[Ferro-Alloys.com]Fitch Ratings has affirmed Molibdenos y Metales S.A.'s (Molymet) foreign and local currency Issuer Default Ratings (IDRs) at 'BBB' and national scale ratings at 'A+(cl)', 'AAA(col)', and 'AA+(mex)', respectively. The Rating Outlook is Stable. A full list of rating actions is shown below.

 

KEY RATING DRIVERS

 

Resilient Business Model:

 

Molymet's investment-grade ratings reflect the company's robust capital structure with an average net debt to EBITDA ratio of 1.4x from 2011 to December 2015, in addition to stable tolling and by-products business lines, which accounted for about 70% of 2015 EBITDA and provided cash flow stability and visibility from long-term contracts. The stability provided by the company's business model during a period of high market volatility and very depressed prices for Molybdenum (Mo) reinforces Molymet's strong credit profile through the demand cycle. Molymet's net debt to EBITDA ratio was just 0.9x in 2015 despite a historical low price of Mo.

 

Strengthening Global Market Position:

 

Molymet has increased its global market share considerably in the moly processing industry to 40% of the market. Due to its larger size in the niche industry of Mo processing, the company benefits from competitive advantages while facing a smaller, fragmented base of international competitors. The company has also improved its diversification into different end markets by moving down the Mo chain, increasing the production of pure Mo and metallic Mo products that are higher value-added. Molymet has production facilities in Chile, Mexico, Belgium, Germany, and China.

 

Robust Operating Results:

 

Molymet exhibited solid financial performance with EBITDA of USD158 million in 2015, the same amount as 2014, despite the sharp drop in Mo prices to USD6.5 per pound in 2015 from USD11.4 per pound in 2014. This was achieved through a higher volume of lower quality material processed under its tolling contracts that provide a higher processing premium, and an improvement of its product mix towards higher value added products. Cash flow from Operations (CFFO) increased significantly to USD190 million, benefitting by a large working capital inflow explained by the decrease in Mo prices. Free cash flow (FCF) was positive at USD164 million following capex of over USD24 million and dividends of USD2 million in 2015, compared to a negative FCF of USD30 million following capex of USD58 million and dividends of USD13 million in 2014.

 

Improved Credit Metrics Expected:http://www.ferro-alloys.com

 

Fitch forecasts Molymet's revenue generation at around USD624 million during 2016, with EBITDA of approximately USD153 million. Funds from operations (FFO) are expected to be around USD173 million in 2016. Projected lower capex of USD18 million and USD26 million dividend payments combined with a working capital inflow should result in a robust FCF of around USD144 million. Fitch projects an improvement in Molymet's net debt-to-EBITDA ratio that would reach a value close to zero.

 

National Equity Rating Rationale:

 

Molymet's equity rating at level 3 is constrained by its liquidity ratio despite the company's solid financial profile. The company's market presence in the Chilean Stock Market is at 14%, with last year's average volume daily estimated at USD32 million as of April 2016. Molymet's market capitalization was USD787 million as of the same date.

 

KEY ASSUMPTIONS

 

Fitch's key assumptions within the rating case for the issuer include:

 

--Molybdenum average prices of USD5.50 p/lb in 2016 and beyond;

 

--Rhenium prices of around USD1,160 p/lb in 2016 and beyond;

 

--Sales volumes of around 147 million lbs in 2016 and 186 million lbs in 2017;

 

--Sustaining capex of USD18 million in 2016 increasing to expansion capex levels of around USD150 million in 2017;

 

--Dividend payout ratio at 40% of net profits during all of the period.

 

RATING SENSITIVITIES

 

A Negative Outlook or rating downgrade could be triggered by a combination of some of the following factors: a loss of major processing clients, a large acquisition that increases net debt-to-EBITDA above 2.5x for sustained period, a substantial loss or weakening of existing tolling contracts, or a long-term increase in leverage throughout the next business cycle.

 

A net leverage ratio consistently below 1.0x as well as a positive free cash flow generation through the cycle could lead to a Positive Outlook or rating upgrade.

 

LIQUIDITY

 

Comfortable Liquidity Position:

 

Molymet's strong liquidity position is supported by its stable and predictable cash flow generation and its healthy cash position of USD476 million which compares favourably to its short-term debt of USD43 million, corresponding to a cash-to-short-term debt ratio at 11.1x and CFFO plus cash-to-short-term debt at 15.5x. The company also has access to available lines of credit totalling more than USD1 billion. Molymet has a comfortable amortization schedule. The company had USD623 million of total debt at the end of December 2015, which was comprised 45% of bonds issued in Chile and Mexico, 38% syndicated loans, with the remaining portion relating to hedging facilities.

 

Unwavering Shareholder Support:

 

The continued strong support of Molymet's shareholders to preserve the company's capital structure when necessary was reflected in the capital injections made in 2013 and 2014 following a period of large investments in Molycorp. This enabled the company to maintain its robust through-the-cycle credit profile.

 

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