14 Oct 2010 11:30

Moody's confirmed the B1 rating for Raspadskaya and changed the outlook to negative

MOSCOW. Oct 14 (Interfax) - On Wednesday, Moody's Investors Service has today confirmed the B1 corporate family rating for Raspadskaya and the B1 rating for the Loan Participation Notes due in May 2012 issued by Raspadskaya Securities totaling USD 300 million. At the same time Moody's Interfax Rating Agency, which is majority owned by Moody's, has confirmed Raspadskaya's A1.ru national scale rating. The outlook to all ratings is negative, the agency said in a statement.

The statement said: "This rating action concludes the review initiated on May, 12, 2010 when the company was placed under review for a possible downgrade following the explosions at the largest mine of the company which accounted for an app. 70% of the total production volume. The review focus was identified as: (i) the potential length and extent of interruption of production at the Raspadskaya mine and the possible mitigates that other producing assets of the company or existing inventories could bring to revenue flow, (ii) the ensuing revenue loss and financial consequences if such suspension of mine operations was to last for an extended period, (iii) the importance of investments and expenses that may be required to re-launch the mine's operation, and (iv) the potential company's liability arising from this event.

"The B1 CFR reflects Moody's view that the currently benign operating environment for coal mining with undersupply of premium coal and historically high prices should allow Raspadskaya to weather the low output period until restart of production at the Raspadskaya mines without material cash flow shortfalls compared to the weak fiscal year 2009 while absorbing the larger part of repair and reconstruction cost in operating cash flows.

"The rating is supported by Raspadskaya's low operating cost and conservative capital structure tempered by liquidity management that relies on cash balances and continued support by its bank lenders. Raspadskaya had entered this troubled period for its operations with a strong financial profile supported by conservative credit metrics, a solid cost competitiveness with high margins potential, and a good cash position which provides some degree of protection to negative developments. Raspadskaya estimates that the cost to rebuild the affected mine will not exceed app. USD 280 million, most of which as increased operating expenses, and is planning to restart operations there in the last quarter of 2010.

"Though the 1H 2010 performance was strong, the agency comments that it largely reflects strong pre-accident (which occurred in May 2010) performance on the back of increase in prices. The negative outlook is premised on: (i) the expected weakening of cash flow generation linked with the unavailability for production of the principal mine of the company for several months and the fact that the restart of operations at the Raspadskaya mine is likely to be only progressive, which increases the dependence on market prices for coal remaining high; (ii) the remaining uncertainties associated with repair work to be completed on time and on budget; and (iii) the possible delays in expected volumes increases at other mines to mitigate the loss of production from Raspadskaya mine.

"The company benefits from favorable market conditions for mining companies in 2010 with current prices for coal concentrate in Russia at app. USD 120/t (for Raspadskaya grades of coal), ie much better than in 2009, which should support a reasonably solid cash flow generation and help the company to maintain healthy credit metrics despite the Raspadskaya mine interruption.

"Furthermore, 3Q 2010 operating performance indicates that the price assumption for the full year could hold allowing the company to have decent financial metrics in spite of the significant loss in volumes of coal produced. For 2011 volumes are expected by Raspadskaya to pick up from the start of the year following a substantial but progressive recovery at Raspadskaya mine and increased production at other mines.

"Moody's also expects that the cost for reconstruction of the damaged mine will primarily be absorbed in its operating costs. At the end of 1H 2010 Raspadskaya had USD 286 million in cash balances and short-term deposits which would be available to fund potential cost overruns.

"In order to maintain the current rating, Moody's would expect that the issue of maturing USD 300 million LPN in 2012 will be addressed in a timely manner. Negative pressure would develop on the rating should the major assumptions supporting the current rating not materialize, ie that (i) the company may not be able to re-start limited operations at Raspadskaya mine by the end of 2010; (ii) that the effective costs and capital expenditures for the restoration of the affected mine may materially exceed management estimates; and (iii) the company may not be able to generate positive free cash flow on an on-going basis because of either continued low production rates or a collapse of coal prices or a combination of both. The last rating action was on May 12, 2010 when Moody's placed OAO Raspadskaya's B1 corporate family rating and B1 rating for Loan Participation Notes due in 2012 issued by Raspadskaya Securities and totaling USD 300 million on review for possible downgrade.

"At the same time Moody's Interfax Rating Agency, which is majority owned by Moody's, placed Raspadskaya's A1.ru national scale rating on review for possible downgrade. The action reflected the uncertainties surrounding the impact of the recent accident at Raspadskaya mine in Kemerovo region on the company's operating performance going forward."