Fitch Affirms Buenaventura's IDRs at 'BBB'; Outlook Stable
Buenaventura's credit ratings reflect its low cost position as a miner of precious and base metals, long track record of operations, and conservative debt philosophy of its management. The company exhibited an all-in sustaining cost (AISC) for gold of $843/oz during 2014, lower than peers such as Barrick Gold Corp. at $864/oz, Goldcorp Inc. (Goldcorp; 'BBB'/Outlook Stable) at $949/oz and Newmont Mining Corp. at $1,002/oz. The company's low cost position allows it to remain profitable and generate robust funds from operations (FFO) through periods of low metal prices. The Stable Outlook reflects the sound management of the company's credit profile during its mine transition period and successful focus on cost savings alongside continued decreases in operational expenditure.
KEY RATING DRIVERS
Low Cost Producer:
Buenaventura's cash cost of production is in the first quartile of the cost curve and has been reinforced over a period of cost optimization and decreased opex combined with the divestment of higher cost units. During 2014, costs applicable to sales at their direct operations was as follows: gold $597/oz, silver $14.9/oz, zinc $1,774/tonne, copper $2.31/lb and lead $1,611/tonne. This compares to an average price of $1,266/oz for gold, $19.08/oz for silver, $2,250/tonne for zinc, $2,149/tonne for lead, and $3.00/lb for copper. The company's AISC for gold was among the lowest globally at $843/oz in 2014 indicating a significant improvement on $1,100/oz in 2013. The global average AISC was $1,314/oz during 2014 according to the GFMS Gold Survey 2015. In response to declining metal prices, management stopped production at four non-profitable operations (Shila-Paula, Poracota, Recuperada and Antipite) and is in the process of divesting them. The company continues to focus its future growth strategy on high-grade, low cost projects.
Conservative Approach to Debt:
Buenaventura has over a 60 year track record of mining operations across Peru. As of March 31, 2015, the company had a net debt-to-latest 12 months (LTM) EBITDA ratio of 1.3x, compared to 1.5x for the same period in 2014. The company has maintained low leverage levels through various stages in the gold cycle and exhibits a conservative management philosophy. Projected leverage levels indicate modest debt ratios - peaking at around 1.8x net adjusted debt/EBITDA in 2015 and declining thereafter - and robust coverage ratios with FFO interest coverage at 11.4x in 2015, improving thereafter. As of 2014 on a direct operations basis, gold accounted for 46% of revenues, silver 32%, and copper 14%, with lead and zinc at 4% each, respectively. The sales mix is expected to be 60% precious metals and 40% base metals by 2017.
Positive FCF Expected 2016:
Buenaventura's free cash flow (FCF) has been negative since 2012 due to the various expansionary capex programs embarked upon prior to the metal price decline. Fitch expects a positive return of Buenaventura's FCF to around $16 million in 2016 following FCF of around negative $130 million in 2015. Buenaventura's FCF is projected to increase year on year from 2016, reaching over $100 million in 2018 as the company's EBITDA increases in line with higher sales volumes while capex declines to $300 million and dividend payments resume at 20% of net income. Fitch projects cash flow from operations (CFFO) of around $260 million in 2015 increasing to about $440 million by 2018. Fitch anticipates that the company will pay down debt in line with scheduled amortizations, which are substantial in 2018 and 2019, consistent with management's conservative debt philosophy and historical behaviour.
Low-Cost Standalone Operations and Significant Partnerships:
Buenaventura currently operates four fully owned mining operations with production costs in the first quartile of the cost curve, and has controlling interests in two other low-cost mining companies that it also operates: El Brocal and La Zanja. It also has one associated mining operation that is not consolidated, Tantahuatay. A significant aspect of Buenaventura's business profile is that it has historically reached mining exploration agreements with affiliates of global mining companies. By doing so, Buenaventura benefits from access to the assets of the partners without the costs and risks of full ownership, increased exposure to new exploration technologies, synergies arising from staff collaboration, and a lower and more manageable investment burden.
Energy Self Sufficiency:
Fitch views Buenaventura's energy self-sufficiency positively. The company successfully completed its Huanza hydro-electrical plant during March 2014, at a total investment of $225 million. This plant generates over 90 MW of electricity, providing 100% of energy needs to Buenaventura's direct operations of around 70 MW with the excess sold to Peru's national grid. Following completion of Huanza, combined with a number of mine closures, other projects and cost efficiency measures, the company expects to achieve around $100 million of potential annual savings beginning this year, benefitting EBITDA going forward.
