Fitch Places Samarco on Rating Watch Negative Following Dam Breaches
KEY RATING DRIVERS
Following the dam breaches, the impact on Samarco's iron ore pellet output in the medium term is currently unknown. Samarco's mine and production facilities were unaffected by the tailings dam ruptures and subsequent flooding, but the company is unable to produce at the Germano unit at this time. Investigations as to the cause of the dam breaches are currently underway, and the findings may have a significant impact. Should the cause be due to natural events, such as seismic activity, Fitch expects the company to be permitted to operate as normal following clean-up efforts. If, however, the cause of the breach was due to a technical error, the penalties could be more punitive.
KEY ASSUMPTIONS
Samarco is currently focussed on rescue and clean-up efforts and the financial impact on the company is unknown at this time. Samarco is Brazil's 10th largest exporter and has a large economic importance to the region. Accordingly, Fitch's current assumption is a gradual return to production albeit at lower levels than previous public guidance of around 30 million dry metric tons (dmt) per year.
Fitch has run two downside financial projection scenarios; one at 30% lower production levels and one at 50% lower production levels compared to guidance in 2016. These scenarios include Fitch's assumptions of total debt at BRL14 billion, dividends to BHPB and Vale of BRL500 million combined, average iron ore price of USD50/dmt, various financial penalties and clean-up costs totalling BRL2 billion and the inflow of BRL3 billion (USD800 million) from insurance. The figures used in Fitch's preliminary downside scenarios are not determined or inevitable, and are purely Fitch's assumptions for modelling purposes.
Under the 30% less production scenario net debt to EBITDA would be in the range of 3.5x-4.0x and in the 50% of production scenario, this ratio would be around 6.0x-6.5x. Samarco has no immediate liquidity issues in the short to medium term, with its next significant amortisation of over USD1 billion due in 2018. Samarco is a standalone legal entity and is responsible for the entirety of the cost resulting from the dam breaches. Fitch expects Vale and BHPB to support Samarco under this scenario by reducing or postponing dividends to support its liquidity and capital structure as it continues to work to resolve the crisis, alongside providing technical assistance.
RATING SENSITIVITIES
The Rating Watch Negative will be resolved once Fitch receives more information regarding the overall impact on Samarco's production volumes, and possible regulatory, legal and/or environmental penalties that could be levied as a result of the dam breaches, and subsequent clean-up costs.
Ratings could be downgraded, either by one notch or more, should developments result in a significant suspension of production or the company's operating licenses being permanently revoked, and/or severe environmental, legal and/or regulatory penalties.
Fitch could remove the Rating Watch and subsequently affirm the ratings if it determines that the overall impact on Samarco's credit profile is temporary and if no significant charges are levied against the company.
LIQUIDITY
Samarco has significant insurance coverage for property damage, business interruption and civil liabilities totalling over USD1.1 billion combined based on declared value at risk. Cash and marketable securities as of Jun. 30, 2015 were robust at BRL2.2 billion. Samarco has comfortable liquidity coverage with short-term debt of BRL1.6 billion. Fitch would expect Vale and BHPB to reduce dividends paid by Samarco should the company require further liquidity, as was seen during 2012.
FULL LIST OF RATING ACTIONS
Fitch has placed the following ratings on Rating Watch Negative:
Samarco Mineracao S.A. (Samarco)
--Local currency long-term IDR 'BBB';
--Foreign currency long-term IDR 'BBB';
--National long-term rating 'AAA(bra)';
--Senior unsecured debt rating 'BBB'.
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