Fitch Ratings has upgraded Perenti Global Limited's Long-Term Issuer Default Rating (IDR) to 'BB+', from 'BB'.
The Outlook is Stable.
The upgrade reflects Fitch's expectation that the company will derive more than 60% of its revenue and work-in-hand (WIH) from stable mining jurisdictions, while maintaining a financial profile that is in line with its 'BB+' rating. Fitch also forecasts stable operating performance over the medium term, which underscores the Stable Outlook, amid improved commodity diversification, as the company expects to win new work for commodities that are essential for a green-energy transition, including copper, nickel, lithium and zinc.
Key Rating Drivers
Improving Jurisdictional Risk Profile: We expect Perenti to generate more than 60% of revenue from investment-grade jurisdictions, as it has recently won several contracts from lower risk countries. The company's strategy is to limit exposure to frontier markets and bring its operating risk profile in line with peers. Perenti reported that around 70% of its WIH and around 60% of its revenue was generated in Australia (AAA/Stable), United States of America (AAA/Negative), Canada (AA+/Stable) and Botswana in the first-half of the financial year ended December 2021 (FY22).
Stable Cash Flow from Underground Mining: Perenti's underground mining division makes the largest contribution to EBITDA, at around 75% (before group functions cost) in 1HFY22, and allows stable cash flow through the cycle. This is evident from the division's steady EBITDA contribution over the last decade when compared with the company's surface mining and investment divisions as well as against competitors.
The division's stability provides a buffer against cyclical commodity prices, and is underpinned by the low-cost position of the mines that Perenti serves, a focus on production-related services and the higher barriers to entry and lower capital intensity than surface mining.
Conservative Financial Policy: Perenti has revised its target leverage metric, which it defines as net debt/EBITDA, to less than 1x, which it has publicly articulated, and will not declare a dividend in FY22. We believe successful implementation would better position the company to withstand commodity-price downturns whilst maintaining conservative credit metrics.
In addition, its business model permits the company to reduce growth capex during commodity-price downturns, allowing it to generate positive cash flow after capex. Perenti maintains conservative leverage metrics through capital-management initiatives, such as limiting capex, suspending dividends and divesting of non-core assets. We expect leverage to improve to 1.0x in FY25, from 1.3x in FY21, on higher EBITDA.
Derivation Summary
Perenti's rating reflects stable cash flow from diversified underground-mining services contracts and a competitive cost position at the mines it serves. This compares favourably against peer, Indonesia-based PT Bukit Makmur Mandiri Utama (BB-/Stable), which has a less diversified business model due to concentrated and lower-quality counterparties. Perenti has better scale, as Australia's second-largest mining contractor, as well as superior credit metrics and diversified commodity exposure and customer base. These factors underscore the two-notch rating differential between the two entities.
Thiess Group Holdings Pty Ltd (BBB-/Stable) is the world's largest mining services company and has better scale, a wider profit margin and no exposure to countries with high sovereign risks when compared with Perenti. However, this is countered by Thiess's more volatile cash flow profile due to its exposure to mines with weak cost positions. Both companies have conservative leverage profiles. These factors underscore the one-notch rating differential between the two entities.
Key Assumptions
Steady revenue growth due to new contract wins and the extension of existing contracts.
Fitch adjusted group EBITDA margin of around 17% over the next four years.
Net capex of around 12% of revenue over the next four years
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Improved scale to be in line with higher-rated peers
Fitch adjusted EBITDA margin rising above 20% for a sustained period (2021: 16.9%)
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Net debt/EBITDA rising above 1.7x for a sustained period (2021: 1.3x)
Decline in revenue and WIH from stable mining jurisdiction to below 60% for a sustained period
We changed the leverage ratio in the sensitivity guidance to EBITDA, from funds from operations (FFO), and adjusted the threshold to account for the historical difference between EBITDA and the FFO-based metric of around 0.3x.
Our definition of debt excludes lease liabilities and we adjust EBITDA to remove lease interest and right-of-use depreciation.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
Liquidity and Debt Structure
Strong Liquidity: Perenti had cash and equivalents of around AUD260 million at FYE21, against interest-bearing liabilities of around AUD730 million. This results in an interest-bearing net debt position of AUD470 million, excluding leases. The company's overall liquidity position was around AUD540 million in cash and undrawn facilities, positioning it for growth and allowing it to meet any funding requirements. The company is working on refinancing its AUD400 million revolving credit facilities, which mature in July 2023.
Issuer Profile
Perenti is a leading global provider of contract and other mining services. In operation since 1987, Perenti is one of the largest mining services companies listed on the Australian Securities Exchange.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
PERENTI LIMITED 