Dividends from Investments:
Buenaventura received dividends from its equity stakes in minority investments that averaged $235 million per year from 2005-2010. These equity stakes include 43.65% of gold mine Minera Yanacocha, the largest in Latin America and second largest globally, and 19.58% of copper mine Cerro Verde that is set to produce over 600,000 lbs per year by 2016. During the large investments being made by these companies, dividend payments to Buenaventura have been temporarily frozen. Dividends from Cerro Verde are expected to commence in 2017 once the expansion is finalized by 2016, with the anticipated dividend to be received being a significant amount in the context of Buenaventura's EBITDA generation. Regarding the Conga Project, a decision regarding the viability of the mine will be taken in 2015. Should it be cancelled, Yanacocha has already made significant asset impairments for the project under IFRS of $1.1 billion in 2013 and 2014.
KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for the issuer on a direct-operations basis include:
--Annual gold sales volumes decline to below 400,000 oz from 2015-2017 before increasing to over 530,000 oz in 2018.
--Silver sales volumes increase by around 10% in 2015 and continue grow through 2019 in-line with Buenaventura's capex plan.
--Zinc and lead sales volumes almost double in 2015 and continue to increase incrementally through 2019.
--Copper sales increase by over 30% in 2015 and a further 7% in 2016, remaining flat thereafter.
--Fitch mid-cycle price assumptions used for gold of $1,200/Oz in 2015 and 2016, zinc of $2,200/tonne in 2015 and $2,300/tonne in 2016 and copper of $6,000/tonne in 2015 and 2016.
RATING SENSITIVITIES
Negative Rating Drivers:
A deteriorating cost position amid depressed precious and base metal prices below Fitch's mid-cycle price assumptions resulting in consistent negative FCF, combined with net debt-to-EBITDAR levels of more than 2.0x on a sustained basis, would result in a Negative Outlook or rating downgrade. A change in management's philosophy toward a strong capital structure would also be viewed negatively, as would deterioration in the company's ability to raise funding in Peru. Adverse rating actions could also occur if the overall framework toward mining projects in Peru deteriorates and if taxes and royalties turn punitive.
Upgrade Unlikely:
The company is at the high end of the intrinsic rating range for companies that are heavily exposed to gold. As a result, a ratings upgrade in the near-to-medium term is unlikely. Stronger than anticipated FCF generation, growth in the revenue share of base metals to provide a natural hedge against precious metals, cost reduction leading to sustained EBITDAR margins above 40% for direct operations, and a total debt to EBITDAR below 1.0x for the long term would be viewed positively.
LIQUIDITY AND DEBT STRUCTURE
Buenaventura's credit metrics compare well against many of its other low cost peers, as demonstrated by its net debt/EBITDA ratio of 1.2x during 2014. This compares to between 2.0x-2.5x for AngloGold Ashanti, Newmont and Newcrest, and is at a similar level to Goldfields (1.3x) and Nord Gold (1.2x). Other peers include Goldcorp ('BBB'/Outlook Stable) at 3.1x, Freeport-McMoran ('BBB'/Outlook Stable) at 2.2x and Yamana Gold ('BBB-'/Outlook Stable) at 2.9x. The company has historically exhibited a very conservative leverage profile with recent management behaviour indicating no change to this philosophy going forward.
Fitch's base case projects Buenaventura's net adjusted leverage ratio to peak at 1.8x during 2015 as a result of lower cash flow generation due to low metal prices amidst continued growth capex partially funded by additional debt. Total debt increased to $423 million in 2014 from $235 million in 2013 mainly due to a financial lease with Banco de Credito del Peru of $109 million to finance the Huanza power generation project. Following increased production volumes for silver, zinc, copper and lead, Buenaventura's net leverage ratio is expected to decline back to 1.3x in 2016 and then below 1.0x in 2017.
FULL LIST OF RATING ACTIONS
Fitch has affirmed the following ratings:
Compania de Minas Buenaventura S.A.A. (Buenaventura)
--Long-term foreign currency IDR at 'BBB';
--Long-term local currency IDR at 'BBB'.
The Rating Outlook is Stable.
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