Fitch Affirms Codelco's FC IDR at 'A+' & National Rating at 'AAA(cl)'; Outlook Stable
KEY RATING DRIVERS
The company's 'A+' rating reflects Codelco's 100% ownership by the state of Chile and its strategic importance to the country. Codelco is subject to a law that stipulates its entire net income be transferred to the Chilean Treasury, in addition to taxes and dividends paid. Following the capitalization law consisting of USD3 billion in capital contributions and USD1 billion in retained earnings for a four-year period ending in 2018, the owner injected USD600 million in 2015 and allowed the company to retain USD225 million of net profits. The capitalization is intended to partially finance the capex program which is essential to maintain current copper volume output levels in light of declining ore grades at its aging mines.
Increasing Pressure on Credit Profile:
Codelco exhibits a weakened standalone credit profile as a result of higher debt levels used to finance its large capex program coupled with the negative impact of lower copper prices resulting in weaker cash flow generation. As of June 30, 2016, the company had over USD15 billion of total debt compared to USD14 billion as of June 30, 2015. Codelco's total debt-to-latest 12 months (LTM) adjusted EBITDA (adjusted for dividends received from associates) ratio for the same period was 5.0x compared to 3.6x in June 2015 and 2.5x in June 2014, and its net debt-to-adjusted EBITDA ratio was 4.8x versus 3.4x in June 2015 and 2.3x in June 2014. Higher gross debt has been exacerbated by a drop in copper prices to around USD2.13/lb in the first half of 2016 (1H16), USD2.50/lb in 2015 from USD3.11/lb in 2014. Fitch expects the government to continue to support the company during this critical period as the current capital structure is under significant stress.
Elevated Leverage to Remain:
Despite the company's standalone credit profile deterioration, rating linkage to the sovereign remains solid based on the strategic importance of Codelco to the Republic of Chile. These ties were reinforced following the government capitalization law approved in 2014 that demonstrates a robust level of commitment by the sovereign to support Codelco. Fitch expects Codelco will continue to increase its debt levels over the next three years, considering the current low copper price environment, high capex, and pending debt maturities, offset by the capital contributions committed in the capitalization law. Fitch's base case net debt/adjusted EBITDA ratio accordingly increases to close to 5.0x for the period and should remain around this level throughout the capex duration. These expectations include the continued depreciation of the Chilean peso further improving operating costs in 2016, and an expected recovery of copper prices in 2018 and 2019 when Fitch expects a deficit in copper supply, increasing Codelco's EBITDA in line with the increased debt projected for the company. The company restructured its capex plan for the period 2016-2018 and was able to decrease the cash needs by USD2.4 billion reaching USD10.1 billion without affecting the production levels.
Key Strategic Asset for Chile:
Codelco possesses immense copper deposits, accounting for 8% of the world's known proven and probable reserves and holds a leading global position in the copper mining industry, accounting for 10% of the world's annual copper output with approximately 1.8 million metric tons of production. This includes output from its respective shares of the El Abra mine deposit and AAS. Fitch views Codelco's long-life reserves as a strategic asset because it should allow the company to remain an important contributor to government revenues in the future. Fitch has witnessed financial support from the government in the form of lower dividends and the permitting of larger allocations of capital so that the company can improve its capital structure to fund its investment program. The commitment of the largest capitalization for a state-owned company in Chilean history further signifies Codelco's strategic importance for the country.
Second-Quartile Cost Position:
The company's position as a second-quartile cash-cost producer of copper also provides some cushion against future volatility in copper price fluctuations. Codelco's cash cost of production including by-products for 1H16 was USD1.27/lb an improvement on USD1.40/lb, in 1H'15 and USD1.58/lb during 1H14, mainly as a result of savings in materials, energy, and exchange rate differences. Copper prices currently remain around USD2.13/lb. As a result, Codelco's financial performance was resilient for the LTM to June 30, 2016, with USD11.2 billion of revenues. However, LTM EBITDA of USD3.2 billion is subject to large tax obligations, negatively affecting funds from operations (FFO), which coupled with higher debt levels has pressured Codelco's credit metrics
Fitch's key assumptions within the rating case for Codelco include:
--Copper price at Fitch mid cycle price assumptions USD2.15/lb in 2016, USD 2.27/lb in 2017, USD2.49/lb in 2018 and USD2.72/lb in 2019 and beyond.
--The company presented a saving plan which is estimated to reduce operating costs by n USD1.2 billion in the next three year period ending in 2018.
--Stable Production volume and sales at around 2.1 thousand metric tons.
--Average Chilean Peso at around $698 in 2016, and $700 in 2017 and beyond.
--Molybdenum production at around 26 metric tons.
--Capex of USD3.2 billion in 2016, USD3.7 billion in 2017 and USD3.5 million in 2018.
--Treasury Capital Contributions of USD800 million in 2016, 2017 and 2018.
--Cash Costs USD1.28/lb in 2016, USD1.34/lb in 2017 and USD1.36/lb in 2018 and 2019.
Codelco's ratings remain closely linked to the sovereign due to its 100% ownership by the government of Chile. The company is in a challenging situation of investing high capex to maintain production volumes as ore grades deteriorate against a backdrop of declining prices for every commodity worldwide, including copper. Support from the sovereign is now more essential than in the past when copper prices were much higher, a time when Codelco contributed much more to government revenues. Accordingly, the government passed a law in 2014 capitalizing Codelco for the next few years. Fitch expects the government to deliver on this commitment between now and 2018. Economically, Chile is facing a more challenging business scenario that may restrict the government's ability to deliver further support, and this considered a key risk. An indication of decreasing financial support from the government could lead to a de-coupling of the ratings.
Ongoing Refinancing Expected:
As of June 30, 2016, the company's liquidity position shows a deterioration with cash and marketable securities of USD339 million and short-term debt of USD1 billion. Around half of the debt is expected to be rolled over and the other half is almost fully refinanced. In addition, as of August 2016, Codelco successfully issued a UF10 million local bond equivalent to USD410 million at a very competitive rate. The company has only USD56 million maturing in 2017 and USD1.256 billion in 2018 which will need refinancing. Fitch expects Codelco to receive an USD800 million capital contribution from the state to reinforce the company's liquidity. The company has strong access to different sources of financing in global markets.
FULL LIST OF RATING ACTIONS
Fitch has affirmed the following ratings:
--Foreign currency IDR at 'A+';
--Local currency IDR at 'AA-';
--USD950 million 5.625% bonds due Oct. 18, 2043 at 'A+;
--EUR 600 million notes due July 2024 at 'A+';
--USD980 million 4.875% notes due Nov. 4, 2044 at 'A+';
--USD500 million 5.625% notes due Sept. 21, 2035 at 'A+';
--USD500 million 6.15% notes due Oct. 24, 2036 at 'A+';
--USD600 million 7.5% notes due Jan. 15, 2019 at 'A+';
--USD1 billion 3.75% notes due November 2020 at 'A+';
--USD1.15 billion 3.875% notes due November 2021 at 'A+';
--USD1.25 billion 3% notes due July 17, 2022 at 'A+';
--USD750 million 4.25% notes due July 17, 2042 at 'A+';
--USD750 million 4.5% notes due Aug. 13, 2023 at 'A+'
--USD2 billion 4.5% notes due September 2025 at 'A+';
--National scale rating at 'AAA(cl)';
--UF6.9 million 3.29% notes due April 1, 2025 at 'AAA(cl)';
--UF10 million bond No. 608 series C at 'AAA(cl)'.
The Rating Outlook is Stable.