Fitch Affirms Altura at 'CCC+' and Withdraws Expected Bond Rating

(The following statement was released by the rating agency) Fitch Ratings-Sydney-17 June 2020: Fitch Ratings has affirmed Australia-based Altura Mining Limited's (AJM) Long-Term Foreign-Currency Issuer Default Rating of 'CCC+' with a Stable Outlook. Fitch has also withdrawn the 'CCC+(EXP)' expected rating with a Recovery Rating of 'RR4' assigned to AJM's proposed US dollar senior secured notes. Fitch has withdrawn the expected rating on AJM's proposed US dollar senior secured notes, which was assigned on 2 December 2019, as it is no longer expected to convert to a final rating. The company decided not to proceed with the issuance following the extension of its existing loan facility and associated funding. The affirmation follows the completion of the company's funding package and reflects our view that AJM will be able to maintain a profile commensurate with its rating in the next 12-18 months. This is supported by Fitch's expectation that AJM will be able to continue to operate, unlike its peers, which have placed their mines on care and maintenance, and will have an adequate liquidity buffer to service its interest cost over the next 12 months. AJM's ratings continue to reflect its high leverage and weak cash flow over the next 12-18 months. The company's credit profile can improve from the current rating level if it is able to sell spodumene at its minimum contracted price of USD550/tonne at nameplate capacity. The ratings were withdrawn with the following reason: an expected rating which is no longer expected to convert to a final rating. Key Rating Drivers Refinancing Package Improves Liquidity: Fitch believes AJM's liquidity improved after the company extended the maturity of its US dollar loan notes to August 2023 and obtained standby equity of AUD50 million from executing a put option agreement with LDA Capital to access the additional equity of up to AUD50 million, if required by the company, over the next three years. AJM will utilise the standby equity to fund its working capital and finance costs over the next 12 months. As a result, AJM will be able to better manage its short-term cash flows, aided by the balloon repayment profile of its US dollar loan notes, which has also extended AJM's debt maturity to the financial year ending June 2024 (FY24) from its previous maturity in August 2020. Coronavirus Impact: Fitch believes AJM's sales volume for 2HFY20 was negatively affected by COVID-19. However, all of its off-take counterparties are based in China and we therefore expect its operations to benefit as lockdowns are eased and industrial activity in the country recovers to pre-pandemic levels. Fitch has assumed in our rating case sales volume of 160,000 tonnes in FY20 and 190,000 tonnes in FY21, which is below AJM's nameplate capacity of 220,000 tonnes/year, before starting to gradually recover from FY22. Small Scale; Strong Lithium Asset: AJM is a small-scale producer compared with other hard-rock miners in Australia. It has a production capacity of 220,000 tonnes a year and reserves of around 45 million tonnes. Nevertheless, its asset has desirable qualities including low mica and medium iron content, and it has demonstrated the ability to increase production to full capacity within a short period, with competitive operating costs compared with other hard-rock miners. This is complemented by strong demand from off-take partners, evidence of product quality, and hence its continued operations unlike its peers. Volume, Price Drive Credit Metrics: Fitch expects the company's credit metrics to improve over time as it increases its sales volume and the market price for spodumene recovers. Funds from operations (FFO) fixed-charge coverage is likely to stay below 1x in FY20 and FY21, and improve on a recovery in spodumene prices as AJM increases sales volume. However, Fitch expects AJM's leverage to remain high over the next 12-18 months due its leveraged balance sheet, weak spodumene prices and low sales volume. Derivation Summary Fitch believes that for issuers rated in a low single 'B' category, liquidity and coverage metrics have far greater impact on the rating than their leverage metrics and business profiles. AJM is smaller in scale and asset diversification than other junior miners in the single 'B' space, but that is partially offset by the company's relatively long mine life and competitive mining costs. AJM has a better cost position and longer reserve life than Petropavlovsk plc (B-/Positive). However, these are offset by AJM's weak coverage metrics and liquidity position as well as its highly leveraged balance sheet. These factors underscore the one-notch rating differential between the two entities. AJM has a similar cost position in comparison with Gran Colombia Gold Corp. (B/Stable). However, the latter has a shorter reserve life and higher country risk as Fitch scored Gran Colombia Gold's country risk relative to mining operations at 'b', while AJM's was scored at 'bbb'. AJM's weak financial and liquidity profile more than offsets its strong business profile and underscores the two-notch rating differential between the two companies. Key Assumptions Fitch's Key Assumptions Within Our Rating Case for the Issuer - Gradual decline in the realised spodumene price over the next two years to around USD400 before recovering to USD480 from FY22 as demand outpaces supply in the spodumene market. - Sales volume around 25% lower than its nameplate capacity in 2020 with gradual improvement thereafter. - Capex of around AUD5 million a year in FY20-FY22. RATING SENSITIVITIES Factors that could, individually or collectively, lead to positive rating action/upgrade: - FFO fixed-charge coverage improves to above 1.5x on a sustained basis - FFO leverage improves to below 4x on a sustained basis Factors that could, individually or collectively, lead to negative rating action/downgrade: - Failure to maintain sufficient liquidity to meet all-in costs for the next 12-18 months. 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 Adequate Liquidity: AJM obtained the standby equity of AUD50 million and had cash on hand of AUD1 million by end-March 2020. We expect AJM to fund its working capital and finance costs in FY21 with the available liquidity and operating cash flows. The maturity of the USD loan notes was extended to August 2023 as part of its refinancing package. AJM raised the equity from strategic partners such as downstream companies, which are interested in securing products reliably, and institutional investors in FY20. 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 The highest level of ESG credit relevance, if present, is a score of 3. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity(ies), either due to their nature or to the way in which they are being managed by the entity(ies). For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg. Altura Lithium Operations Pty Ltd ----senior secured; Long Term Rating; Withdrawn; WD Altura Mining Limited; Long Term Issuer Default Rating; Affirmed; CCC+; RO:Sta Contacts: Primary Rating Analyst Leo Park, Associate Director +61 2 8256 0323 Fitch Australia Pty Ltd Suite 15.01, Level 15 135 King Street Sydney 2000 Secondary Rating Analyst Kelly Amato, CFA Director +61 2 8256 0348 Committee Chairperson Vicky Melbourne, Senior Director +61 2 8256 0325 Media Relations: Peter Hoflich, Singapore, Tel: +65 6796 7229, Email: peter.hoflich@thefitchgroup.com Leslie Tan, Singapore, Tel: +65 6796 7234, Email: leslie.tan@thefitchgroup.com Additional information is available on www.fitchratings.com Applicable Criteria Corporate Rating Criteria (pub. 01 May 2020) (including rating assumption sensitivity) (https://www.fitchratings.com/site/re/10120170) Corporates Notching and Recovery Ratings Criteria (pub. 14 Oct 2019) (including rating assumption sensitivity) (https://www.fitchratings.com/site/re/10090792) Sector Navigators: Addendum to the Corporate Rating Criteria (pub. 01 May 2020) (https://www.fitchratings.com/site/re/10120367) Applicable Model Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s). 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