29 Jul 2010 13:51

Fitch affirms OJSC Novolipetsk Steel at 'BB+'; Outlook Stable

MOSCOW. July 29 (Interfax) - Fitch Ratings on Thursday affirmed Russia-based OJSC Novolipetsk Steel's (NLMK) Long-term Issuer Default Rating (IDR) at 'BB+' and National Long-term rating at 'AA(rus)'. The Outlooks on both ratings are Stable. Fitch has also affirmed NLMK's Short-term IDR at 'B', the agency said in a statement.

The statement said: "The rating affirmation in part reflects the company's good performance during 2009 despite the negative impact of the global recession. In 2009, NLMK was able to marginally increase its production volume to 10.6 million tonnes by selling to markets where demand was still growing. NLMK has remained profitable throughout the industry downturn, reporting a FY09 EBITDAR margin of 23%.

"NLMK's ratings continue to reflect its low production cost base which is supported by the technological efficiency of its plants, self-sufficiency in iron ore and coke, partial self-sufficiency in energy and scrap, and low labour costs. The company has strong market positions, including a 31% share of the domestic machine building industry and 30% of the domestic construction industry. NLMK also continues to follow a conservative financial policy, reflected in low leverage metrics (Fitch-adjusted FY09 gross debt/EBITDAR 1.92x) and strong cash flow, despite the industry downturn and significant capex spending of USD1.1bn.

"In recent years NLMK has improved its corporate governance to a level which is above average for Russian metals and mining companies. However, the company's ratings primarily continue to be constrained by its exposure to the weak Russian business environment with the associated higher-than average political, business and regulatory risks. NLMK also lacks self-sufficiency in coking coal which exposes it to potentially volatile prices. The company has, nonetheless, historically been able to largely pass through coal price increases to end customers. Plans to implement Pulverised Coal Injection (PCI) technology will reduce future coal consumption. NLMK also has a comparatively higher level of semi-finished products production compared to Russian peers. While this has not historically constrained NLMK's profitability, it could expose the company to higher than average demand and price volatility, especially during downturns.

"For 2010, Fitch forecasts revenue growth of 25-30% y-o-y with an EBITDAR margin in the range of 25%-30%. The agency forecasts NLMK's 2010 gross adjusted leverage (adjusted gross debt/EBITDAR) at 1.7x-1.9x, and net adjusted leverage (net adjusted debt/EBITDAR) at 1.2x-1.4x. NLMK is expected to have slightly negative free cash flow in 2010 due to significant capex spending for its modernisation programme. Nevertheless, due to significant cash balances (Q110: USD1.2bn) and undrawn committed credit lines (Q110: USD1.6bn) in 2010-2011, the company will continue to maintain a satisfactory liquidity position.

"The Stable Outlook reflects Fitch's expectation that NLMK will continue to follow an organic growth strategy while maintaining strong liquidity and a conservative financial profile with a long-term average net debt/EBITDAR ratio of less than 1.0x".