S&P assigns Polyus Gold preliminary 'BB+' rating, outlook positive
MOSCOW. April 17 (Interfax) - International ratings agency Standard & Poor's has assigned its preliminary 'BB+' long-term corporate credit rating to Russia-based gold miner Polyus Gold International Ltd., the agency said in a press release.
The outlook is positive.
At the same time, S&P assigned its preliminary 'BB+' issue rating to Polyus' proposed senior unsecured notes. The preliminary recovery rating on the notes is '3', indicating S&P's expectation of meaningful (50%-70%) recovery in the event of a payment default.
The ratings are based on the draft documents S&P has received, and are subject to its review of the final terms and conditions. Any material changes to these terms and conditions could affect the ratings, the press release said.
The ratings on Polyus reflect S&P's assessment of the company's "fair" business risk profile and "significant" financial risk profile, as the ratings agency's criteria define these terms.
S&P's assessment of Polyus' "fair" business risk profile reflects its view of the company's position as the eighth-largest gold producer in the world and the largest gold miner in Russia, with production of 1.7 million ounces (Moz) of gold in 2012 across six mines and alluvial operations. Further strengths are Polyus' long reserves life of more than 20 years and prevailing strong gold prices, the press release said.
These strengths are partially mitigated by Polyus' exposure to a single commodity; country risk, because all of Polyus' assets are concentrated in Russia; and its unit cash cost of about $700 per ounce, which puts it in a median position on the global cash cost curve. The rating is further constrained by execution risk at the Natalka gold mine. S&P believes this asset should improve Polyus' competitive position and strengthen its cash flow generation once it is commissioned. However, S&P sees risks of delays, further cost overruns, and eventually a higher unit cash cost than the ratings agency currently assumes. These risks stem from the scale of the project and the remote location of the mine in the far east of Russia, the press release said.
S&P's assessment of Polyus' "significant" financial risk profile reflects the company's current net debt position. Polyus has low debt, and S&P forecasts that it will maintain Standard & Poor's-adjusted debt to EBITDA at between 0.5x and 1.0x in the coming years. This is in line with Polyus' financial policy that targets debt to EBITDA of less than 1.5x, and S&P's view of its ability to scale back capital expenditure (capex) from 2014 to protect free operating cash flow (FOCF). In S&P's view, after factoring in the notes that Polyus is planning to issue in the coming weeks, the company should have sufficient liquidity sources to bridge 2013 and 2014, even under a conservative gold price assumption of $1,200 per ounce, the press release said.
These factors are offset by S&P's forecast of substantially negative FOCF in 2013 due to high capex in the Natalka mine, and the risk of additional negative FOCF in case of delays or cost overruns in this project. S&P also sees the risk of Polyus adopting a more aggressive dividend and financial policy in the future following recent changes in ownership, the press release said.
According to S&P, there is a one-in-three possibility of us raising the rating in the coming 12-18 months if: Polyus successfully starts operations at the Natalka mine in the summer of 2014, with a second-quartile unit cash cost; Polyus continues to adhere to a moderate financial policy and demonstrates its ability to generate positive FOCF and broadly neutral discretionary cash flow after operations start up at the Natalka mine.
S&P could revise the outlook to stable in the event of material delays and cost overruns in the Natalka project, leading to additional significant negative FOCF. We could also stabilize the outlook if the company's financial policy becomes more aggressive due to high dividends or capex. Finally, rating upside will likely disappear if gold prices decline substantially below S&P's short-term price assumptions of $1,500-$1,400 per ounce, or if Polyus' cash cost position deteriorates substantially. However, S&P does not currently anticipate these outcomes, the press release said.