Fitch Affirms Solway Investment at 'B-'; Outlook Stable
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
Fenix Ramp-up
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
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
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
KEY ASSUMPTIONS
-Fitch mid-cycle price assumptions for nickel: USD15,000/t in 2015 and USD17,000 in the medium term
-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:
- 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:
- Sustained negative FCF.
- Deterioration of the liquidity profile.
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