OREANDA-NEWS. Fitch Ratings has affirmed Cyrpus-based Solway Investment Group Limited's (Solway) Long-term Issuer Default Rating (IDR) at 'B-' with Stable Outlook and its Short-term IDR at 'B'.

The affirmation reflects Fitch's view that despite tight liquidity in 2015 Solway should be able to tap several sources of funding, including refinancing its debt maturities, and the sale of core and non-core assets to meet its obligations to the end of the year.

The Stable Outlook is supported by our expectation of a significant improvement in Solway's operational profile starting from 2016, following the full ramp-up of the Fenix nickel project in Guatemala and KurilGeo gold mine in Russia, both expected by end-2015.

KEY RATING DRIVERS

Liquidity Risk in 2015

At present group liquidity is weak for 2015. Delays in Fenix's ramp-up and large repayments (USD100m of which USD46m has already been made) by end-2015 are expected to generate a liquidity shortfall of approximately USD40m based on Fitch's calculations. The company is seeking to fund this by refinancing its PXF facilities. We believe that alternative options such as asset sales may also be available in the near term and that the company will continue to be able to manage liquidity appropriately through the period.

Fenix Ramp-up

Despite further delays in commissioning, phases 1 and 2 of the Fenix nickel mine project in Guatemala were completed in 2014 with the commissioning of a processing plant with a capacity of 25,000 metric tonnes per annum in aggregate and a diesel power plant.

Delays in the ramp-up of the planned capacity were due to power constraints. The company's strategy has been to add a second coal-fired power plant to the existing diesel plant and gradually switch all power generation to coal. The second power plant was put in place in August 2014 and the switch to coal power generation is expected to complete by end-2015. This will enable production volumes to ramp up through 2015 and to reach full capacity by end of the year. The company's ability to deliver on this will be key to achieving Fitch's forecasted financial metrics.

Improved Operating Profile

The company's operating profile has seen positive structural changes, in various aspects of the business. Fenix is ramping up and will add between USD120m-USD140m per annum to the company's operating profitability from 2016 onwards, based on Fitch nickel mid-price assumptions.

KurilGeo is now generating positive free cash flow (FCF) and is expected to contribute up to USD40m of EBITDA in 2015 and USD25m thereafter. Nickel prices have weakened to USD13,900 in May from the USD17,000 average in 2014, but Fitch expects them to recover to an average USD15,000 in 2015 before stabilising at USD17,000 over the medium term, subject to Indonesia maintaining its ban on the export of unprocessed ores.

Performance is also supported by the company's Ukrainian ferro-nickel plant production, despite issues around nickel ore sourcing since the ban of Indonesian exports and the geopolitical developments in the country. The company has managed to keep the plant fully sourced, replacing Indonesian nickel ore with Guatemalan (from Fenix). The ongoing conflict in Ukraine is not affecting the region where the plant is located, and so far has not had an impact on its operations. Macedonian assets (SASA; copper, lead and zinc) show stable operating performance.

Small Scale; Acceptable Diversification

Solway is a small mining company with USD532m of revenue and USD143m of Fitch-adjusted EBITDA in 2014. Historically, the group has maintained reasonable operational diversification, with ferronickel (69% of revenue in 2014), copper and copper concentrate (14%) and lead and zinc concentrates (17%).

Fitch generally takes a positive view of product diversification as it reduces margin volatility through the business cycle. However, the company's exposure to highly volatile nickel prices will increase from 2016 when Fenix becomes fully operational, increasing volatility in operating margins.

Separately, based on Fitch's assessment Solway operates in countries with 'high' and 'medium' risk relative to mining operations (Ukraine, Macedonia, Guatemala and Russia), although it possesses some geographical diversification.

Below Average Corporate Governance

The company is currently domiciled in Cyprus but will change to Swiss registration by end- June. The new Swiss holding company will form part of a reorganised group structure. The Swiss company will hold the group's core operating assets (Fenix, KurilGeo, etc). Despite the potential benefit of the new group structure to the company's corporate governance, we continue to see the company's low level of transparency and public information disclosure as rating constraints.

KEY ASSUMPTIONS

-Fitch mid-cycle price assumptions for nickel: USD15,000/t in 2015 and USD17,000 in the medium term

-Fenix to reach full capacity by end-2015
-No disruptions to KurilGeo operations
-USD100m debt repayments in 2015 to be covered though a combination of group cash flows, refinancing activity or funds from asset sales

RATING SENSITIVITIES

Future developments that could lead to a positive rating action include:

- Period of sustainable production from key Fenix and KurilGeo development projects.
- FFO adjusted gross leverage sustainably below 2.0x (2014: 2.5x).
- Strengthening of the liquidity profile.
-Improvement of corporate governance, including greater transparency and information disclosure.

Future developments that could lead to a negative rating action include:

-Further delays and/or cost overruns in key development projects.
- Sustained negative FCF.
- Deterioration of the liquidity profile.