OREANDA-NEWS. Fitch Ratings has assigned metals and mining conglomerate China Minmetals Corporation's (Minmetals, BBB+/Stable) proposed US dollar notes an expected rating of 'BBB+(EXP)'.

The notes are to be issued by indirect subsidiary Minmetals Bounteous Finance (BVI) Limited, and unconditionally and irrevocably guaranteed by Minmetals. The notes are rated at the same level as Minmetals' senior unsecured debt rating as they represent direct, unconditional, unsecured and unsubordinated obligations of the company.

The final rating on the proposed notes is contingent upon the receipt of documents conforming to information already received.

Minmetals is rated at three notches below China's rating (A+/Stable) based on Fitch's top-down approach in line with its Parent and Subsidiary Linkage rating criteria. This reflects Minmetals' strong operational and strategic ties with the Chinese government in securing overseas natural resources, and its position in ensuring the security of China's supplies of key commodities, including copper, tungsten, nickel and heavy-weight rare earths. The Stable Outlook reflects Fitch's expectation that Minmetals' strategic and operational linkages with China will remain stable.

KEY RATING DRIVERS

Ratings Linked to Sovereign: Fitch's top-down rating approach reflects Minmetals' high strategic and operational linkages with the state. The company, which is 100% owned by the state, is tasked with acquiring large overseas mining projects and securing offshore mineral assets that China lacks. Minmetals is also a key supplier to China's State Reserves Bureau for key nonferrous minerals such as copper and rare earths. The three-notch gap is the widest used in the top-down approach as Minmetals' business segments are operated on commercial basis in a competitive market environment.

Recent Restructuring Supports Ratings: Fitch believes Minmetals' takeover of China Metallurgical Group Corporation (CMGC) orchestrated by the Chinese government supports Minmetals' ratings. The new entity will emerge as a global mining and base metal giant by assets and the government will use it to drive China's overseas resource development. The merger is likely to be completed in 3Q16 and will strengthen Minmetals' operational and strategic linkages with the state, and confirms Fitch's assessment of Minmetals' role in consolidating the domestic mining and non-ferrous metal industry, securing China's strategic non-ferrous metal reserves overseas and improving the competitiveness of China's mining industry against overseas rivals.

Key Supplier to State Reserves: Minmetals has been the sole supplier of copper to the National Strategic Reserve since 1995 and now supplies a significant portion of State Reserves Bureau's copper requirement. Fitch expects Minmetals to remain a key supplier to the state reserves, given its position as the largest metals trader owned by the state and its inclusion among China's 53 "backbone" state-owned enterprises.

Leading Base Metal Producer: Minmetals is one of the largest metals and mining enterprises in China. It produced over 580,000 tonnes of zinc concentrate, 130,000 tonnes of lead concentrate and about 170,000 tons of electrolytic copper in 2015. Fitch expects the company's market position to strengthen once the Las Bambas copper mine in Peru reaches full production 2H16, after which the project would account for 15% of China's total copper imports.

Leverage Remains High: Minmetals' standalone profile is constrained by its high leverage. FFO-adjusted net leverage rose to 11.5x at end-2015 from 6.9x at end-2014 following the completion of the acquisition of Las Bambas in July 2014 and capex to bring Las Bambas into commercial operations. Fitch expects Minmetals' standalone profile to be constrained in the near term because meaningful deleveraging is unlikely due to the large debt incurred from the Las Bambas acquisition and lacklustre overall EBITDA generation arising from weak global markets for base metals.

KEY ASSUMPTIONS

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

- Las Bambas reaches full capacity by 4Q16

- Capex of CNY10bn in 2016 and CNY6.5bn in 2017

- No major M&A going forward

RATING SENSITIVITIES

Positive: Future developments that may, individually or collectively, lead to positive rating action include:

- Positive rating action on the Chinese sovereign

- Strengthening linkages between Minmetals and the Chinese sovereign

Negative: Future developments that may, individually or collectively, lead to negative rating action include:

- Negative rating action on the Chinese sovereign

- Weakening linkages between Minmetals and the Chinese sovereign