November 05, 2014 | Cbonds
|Fitch Ratings-Moscow/London-31 October 2014: 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. A full list of ratings actions is provided at the end of this commentary.|
Fitch views Kazatomprom's liquidity at end-1H14 as insufficient to fully cover the forthcoming USD500m eurobond repayment in May 2015 and failure by the company to secure refinancing by end-2014, negotiations for which we believe are well-advanced, may result in the negative rating action.
Kazatomprom's leverage at end-2014 may exceed our negative rating guidance of 2.5x but we expect the ratio to dip slightly under this threshold (around 2.4x) during 2015-2017 as a result of a moderation of investment plans. The refinancing plans and our expectation for leverage over the medium term support the Stable Outlook.
The ratings reflect Kazatomprom's standalone profile due to limited links with its ultimate parent - Republic of Kazakhstan (BBB+/ Stable). Its standalone profile primarily reflects the company's leading position in global uranium mining, the fact that most of its uranium production volumes have been contracted over the medium term, and its competitive cash costs compared with those of its global peers.
KEY RATING DRIVERS
At end-1H14 Kazatomprom's cash and cash equivalents stood at KZT17bn which, together with short-term deposits of KZT3bn (mainly with Kazakh banks) and available unused credit facilities of KZT20bn, are not sufficient to cover short-term maturities of KZT116bn that is mainly represented by the USD500m eurobonds due in May 2015.
The company is currently negotiating new loans with the banks to refinance the eurobonds and expects to conclude loan agreements by end-2014. Fitch believes that Kazatomprom will continue generating healthy cash flows from operations over 2014-2017. Its free cash flow is likely to remain negative in 2014 but may turn positive thereafter due to capex moderation. Failure by the company to secure refinancing by end-2014 may result in negative rating action.
Limited Headroom in Credit Metrics
In 2013 Kazatomprom reported funds from operations (FFO) gross adjusted leverage of 2.4x and may exceed our negative rating guidance of 2.5x at end-2014 on account of falling uranium prices and an intensive capex programme of about KZT90bn over 2014-2018, which is likely to be partially debt funded. However, we expect leverage reduction to about 2.4x during 2015-2017 as a result of a cutback in investment plans. This supports the Stable Outlook. Failure by the company to maintain leverage below 2.5x could lead to negative rating action.
Uranium Prices Pressure Continue
Uranium oxide (U3O8) prices continued to fall in 1H14 as a result of sustained oversupply of uranium products on the market, and reached USD28/lb, last seen in 2005. However, this trend has started to reverse in 2H14 as uranium prices gradually increased to USD35.65/lb in mid-October. In Fitch's view, a 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. We do not expect prices to recover to pre-2013 levels in our projections for the company.
Kazatomprom's ratings are constrained by limited diversification and exposure to uranium price volatility. The latter could be mitigated by the expected implementation of the company's vertical integration strategy and shift to higher value-added products and services in the long term, as well as by its strong market position, low-cost production, contracted sales and ramped-up production.
Lower than Expected Dividends from JVs and Associates
Fitch includes dividends from Kazatomprom's joint ventures (JVs) and associated companies into its FFO calculation. These dividends, which have become essential for the company, have dramatically decreased to KZT23.4bn in 2013 from KZT43bn in 2012 due to the negative impact of uranium prices on JVs. In addition, we believe that the company's JVs and associates will remain the main driver of its consolidated uranium production growth in the short- to medium-term. The group's 2013 output reached almost 13,000 tonnes (including equity affiliates).
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 2012 and 2013 would have been higher by about 0.6x, if all off-balance sheet obligations were included in the leverage ratio calculations.
At end-2013, the company had outstanding financial guarantees of KZT38.2bn. Following the tenge's devaluation in 1Q14 the amount of outstanding financial guarantees increased to KZT44.9bn at end-1H14. As of end-1Q14 about 70% of outstanding financial guarantees expire in 2018 and the remainder in 2023. The company does not expect an acceleration of loans at one of its JVs, Kyzylkum LLP (under which it provides guarantees), by Japanese lenders following loans restructuring as a result of mineral rights annulation in June 2014. The mineral rights have been transferred to newly created JVs in October 2014, reflecting the same shareholding structure and main terms. Kazatomprom expects to resolve outstanding issues with banks in the short-term.
Strong Uranium Market Position
Kazatomprom's investment-grade rating continues to be primarily driven by its leading position in global uranium mining, stable operating profile, the fact that most of its uranium production volumes have been contracted over the medium term and its competitive cash costs compared with those of its global peers. In 2013, Kazatomprom maintained its leading position in global uranium mining with a market share of 21%. 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.
Rating on a Standalone Basis
Fitch rates Kazatomprom on a standalone basis, as legal, operational and strategic ties between the company and the Republic of Kazakhstan (BBB+/Stable), its ultimate parent, are considered limited, according to Fitch's Parent and Subsidiary Rating Linkage criteria. Our ratings, however, incorporate implicit state support in the form of certain privileges in obtaining subsoil use agreements through direct negotiations with the Kazakh government and the state's participation in negotiation with certain foreign customers.
Tenge Devaluation Impact Marginal
Kazatomprom has lower exposure to foreign currency risks than peers. Although almost all of its debt of KZT136bn at end-1H14 is denominated in foreign currencies (mainly in USD), this is mitigated by over 70% of Kazatomprom's revenue being denominated in USD. We expect its credit metrics to worsen marginally in 2014 as a result of the tenge devaluation, with other things being equal.
Fairly Strong Long-term Demand Fundamentals
Uranium demand is mainly driven by the fuel requirements of nuclear power plants that meet around 12%-13% of world's electricity production. Currently over 400 nuclear reactors are operating in over 30 countries, with a total capacity of over 350GW, requiring about 65,000 tonnes of uranium annually.
Despite the closure of all nuclear power reactors in Japan and about half in Germany, we expect 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. Therefore we consider uranium sector fundamentals to be fairly strong over the long term.
Positive: Future developments that could lead to positive rating actions include:
- Reduction of FFO adjusted gross leverage to below 1.5x on a sustained basis. However, Fitch does not forecast such deleveraging to take place in the medium term due to Kazatomprom's intensive capex plans and falling uranium prices
- Successful implementation of the vertical integration strategy, while maintaining a sound financial profile
Negative: Future developments that could lead to negative rating action include:
- Failure by the company to secure refinancing by end-2014
- 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
FULL LIST OF RATING ACTIONS
Long-term IDR affirmed at 'BBB-'; Outlook Stable
Short-term IDR affirmed at 'F3'
Foreign currency senior unsecured rating affirmed at 'BBB-'
|Full company name||Joint Stock Copmany "National Nuclear Company "Kazatomprom"|
|Country of risk||Kazakhstan|
|Country of registration||Kazakhstan|