OREANDA-NEWS. July 26, 2011. Fitch Ratings has revised JSC National Atomic Company Kazatomprom's (Kazatomprom) Outlook to Negative from Stable and affirmed the Long-term foreign currency Issuer Default Rating (IDR) at 'BBB-'. The agency has also affirmed the Short-term foreign currency IDR at 'F3' and the foreign currency senior unsecured rating of 'BBB-', reported the press-centre of KASE.

The Outlook revision reflects Fitch's concerns over Kazatomprom's increasing gross leverage, which has reached the upper band of Fitch's guidance for the standalone investment-grade rating of 1.5x-2.5x on a sustained basis.

Fitch rates Kazatomprom on a standalone basis as legal, operational and strategic ties between Kazakhstan ('BBB-'/Positive/'F3'), its ultimate parent and the company are considered to be limited, according to Fitch's Parent and Subsidiary Rating Linkage methodology.

Kazatomprom's ratings reflect its position as one of the leading uranium producers worldwide - its 2010 output reached 10,000 tones of uranium (including equity-method associates) - with a substantial reserve life. The company benefits from the fact that most of its planned uranium production for 2011-2015 has been contracted under long-term agreements as well as from high barriers to entry, as the uranium mining industry requires special certification and licensing with long lead times and specialised expertise.

The ratings also factor in the limited diversification of Kazatomprom's business profile and exposure to uranium price volatility, since about half of Kazatomprom's uranium products are sold at spot prices. The company's exposure to uranium price volatility could be mitigated by the expected vertical integration and shift to higher value-added products and services in the future as well as its strong market position, contracted sales and ramped-up production.

Kazatomprom's exposure to Japan's troubled Fukushima-Daichi nuclear power plant is fairly limited. At the same time, uranium oxide (U3O8) futures prices have been under pressure since the accident, which may have a lasting negative impact on Kazatomprom's earnings.

The ratings for Kazatomprom also take into account the company's ability to successfully implement its ambitious expansion strategy. Its FY10 EBITDA margin of 26% and gross leverage (gross debt / EBITDA) of 2.8x were in line withthose of its nuclear-related peers. On the other hand, Kazatomprom's leverage is high compared to its CIS-peers rated in the low 'BBB'/high 'BB' categories on a standalone basis. While most of Kazatomprom's CIS peers' gross leverage ratiofluctuated around 0.8x-1.4x in 2008-2010, Kazatomprom's gross leverage ratio was in the 1.6x-2.8x range. EBITDA interest coverage ratio (EBITDA / gross interest expense) for peers was between 14.5x to 22x in 2008-2010 versus 6x-11x  for Kazatomprom.

Fitch notes that Kazatomprom's intensive investment programme in excess of USD1.5bn over 2011-2013 is likely to be partly funded with additional debt. Using a conservative uranium price and sales volume assumptions, Fitch expects that Kazatomprom's gross adjusted leverage (total debt/adjusted EBITDA) will remain at around 2.5x and adjusted EBITDA interest coverage at around 6x-7x. When calculating adjusted EBITDA Fitch includes dividends from Kazatomprom's joint ventures (JVs) and associated companies. The agency expects these dividends to increase dramatically from KZT5.7bn in 2010 as JVs and associates continue to ramp up their production and move into a stable cash generating phase. Fitch will closely monitor the performance of Kazatomprom's JVs and associates and the dividends paid to the company, which have become essential for the company's cash flow generation.

Kazatomprom's capital structure improved after the company placed USD500m Eurobonds in May 2010. Presently, over 60% of the company's loans are due in 2015 and it needs to refinance or repay KZT11.5bn of debts maturing in FY11. Kazatomprom's total indebtedness at 31 December 2010 includes other financial liabilities of KZT44.6bn that are mainly guarantees of minimum distribution to Beijing Sino-Kaz Uranium Resources, a JV partner, for KZT42.5bn over 2010-2033.

Kazatomprom continues to provide financial guarantees to its JVs, which have bank debt, mainly from Japanese banks. Fitch continues to exclude these off-balance sheet liabilities from the adjusted debt calculations. In total, Kazatomprom had outstanding financial guarantees of KZT56.7bn at 31 December 2010 (down from KZT57.2bn at 31 December 2009) primarily on behalf of two JVs - Kyzylkum LLP and Baiken-U LLP, both of which are currently in the production/commissioning phases. Most of Kazatomprom's existing financial guarantees expire in December 2013. Fitch estimates that Kazatomprom's gross leverage ratio for FY08, FY09 and FY10 would have been higher by about 1.5x, 1x and 1x, respectively, if all off-balance sheet obligations were included in the leverage ratio calculations.

Kazatomprom remains exposed to the Kazakh banking sector as it continues to maintain significant deposits with local banks, mainly Halyk Bank of Kazakhstan ('BB-'/Stable), a related party, Bank CenterCredit ('B'/Stable) and Kazkommertsbank ('B-'/Stable). At 31 December 2010, it had KZT72.1bn (USD489m) of cash and deposits with Kazakh banks, or 72% of its cash and deposits on that date.