Fitch affirms Kazatomprom at ‘BBB-‘; outlook stable
July 19. Reuters
Fitch Ratings has affirmed JSC National Atomic Company Kazatomprom’s Long-term foreign currency Issuer Default Rating (IDR) at ‘BBB-‘, Short-term IDR at ‘F3’ and foreign currency senior unsecured rating at ‘BBB-‘. The Outlook on the Long-term IDR is Stable.
KEY RATING DRIVERS
Limited Headroom in Leverage Metrics
Kazatomprom’s FFO gross adjusted leverage reached 2.6x in 2012 and Fitch expects it to remain elevated at around 2.8x in 2013, which exceeds Fitch’s negative rating guideline of 2.5x. This is mainly due to an intensive capex programme of about KZT234bn (USD1.6bn) over 2013-2015, which is likely to be partly debt funded. However, we anticipate quick de-leveraging to below 2.5x in 2014 and to around 2x in 2015-2016 as a result of higher EBITDA due to production growth and moderation of capex. In our view, this supports the current Stable Outlook on the Long-term IDR. Failure by the company to demonstrate a prompt reduction in leverage ratios to below 2.5x could lead to negative rating action.
Fitch does not include financial guarantees provided by Kazatomprom to non-consolidated JVs for their bank debt (mainly with Japanese banks) in its ratings case leverage calculations as we expect these companies to generate sufficient cash flows to service their obligations. However, we monitor the dynamics of the group’s off-balance sheet obligations and estimate that Kazatomprom’s FFO adjusted leverage ratio for FY11 and FY12 would have been higher by about 0.5x and 0.6x, respectively, if all off-balance sheet obligations were included in the leverage ratio calculations. At end-2012, the company had outstanding financial guarantees of about KZT38.3bn. Currently, about 68% of outstanding financial guarantees expire in 2018 and the remainder in 2023.
Cash Flows Supported by Dividends from JVs and Associates
When calculating FFO, Fitch includes dividends from Kazatomprom’s non-consolidated JVs and associates. The agency expects that Kazatomprom will continue to receive dividends following JVs and associates’ production expansion in the short to medium term and will closely monitor their performance as this dividend stream has become an essential contributor to the group’s cash flow. In 2012 Kazatomprom received dividends of KZT43.1bn up from KZT5.7bn in 2010. In addition, we believe that the company’s equity stakes will remain the main driver of its consolidated uranium production growth in the short to medium term. The group’s 2012 output reached almost 12 thousand tonnes (including equity affiliates).
Strong Uranium Market Position
Kazatomprom’s investment-grade rating continues to be primarily driven by its leading position in global uranium mining, stable operating profile, the fact that most of its uranium production volumes have been contracted over the medium term; its competitive cash costs compared with those of its global peers and relatively stable profit margins despite market challenges following the Fukushima accident in 2011. In 2012, Kazatomprom maintained its leading position in global uranium mining with a market share of 20%. It also benefits from high barriers to entry as the uranium mining industry requires special certification and licensing with long lead times and specialised expertise.
Nuclear Industry Challenges to Continue
Although Kazatomprom’s direct exposure to Japan’s Fukushima-Daichi nuclear power plant is fairly limited, negative market sentiment is reflected in uranium oxide (U3O8) futures prices, in particular the noticeable drop in expectations over the past years. In Fitch’s view, a sustained uranium price decline may have a lasting negative impact on Kazatomprom’s earnings given the inclusion of spot price elements in company’s existing long-term sales contracts. Kazatomprom’s ratings are constrained by its presently limited diversification and exposure to uranium price volatility. The latter could be mitigated by the expected vertical integration and shift to higher value-added products and services in the long term as well as its strong market position, contracted sales and ramped-up production.
Rating on a Standalone Basis
Fitch rates Kazatomprom on a standalone basis, as legal, operational and strategic ties between the company and the Republic of Kazakhstan (BBB+/Stable), its ultimate parent, are considered limited, according to Fitch’s Parent and Subsidiary Rating Linkage criteria. Fitch notes that the company’s rating incorporates implicit state support in the form of certain privileges in obtaining subsoil use agreements through direct negotiations with the Kazakh government and the state participation in negotiation with certain foreign customers.
Positive: Future developments that could lead to positive rating actions include:
– Reduction of FFO gross adjusted leverage to below 1.5x on a sustained basis would be positive for the ratings. However, Fitch does not forecast such deleveraging to take place in the medium term due to Kazatomprom’s intensive capex plans.
– Successful implementation of the vertical integration strategy, while maintaining a sound financial profile could be positive for the rating.
Negative: Future developments that could lead to negative rating action include:
– Deterioration of FFO gross adjusted leverage beyond 2.5x on a sustained basis due to, among other things, a more aggressive capex programme, acquisitions and/or lower than expected uranium prices would put pressure on the rating.
LIQUIDITY AND DEBT STRUCTURE
Liquidity To Remain Satisfactory
Kazatomprom maintained the liquidity position of KZT40.2bn (including KZT2.2bn of short-term deposits) at end-2012, mainly with Kazakh banks, and had access to available credit facilities of USD60m (KZT9bn) at end-H113. Fitch believes that Kazatomprom will continue generating strong cash flow from operations over 2013-2016 but its free cash flow is likely to remain negative in 2013.
While the liquidity position did not cover short-term obligations of KZT61.1bn at end-2012, the latter were affected by one-off re-classification and included KZT14bn of short-term loans and borrowings and about KZT47bn of Kazatomprom’s guarantee of minimum distributions to Beijing Sino-Kaz Uranium Resources, a JV partner, over 2010-2033. According to IFRS 2012 Financial Statements, this guarantee was re-classified to short-term liabilities as Kazatomprom and Sino-Kaz Company has reached an agreement to rescind the latter’s right for distributions and Kazatomprom’s guarantee. Sino-Kaz Company will instead retain its 49% ownership interest in Semizbay and Kazatomprom will make a cash payment equal to the difference between the original contractual obligation and the current fair value of LLP Semizbay-U. In May 2013, Kazatomprom paid USD132m (about KZT20bn) to Sino-Kaz Company. As a result, the amount of guarantee is expected to be removed from the company’s financial liabilities in 2013.
At end-2012 about 80% of Kazatomprom’s outstanding loans were due in 2015 or later mainly represented by an USD500m Eurobond due in 2015.