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Fitch Rates Polyus Gold's New Notes 'BB-(EXP)'

January 26, 2017 | Cbonds

Fitch Ratings has assigned Polyus Gold International's (PGIL) planned notes an expected senior unsecured rating of 'BB-(EXP)'. The rating is in line with PGIL's Long-Term Issuer Default Rating (IDR) of 'BB-'/Positive. The assignment of a final rating to the notes is conditional on the receipt of final documentation in line with the draft received.

The notes will be guaranteed by the Russian public holding company PJSC Polyus and JSC Gold Mining Company Polyus, a key operating subsidiary and a holding company for all company's key subsidiaries accounting for 100% of 2016 EBITDA and 100% of fixed assets at end-2016. The proceeds from the offering are expected to be used to rebalance the debt portfolio structure toward fixed interest rates, via repayment of a portion of the company's variable rate debt. The notes will rank pari passu with PGIL's existing and future unsecured and unsubordinated obligations. The guarantee will also rank pari passu with all existing and future unsecured and unsubordinated obligations of the guarantor.

KEY RATING DRIVERS
Corporate Governance Changes
The previously strong corporate governance structures at PGIL were dismantled following the change in shareholding structure in late 2015. The company has since implemented a new framework at the PJSC Polyus level, including independent director representation. At present, we regard the group's corporate governance as slightly below average compared with its peer group of major Russian corporates and we notch its rating down by two notches compared with international peers. This factors in our view of the higher than average systemic risks associated with the Russian business and jurisdictional environment as well as our assessment of the company's specific corporate governance practices.

Leverage Reduction Postponed to 2019
The USD3.4bn share buyback completed in 1H16 was funded using USD2.5bn of new debt and USD0.9bn of balance sheet cash. This resulted in a material increase in leverage, driving FFO adjusted gross leverage to 4.2x in 2016 under our base case compared with 2.7x in FY15. Fitch expects net debt/EBITDA to exceed 2.3x in 2016-2018, compared with historical levels below 1.0x. We also expect absolute debt levels to remain elevated at least until 2019 when expected production increases from the company's new Natalka mine, as well as increased volumes from some existing mines, will start to have a positive impact on metrics.

Compared with our October 2016 forecasts, we now do not expect significant debt reduction to occur by 2018 but forecast only a moderate decrease by 2019, mainly due to revised production forecasts for Natalka. We expect FFO gross leverage to remain stable around 4.0x-4.5x for 2016-2018 and to decrease to around 3x by 2019. FFO net leverage is forecasted to remain around 1x below the FFO gross leverage throughout the period. This compares unfavourably with our October forecasts, when we expected FFO gross leverage to decline to around 3x by 2018, which was the main driver behind the revision of the Outlook to Positive. However, we still believe that PGIL could take additional non-operational measures such as a secondary public offering, which could potentially support positive rating action.

Competitive Cost Position
Operationally PGIL remains a strong group with good quality gold reserves and large efficient open pit assets, which place it in the first quartile of the global cost curve (total cash costs; TCC). In 9M16, TCC declined to USD387/oz - an 8% decline year-on year. This was driven by local currency (RUB) devaluation as well as operational improvements, which resulted in higher processing volumes and better recovery rates.

Strong Production Prospects
The group reported production growth of 12% in FY16 to 1,968k/oz of metal versus 1,731k/oz in FY15. This is in line with the positive trend over the past two years. Most of the increase came from the Olimpiada, Blagodatnoe and Kuranakh mines, which delivered higher processing volumes and better recoveries.

In terms of growth, the group intends to concentrate on streamlining and improving capacity on its key producing mines. In addition, Fitch expects the group's key development mine - the Natalka mine - to be launched in late 2017 and gradually ramp up throughout 2018, resulting in an approximate 15%-20% year-on year increase in the group gold production. Fitch expects production to reach 2,100k/oz in 2017, 2,400k/oz in 2018 and 2,900k/oz in 2019 mainly driven by Natalka (+740k/oz in total for 2018-2019).

DERIVATION SUMMARY
Polyus Gold International is the largest gold producer in Russia and one of the top 10 gold miners globally by ounces produced (2.0 million ounces of gold production in 2016). Comparable peers to PGIL rated by Fitch include Goldcorp (BBB/Stable), Kinross Gold Corporation (BBB-/Stable) and NordGold (BB-/Stable). Polyus's standalone rating of 'BB+' (BB-/Positive after notching down for the operating environment) reflects a comparable operating profile in most respects (eg. market position and reserves size), but typically higher leverage metrics offset by lower than average PGIL's cost position. PGIL's Russian peer NordGold (BB-/Stable) has a smaller reserve base and scale production.

KEY ASSUMPTIONS
- No cash upstreaming over the rating horizon by way of share buybacks
- Dividends in line with new dividend policy of 30% of EBITDA if net debt/EBITDA is less than 2.5x
- Average gold price of USD1,141/oz in 2017, USD1,120/oz in 2018 and USD1,100/oz afterwards (realised prices adjusted to reflect gold price hedging entered into by the company)
- USD/RUB exchange rate of 65 in 2017, 60 in 2018 and 57 thereafter
- Natalka project to be launched in late 2017 and gradually ramp up throughout 2018
- Operating efficiencies at the existing mines as per management's expectations

RATING SENSITIVITIES
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- Expectation of FFO gross leverage below 3.0x by end-2018
- Sustained positive FCF generation

Negative: Future developments that could lead to negative rating action include:
- Higher than expected dividend payments or other shareholder distributions over 2016-2019 leading to weaker liquidity and sustaining high leverage metrics
- FFO gross leverage expected to be sustained above 4.0x by end-2018
- Sustained negative FCF generation

LIQUIDITY
Polyus Gold's liquidity position is strong, with estimated cash position of USD1.9bn and USD0.7bn of undrawn committed bank facilities as of Dec-16. This compares very favourably with the current maturities, which were virtually removed with the October 2016 notes issue and loans refinancing, and now only amount to USD52m over the next 24 months.

Company: Polyus Gold International Limited

Full company namePolyus Gold International Limited
Country of riskJersey
Country of registrationJersey
IndustryMining industry

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