VOLCAN COMPAÑÍA MINERA S.A.A.
Fitch Ratings has downgraded
The Rating Outlook is Stable.
The ratings downgrade reflects Fitch's expectation that the company's gross and net leverage ratios will rise to an average of 4.0x and 3.2x, respectively, over the rated horizon. The higher leverage is due to higher costs and production volumes below previously projected levels amidst a backdrop of falling prices and capital expenditures that will be needed to sustain volumes. Resulting negative free cash flow will need additional borrowing at less favorable terms than historically obtained.
Volcan's rating was not supported by Glencore's ownership stake in the company. Glencore's decision to sell its stake in the company could have implications for Change of Control Clauses in lending documents that could result in additional refinancing risk for Volcan.
Key Rating Drivers
Lower Production: Volcan's output has been below Fitch's expectations over the last two years, as the 2020 coronavirus pandemic resulted in investment cuts and operational hardships that affected mine plans. The Yauli operation (58% of sales in 2022) has faced difficulties to access newly discovered higher-grade areas while the Chungar operation (20% of sales in 2022) has been grappling with narrower veins. Fitch has adjusted downward Volcan's forecast production to an average of 410,000 MT zinc equivalent between 2023 and 2025 from 460,000 MT zinc equivalent, previously.
Weakening Zinc Prices: Decreasing energy costs have started to ease their sway in the zinc smelting and refining market. The zinc refined market will be in a 39,000 MT deficit during 2023, according to metals and mining consultancy CRU. This figure represents less than 0.5% of zinc production, while global concentrate surplus will reach 112,000 MT. Fitch expects this downward pressure to lower zinc prices to an average of
High Cost: Volcan's cost structure reached the fourth quartile of the global zinc all-in sustaining cost curve in 2022, with a weighted average of
Low
Cash Flow Generation: Fitch forecasts Volcan's EBITDA at
Weak Credit Ratios: Fitch projects gross leverage to average over
Glencore's Exit: Glencore's publicly stated intention to sell its 55% voting and 22% economic stakes in the company does not affect Fitch's rating of Volcan. Fitch was not considering further financing, or operational support from Glencore. However, this process casts doubt on Volcan's ability to promptly develop its extensive mining rights. More generally, it also underscores a perceived higher risk toward mining development in
Asset Sales: Divestitures from non-core assets may be used as a contingent source of cash for debt repayment. Assets more likely to be sold include Volcan's approximately 16% stake in Polpaico, a Chilean cement producer, and its hydro power plants. Fitch does not expect the 40% stake in the Chancay port project, located 50 miles north of
Derivation Summary
Volcan's production of base and precious metals diversification is higher than that of peers
Volcan's scale of operations is higher than that of Ero and Aris, similar to that of
Fitch projects that Volcan will have a weaker capital structure and liquidity than these peers. Its 4.0x and 3.2x gross and net EBITDA leverage compares with
Volcan's cost position in the fourth quartile of the zinc all-in sustaining costs is similar to that of
Volcan's consolidated life of mine of five years of reserves is also on the lower end, and is comparable with that of
Key Assumptions
Fitch's Key Assumptions Within the Rating Case for the Issuer:
Average zinc price of
Average silver price of
Average lead prices of
Capex of
Zinc output of 243,000 MT, 260,000 MT and 264,000 MT in 2023, 2024 and 2025;
Silver output of 13.4 million oz, 12.0 million oz, and 11.6 million oz in 2023, 2024, and 2025;
Yauli's zinc and silver production rise 9% and 4%, respectively in 2023. Fitch expects Yauli to contribute 60% of revenues in 2023;
Romina is expected to achieve full production in late 2024. Fitch expects the resulting Alpamarca, with the Romina expansion, to contribute 10% of revenues in 2025.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
A sustained gross debt/EBITDA ratio of less than 3.5x in a sustained basis;
A sustained net debt/EBITDA ratio of less than 3.0x in a sustained basis;
Positive to neutral FCF over the rating horizon;
Improved liquidity through asset sales or equity injection.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
A sustained gross debt/EBITDA ratio of more than 4.5x with an unwillingness or inability to deleverage;
A sustained net debt/EBITDA ratio of more than 4.0x with an unwillingness or inability to deleverage;
Negative FCF over the rating horizon;
EBITDA to interest expense coverage ratio consistently below 2.0x.
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 '
Liquidity and Debt Structure
Pressured Liquidity: Volcan ended 2022 with
Volcan's liquidity position is pressed to finance capex for Romina and to refinance the approximately
Issuer Profile
Volcan is a polymetallic mining company with a fourth quartile cost position on the global zinc cost curve per CRU. It has a track record over 75 years of operating in
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.
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