OREANDA-NEWS. June 30, 2015. Fitch Ratings has downgraded iron ore mining company China Hanking Holdings Limited's (Hanking) Long-Term Issuer Default Rating (IDR) to 'B' from 'B+', and has chosen to withdraw the ratings for commercial reasons. The Outlook on the IDR at the point of withdrawal was Negative.

Hankings's senior unsecured rating was also downgraded to 'CCC+' with recovery rating of RR6, from 'B+' with recovery rating of RR4; and the senior unsecured rating was simultaneously withdrawn.

The downgrade is driven by sustained industry weakness, resulting in persistent lower EBITDA margin and therefore much slower pace of deleveraging. The negative outlook reflects Fitch's concern on Hanking's capex to develop the company's overseas mining assets, which could result in high leverage.

KEY RATING DRIVERS

Weak ASP, Higher Cost: Hanking's 2014 EBITDAR margin dropped to 27.0% from 38.6% in 2013 (2012: 39.1%), driven by a falling average selling price (ASP) and rising cash production costs. Hanking's 2014 iron ore concentrate ASP was CNY691/tonne, a 19.1% drop from CNY854/tonne in 2013. On the other hand, cash production costs for iron ore increased to CNY389/tonne in 2014 from CNY354/tonne one year ago.

Fitch expects global spot iron ore prices to remain weak between USD50-70/t from 2015 to 2017, caused by a supply glut in Australia and Brazil and changing expectations for Chinese steel output and overall growth. Such industry weakness is likely to keep Hanking's EBITDA margin at no higher than the 2014 level.

Capex to Keep Leverage High: Hanking's leverage, measured by funds flow from operations (FFO) adjusted net leverage, rose to 4.6x in 2014 compared with 3.5x at end-2013. This is mostly driven by a combination of lower EBITDA margins and capex (CNY373m in 2014). Fitch estimates that Hanking's capex is likely to remain high at around CNY400m (including acquisitions) in 2015, in order to develop its nickel pig iron project in Indonesia and further develop its gold mine in Australia, resulting in its leverage rising to over 6x in 2015.

Diversification Into Other Metals: Hanking's effort to expand into gold and nickel will help to reduce the risk of concentration on the iron ore market, which will remain depressed in the next few years. While its Australian gold mine has started production in 2015, meaningful contribution to cashflow will likely be after 2016 considering the gold spot price. The company still has to make significant capex to develop the nickel pig iron project in Indonesia and commercial production will not start until 2017.

KEY ASSUMPTIONS

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

- Price assumptions for iron ore: USD50/t in 2015- 2016, USD60/t in 2017 and USD70/t long term;
- Cash production costs in 2015 and 2016 remain stable;
- Total capex (including acquisitions) between 2015 and 2017 higher than CNY500mn;
- The company is able to roll over short-term debt

RATING SENSITIVITIES
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
-EBITDAR margin being sustained below 20%; or
-Funds flow from operations (FFO) adjusted net leverage being sustained above 4.5x (2014: 4.6x); or
-Sustained material adverse developments in overseas mining operations

Positive: Future developments that may collectively lead to positive rating action include:
-EBITDAR margin being sustained above 30%, and
-FFO adjusted net leverage being sustained below 3.0x, and
-Sustained success in overseas mining operations