile Production Cost Position:
Volcan is well positioned at the bottom of the cost curve as a first-quartile,
low cost, polymetals producer. This allows it to generate positive operating
cash flows through troughs in the demand cycle. For the period spanning January
to September 2012, Volcan had a total cash cost for its overall zinc ore
production of USD54 per metric ton, or just USD0.02 per pound. Helping to
achieve this low production cost for zinc are the by-products of silver, lead
and copper. For silver, the by-products include zinc and copper. With the
production of fine zinc at 228,095 metric tons and fine silver at 16,348
thousand troy oz during the first nine months of 2012, the company is well
placed to achieve strong cash flows. Total production volumes for pure zinc and
silver during 2011 were 318,435 metric tons and 21,136 thousand troy oz,
Cash Flow Generation is Historically Strong but Negative FCF Expected 2012-2014:
Volcan has generated positive levels of free cash flow (FCF) during 2009 to
2011, a period that included two years of great volatility. Fitch projects that
the company will generate cash flow from operations (CFFO) in the region of
USD350 million to USD375 million in 2012. Capex in 2012 is anticipated in the
USD450 million to USD500 million range, resulting in negative FCF of between
USD150 million to USD200 million. This compares to FCF of USD21 million in 2011,
which followed CFFO of USD470 million, capex of USD328 million and dividends of
USD122 million. Fitch expects FCF to remain negative throughout the four year
expansion capex program totalling USD1.1 billion and turn positive in 2015.
Volcan has exhibited high EBITDA margins historically, averaging around 49% for
the last four years. EBITDA has grown at a CAGR of 15.1% to USD453 million for
the LTM to Sept. 30, 2012 from USD241 million in 2008. Fitch's base case
scenario for EBITDA generation in 2012 is conservative at around USD400 million,
with total expected debt of around USD700 million. This equates to a total debt
to EBITDA ratio of 1.7x. Fitch's revenue and EBITDA base case expectations for
2013 are around USD1 billion and USD480 million, respectively, with a net debt
to EBITDA ratio of around 0.4x. Key assumptions are prices for zinc of USD1,900
million per tonne in 2013 and USD2,050 long term, and copper of USD7,500 per
tonne and USD6,500 long term (see Fitch's Special Report: 'Initiating Mid-Cycle
Metals Price Assumptions, published Sept. 14, 2012, available at
Ambitious Investments to Diversify into Copper by 2015:
The company's ambitious expansionary capital expenditure project will more
evenly distribute sales of silver and zinc while expanding further into copper
and gold and will make the company over 100% self-sufficient in energy by 2015.
The company's capital expenditure plan began in 2011 and is scheduled to
complete in 2015 at a cost of approximately USD1.1 billion over the period.
Funding for this investment will be met through the USD600 million 5.375% notes
issued in January 2012, combined with internal cash flow generation.
Volcan is positioned well for future growth in Peru. The company has 341,230
hectares of mining concessions across a region of significant geological
reserves and is currently exploiting 12%, with a further 11% currently being
explored. This equates to 18 years of reserves at current production levels or
37 years when including resources. As of Dec. 31, 2011, Volcan had over 136
million metric tons of proven and probable reserves, and over 224 million metric
tons of additional resources.
Steady Demand Expected for Silver, Zinc and Copper:
Fitch's long-term outlook for silver and zinc is favorable, with silver prices
correlated to gold as a less expensive investment, but also supported by its
industrial uses such as for batteries and electronic components, among others.
Zinc is well supplied at present, yet demand remains consistent. Stocks of zinc
are declining and long-term supply is constrained due to a lack of projects in
the pipeline. In addition to being an alloying agent for steel, zinc also has
uses as an additive to fertilizers and in health supplements for human
consumption. Volcan's expansion into copper, which also has good long-term
fundamentals, and as a by-product of gold, will further diversify the company's
Location in Rating Scale:
Volcan's historical leverage and debt coverage ratios are strong within its
'BBB-' profile. The company's leverage ratios will increase during 2012 to 2015
compared to previous years as a result of its USD1.1 billion expansionary capex
program, but they are expected to remain consistent within the rating category.
Deterioration in the company's net debt to EBITDA ratio above 2.5x over a
sustained period and/or a decline in profitability due to increased operating
costs, could put negative pressure on the ratings. Swift deleveraging of total
debt to EBITDA below 1.0x combined with successful execution of planned
diversification of revenues substantially into copper would put positive
pressure on the ratings.
Fitch affirms the following ratings of Volcan:
--Long Term IDR at 'BBB-';
--Local Currency Long Term IDR at 'BBB-';
--Senior Unsecured 5.375% Notes due 2022 at 'BBB-';
The Rating Outlook is Stable.
Fitch affirms and withdraws the following rating:
--National Long Term Rating at 'AA+(per)'.
This rating is withdrawn as it is no longer considered analytically meaningful.
Additional information is available at 'www.fitchratings.com'. The ratings above
were solicited by, or on behalf of, the issuer, and therefore, Fitch has been
compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Parent and Subsidiary Rating Linkage' (Aug. 8, 2012);
--'National Ratings Criteria' (Jan. 19, 2011);
--'Evaluating Corporate Governance' (Dec. 12, 2012);
--'Initiating Mid-Cycle Metals Price Assumptions, Sept. 14, 2012.
Applicable Criteria and Related Research:
Evaluating Corporate Governance
National Ratings Criteria
Parent and Subsidiary Rating Linkage
Corporate Rating Methodology
Initiating Mid-Cycle Metals Price Assumptions