OREANDA-NEWS. Fitch Ratings has affirmed Kazakhstan-based JSC National Atomic Company Kazatomprom's (Kazatomprom) Long-term foreign currency Issuer Default Rating (IDR) at 'BBB-' with Stable Outlook and Short-term IDR at 'F3'.

Kazatomprom's ratings reflect its standalone profile as Fitch considers legal, operational and strategic ties with its ultimate shareholder, the Republic of Kazakhstan (BBB+/Stable) as limited, according to Fitch's Parent and Subsidiary Rating Linkage methodology.

Kazatomprom's standalone profile is supported by its leading position in global uranium mining, contracted uranium production volumes over the medium term, and its competitive cash costs compared with those of its global peers. Limited diversification and exposure to uranium price volatility constrain the ratings.

KEY RATING DRIVERS
Tenge Devaluation Positive
Kazatomprom has lower exposure to foreign currency risks than many other Kazakh rated companies. Although all of its debt of KZT133bn at end-1H15 was denominated in foreign currencies (mainly in USD), this is mitigated by over 60% of Kazatomprom's revenue and 65% of cash being denominated in USD and EUR. We expect the company's earnings to improve, with a slight positive effect on credit metrics as a result of the tenge devaluation, other things being equal.

Uranium Prices Still Under Pressure
Although the uranium oxide (U3O8) spot prices have gradually improved to about USD36.5/lb at 26 October 2015 from about USD28.2/lb in June 2014, we do not expect a significant price increase over the medium term. Fitch notes that sustained decline in uranium prices would have a lasting negative impact on Kazatomprom's earnings, given the inclusion of spot price elements in its existing long-term sales contracts.

Capex Moderation Leads to Positive FCF
At end-2014, Kazatomprom reported positive free cash flow (FCF) of KZT26.4bn, mostly due to capex and dividend moderation. We expect Kazatomprom to continue generate positive FCF in 2015-2019 on the back of lower capex and dividend expectations that are subject to market conditions supporting Kazatomprom's ability to adapt to uranium prices volatility. We consider the company's dividend policy of a minimum 15% of IFRS net income as moderate, and include dividend payments in our FCF calculation. We expect Kazatomprom's funds from operations (FFO) gross adjusted leverage to stay around 2x at end-2015 and slightly below this level in the medium term following expectations of lower capex, a slight improvement in uranium prices as well as the tenge devaluation impact.

Dividends From JVs and Associates
Fitch continued to include dividends from Kazatomprom's joint ventures (JVs) and associated companies, which have become essential for the company, into its FFO calculation. The dividends were KZT20.5bn in 2014, which has slightly decreased from KZT23.4bn in 2013 due to the negative impact of uranium prices on JVs. We believe that the company's JVs and associates will continue generating recurring dividends and remain the main driver of its consolidated uranium production growth in the short to medium term.

Financial Guarantees
Fitch does not include financial guarantees provided by Kazatomprom to non-consolidated JVs for their bank debt (mainly with Japanese banks) in its base case leverage calculations as we expect these companies to continue to generate sufficient cash flows to service their obligations, which are amortising. However, we monitor the dynamics of the company's off-balance sheet obligations and estimate that Kazatomprom's FFO adjusted leverage ratio for 2014 would have been higher by about 0.5x, if all off-balance sheet obligations were included in the leverage ratio calculations. At end-1H15, the company had outstanding financial guarantees of USD213.3m (KZT39.7bn), 70% of which expire in 2018 and the remainder in 2023.

Strong Uranium Market Position
Kazatomprom's investment-grade rating continues to be primarily driven by its leading position in global uranium mining, with a 24% market share up from 21% in 2013, relatively stable operating profile and contracted uranium production volumes over the medium term, as well as competitive cash costs compared with those of its global peers. It also benefits from high barriers to entry as the uranium mining industry requires special certification and licensing with long lead times and specialised expertise.

Long-term Demand Fundamentals Remains
Uranium demand is mainly driven by the fuel requirements of nuclear power plants that meet around 12%-13% of world's electricity production. Despite the resent closure of nuclear power reactors in some countries, we anticipate the use of nuclear power to continue given its environmental advantages and ability to contribute to the reduction of greenhouse and other gases and substances. We expect uranium requirements to fuel reactors will continue and may increase in the long term, especially after putting into operation about 70 power reactors that are currently under construction worldwide, mainly in the developing countries.

KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- Uranium sales volumes to remain relatively flat slightly below 2014 level.
- Uranium sales prices based on current uranium futures price, published by CME Group.
- Inflation of 7.5% in 2015 and 6.3% on average over 2016-2019.
- Capex and acquisitions in line with company's guidance for 2015-2016, and in line with the historical average from 2017.
- Dividends received on average over 2015-2019 slightly above the 2014 level.
- Dividends paid in line with the level approved by Samruk-Kazyna for 2015 results, 30% dividend payout ratio for 2016-2019.

RATING SENSITIVITIES
Positive: Future developments that could lead to positive rating action include:
- Reduction of FFO adjusted gross leverage to below 1.5x on a sustained basis.
- Successful implementation of the vertical integration strategy, while maintaining a sound financial profile.

Negative: Future developments that could lead to negative rating action include:
- Deterioration of FFO adjusted gross leverage above 2.5x on a sustained basis due to, among other things, a more aggressive capex programme, acquisitions and/or lower-than-expected uranium prices.
- Reduction in dividends from JVs and associates significantly below Fitch's current expectations would put pressure on the ratings.

DEBT AND LIQUIDITY STRUCTURE
At end-1H15 Kazatomprom's cash and cash equivalents stood at KZT23.6bn, mainly with Kazakh banks including Halyk Bank (BB/Stable), Kazkommertsbank (B-/Negative) and Citibank Kazakhstan, which together with short-term deposits of KZT2.5bn and available unused credit facilities of KZT10bn, are not fully sufficient to cover short-term maturities of KZT56bn. However, Fitch believes that Kazatomprom will continue generating healthy cash flows from operations over 2015-2019 and its FCF is likely to be positive in 2015 as in 2014 due to capex moderation.