Fitch Affirms Kazatomprom at ‘BBB-‘; Outlook Stable
Fitch Ratings-Moscow/London-05 December 2016: Fitch Ratings has affirmed Kazakhstan-based JSC National Atomic Company Kazatomprom’s Long-Term Foreign Currency Issuer Default Rating (IDR) at ‘BBB-‘ with Stable Outlook and its Short-term IDR at ‘F3’.
The affirmation reflects our expectations that the company will maintain its financial profile over 2016-2019 within our guidelines for the current rating level, despite a drop in uranium prices and some deterioration of credit metrics in 2018-2019.
Kazatomprom is rated on a standalone basis as we consider legal, operational and strategic ties with its ultimate shareholder, the Republic of Kazakhstan (BBB/Stable) to be limited.
KEY RATING DRIVERS
Uranium Prices Under Pressure
The average uranium oxide (U3O8) spot prices decreased to USD26.9/lb over 10M16, from USD36.7/lb over 10M15, and plunged in November 2016 to USD18.5/lb, a 12-year low. We expect the price to remain under pressure, with only a marginal increase to slightly above USD20/lb by 2019 on the back of uranium oversupply, as a result of nuclear industry developments, ie a slowdown following the Fukushima accident in 2011. A sustained decline in uranium prices would have a lasting negative impact on Kazatomprom’s earnings, given the inclusion of spot price elements in its existing long-term sales contracts.
Strong 2016, Weaker 2017-2018
In 6M16, Kazatomprom reported EBITDA of KZT60bn, up from KZT22bn in 6M15. The surge in earnings was mainly driven by a devaluation of the local currency, which declined to an average of KZT345/USD over 1H16 from KZT185/USD over the same period a year ago; Kazatomprom generates around 70% of its revenue in foreign currencies. Despite the continued pressure on uranium prices and its recent drop, we expect Kazatomprom’s EBITDA to remain strong in 2016 at about the 2015 level.
However, we forecast EBITDA to drop significantly in 2017-2018, due to depressed uranium prices and our expectation of local currency strengthening over this period (to about KZT310/USD in 2018 from our 2016 expectation of KZT340/USD). However, we expect the company’s credit metrics to remain commensurate with the ‘BBB-‘ rating.
High 2016-2017 Dividends From JVs Expected
We include dividends from Kazatomprom’s joint ventures (JVs) and associated companies in our funds from operations (FFO) calculation; JVs and associated companies have become essential contributors to Kazatomprom’s cash flow. We anticipate dividends from JVs and associates to increase significantly in 2016 and 2017, to about KZT70bn on average from the average of KZT32bn over 2012-2015. This increase is mainly driven by significant revenue improvement, as a result of a tenge devaluation, and a lower increase in costs (as the latter are mainly denominated in local currency).
We believe that the company’s JV and associates will continue generating recurring dividends, remaining the main driver of consolidated uranium production growth in the short to medium term. After 2017, we anticipate the dividends from JVs will decrease on weak uranium spot prices and local currency strengthening.
FX Debt Naturally Hedged
At end-1H16 the majority of Kazatomprom’s debt was denominated in foreign currencies, mainly USD and EUR. We assess the company’s FX exposure as manageable, due to a natural hedge from the foreign currency-denominated revenue (about 70% in H116) that the company generates from uranium sales and some foreign currency cash holdings (about 88% at end-2015).
Fitch excludes financial guarantees provided by Kazatomprom to non-consolidated JVs for their bank debt (mainly with Japanese banks) from its adjusted debt calculations as we expect these companies to continue to generate sufficient cash flows to service their obligations, which are amortising. However, we monitor the dynamics of the Kazatomprom’s off-balance sheet obligations and estimate that its FFO adjusted leverage ratio for 2015 would have been about 0.7x higher, if all off-balance sheet obligations were included in the leverage ratio calculations. At end-9M16, the company had outstanding financial guarantees of USD75m (KZT25bn), expiring over 2018-2024.
Kazatomprom’s low investment-grade rating continues to be primarily driven by: its leading position in global uranium mining, with about a 21% market share in 2015; a relatively stable operating profile; and contracted uranium sales volumes over the medium term. It also benefits from competitive cash costs compared to global mining peers (ie, Cameco), although its cash costs are comparable to those of Uranium One Inc (BB-/Stable) as they share stakes in some JV. Kazatomprom is the largest uranium mining company worldwide. It benefits from high barriers to entry, as the industry requires special certification and licensing, with long lead times and specialised expertise.
Fitch’s key assumptions within our rating case for the issuer include:
– uranium sales volumes to remain relatively flat, in line with the company’s guidance;
– uranium sales prices of USD28/lb in 2016, USD21-22/lb in 2017-2018 and USD24/lb in 2019;
– inflation of 14% in 2016 and 6.3% on average over 2017-2019;
– capex averaging KZT50bn annually for 2016-2019;
– dividends received on average of KZT50bn annually over 2016-2019; and
– dividends paid in line with the level approved by Samruk-Kazyna for 2016 results; a 30% dividend payout ratio for 2017-2019.
Future Developments That May, Individually or Collectively, Lead to Positive Rating Action
– Reduction of FFO adjusted gross leverage to below 1.5x on a sustained basis.
– Successful implementation of a vertical integration strategy, while maintaining a sound financial profile.
Future Developments That May, Individually or Collectively, Lead to Negative Rating Action
-Deterioration of FFO adjusted gross leverage above 2.5x on a sustained basis due to, among other things, a more aggressive capex programme, acquisitions, and/or lower-than-expected uranium prices.
– Reduction in dividends from JV and associates that are significantly below Fitch’s current expectations could put pressure on the ratings.
At end-9M16, Kazatomprom’s cash and cash equivalents stood at KZT95.8bn, mainly with Kazakh banks. Together with short-term deposits and available unused credit facilities of KZT68bn (USD204m), this comfortably covers short-term maturities of KZT50bn. Kazatomprom does not pay any commitment fees on undrawn credit facilities.
We believe Kazatomprom will generate healthy cash flows from operations over 2016-2019 and its FCF is likely to be positive in 2016, due to strong financial performance as a result of a favourable tenge devaluation; however, this may turn negative in 2017 as a result of lower cash generation pressured by low uranium prices and relatively high capex. This may add to funding requirements.
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