OREANDA-NEWS. Fitch Ratings has assigned Russia-based OJSC Polyus Gold's (Polyus Gold) RUB15bn rouble bond issue programme a final local currency senior unsecured rating of 'BBB-'. The assignment of a final rating follows the receipt of final documentation in line with the draft documentation previously received.

Polyus Gold is a Russia-based intermediate holding company of Jersey-based Polyus Gold International Limited (BBB-/Negative; Polyus Gold International) which directly or indirectly controls all of the group's gold mining companies in Russia. The bond programme comprises three individual bond issues with a nominal amount of RUB5bn each. The bonds will be puttable after six years and will have an initial coupon rate of 12.1%. Fitch assumes that proceeds from the bonds will be on lent to the various operating entities within the group to fund future capex.

The bondholders will not benefit from guarantees from any operating companies. Instead, Polyus Gold International will give an irrevocable public offer (similar to a put option) to acquire the bonds in case they are delisted from MICEX or there are delays in coupon and principal repayments. We consider the RUB bonds will be structurally subordinated to other senior unsecured obligations within the group, including the Eurobonds issued by Polyus Gold International (which have guarantees from operating companies). Debt service at Polyus Gold is reliant upon the upstreaming of cash from operating entities.

However, overall debt levels within the group are not high and accordingly overall debt recovery prospects are reasonable. On this basis, Fitch has not notched down the rating of the RUB bonds despite the existence of prior ranking debt. Should the future level of prior ranking debt exceed 2x EBITDA on a sustained basis then the RUB bonds could be notched down.

KEY RATING DRIVERS
Natalka Postponed
Due to the significant revision of the resource block model and the on-going operational review, Polyus Gold had to postpone the commissioning of the Natalka mine and is no longer targeting a launch in summer 2015. The detailed operational review of the Natalka project is currently expected to be completed in mid-2015. Polyus Gold is engaged in talks with a number of potential partners regarding the development of the project. Fitch views positively management's decision to postpone development due to the weak market environment and ongoing engineering studies (in particular, aimed at minimising capex), which should allow it to avoid a significant deterioration in leverage.

Streamlining Operating Projects
With Natalka under review, Polyus Gold intends to concentrate on streamlining and capacity improvement at key operational projects in order to attain annual production growth in the medium term. A capacity increase at the Krasnoyarsk business unit, which includes the Olimpiada, Blagodatnoye and Titimukhta mines, along with the utilisation of accumulated stockpiles should yield incremental production of 300koz-350koz by 2018 while increases in capacity throughput at Verninskoye and Kuranakh should bring an additional 100koz-160koz and 45koz-50koz, respectively. Fitch views this strategic approach as balanced and optimal in the current market environment.

Revaluation of Natalka Reserves
In February 2015, the company announced a material (49%) reduction versus previous estimates of proved & probable reserves at the Natalka deposit. The reduction was driven by revised geological results of the ore body layout and new parameters applied to make the development of the deposit economically viable. The Natalka reserves decline along with a minor mining-related reserve depletion in 2014 resulted in a 20% reduction of Polyus Gold's total reserves to 65.8moz. This reserve estimate still makes Polyus Gold the third-largest among global gold producers. With annual production of 1.7moz in 2014, this implies a lifespan of its operations of around 40 years, well above the gold industry's average levels. The world-class quality of Polyus Gold's reserves is supported by a fairly high average gold grade of 2.21g/t compared with the industry average of 1.1g/t.

Competitive Cost Position
Polyus Gold reported total cash costs (TCC) of USD585/oz in 2014, 17% down yoy mostly due to the significant devaluation of the rouble against the US dollar and implementation of the full-scale cost optimisation programme. Fitch expects a further decline in TCC in 2015 driven by currency devaluation and further cost-cutting efforts. In addition, all of Polyus Gold's operations are open pit, which is a significant operational advantage compared with underground mining. Combined with the fairly high quality of gold reserves, this makes Polyus Gold one of the world's most efficient gold producers and firmly places it in the first quartile of the global TCC curve.

Special Dividends
The company's board of directors approved the payment of a special dividend of USD500m based on 2014 results. The decision was driven by the company's ongoing strong underlying financial performance and its exceptionally strong liquidity position. Fitch expects a slightly higher pay-out ratio during the forecasting period than in previous years, which will comprise 30% regular dividend pay-outs and special dividends subject to the company's financial position, FCF and leverage.

Strong Corporate Governance
Fitch assesses Polyus Gold's corporate governance as strong compared with other Russian corporates. We believe that relationship agreements signed between the company and its shareholders, contribute to the independence of the company's board and reduce the potential for shareholder actions to negatively impact the company's financial profile and/or the position of creditors. This is reflected in the ratings being notched down by one notch from their standalone level, compared with the more usual two notches for Russian companies.

KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- Average gold price of USD1,200/oz during the forecasting period
- No production from Natalka project as it is currently being reviewed
- Profitability improvement in 2015-2016 driven by rouble weakness and cost-cutting measures

RATING SENSITIVITIES
Positive: Positive rating action would be contingent on the company achieving considerable additional scale and diversification, while maintaining conservative credit metrics. Therefore we do not expect positive rating action in the short to medium term. However, future developments that could lead to positive rating action include:
- Positive rating action on the Russian sovereign
- Positive free cash flow (FCF) on a sustained basis
- Funds from operations (FFO)-adjusted gross leverage below 1.5x

Negative: Future developments that could lead to negative rating action include:
- Negative rating action on Russian sovereign rating
- EBITDA margin below 30% on a sustained basis
- Failure to deleverage in line with Fitch's expectations resulting in FFO leverage sustainably above 2.5x

LIQUIDITY AND DEBT STRUCTURE
Polyus Gold's liquidity position is strong with USD1.4bn of cash and USD0.7bn of undrawn committed bank facilities at end-2014, compared with only USD90m of short-term borrowings.

Despite a challenging market environment, Polyus Gold's profitability remained robust in 2014, with a 45% EBITDA margin versus 39% in 2013. A significant decrease in capital spending in 2014 due to the Natalka construction revision and a pay-out of USD0.5bn special dividends funded by new debt, resulted in negative FCF of USD0.3bn and an increase in FFO adjusted gross leverage of 2.24x (1.85x in 2013).

Fitch expects Polyus Gold's leverage to remain below 2.5x over the rating horizon, Fitch's guideline for negative rating action.