(The following statement was released by the rating agency) Fitch Ratings-Sydney-December 20: Fitch Ratings has affirmed Australia-based Mineral Resources Limited's (MIN) Long-Term Issuer Default Rating (IDR) at 'BB'. The Outlook is Stable. The senior unsecured debt has also been affirmed at 'BB'. The notes are rated at the same level as the IDR as they are unconditionally, jointly and severally guaranteed by MIN and its subsidiaries, which represent more than 95% of group consolidated total assets and net income. The affirmation follows a review of the company's performance in the financial year ended 30 June 2019 (FY19), which exceeded Fitch's forecasts due to strong iron ore prices and the narrower price discount of lower-grade iron ore from higher-grade ore during 2HFY19. The company's FFO adjusted net leverage was 2.7x at FYE19, better than our forecast of 4.0x. The ratings on MIN reflect its strong business profile, which is supported by its stable cash flow from internal mining services contracts, long-term external crushing contracts with diversified miners and low-cost lithium assets in Australia. However, execution risks with any further development of hydroxide plants, risks of a delay in commercial production at the Kemerton hydroxide plant and a subdued outlook for spodumene and iron ore prices are likely to result in lower group EBITDA for FY21 and FY22 compared with FY20. Accordingly, Fitch has a Stable Outlook on the IDR, even though the agency expects the company's credit profile to improve significantly once the Kemerton hydroxide plant starts commercial production in FY22. Key Rating Drivers Improved Financial Profile: MIN is back in a net-cash position following the completion of the sale of its stake in the Wodgina lithium mine. Fitch believes the strong balance sheet provides enough financial flexibility for MIN to weather any weakness in spodumene and iron ore prices as well as a delay in commercial production at the Kemerton hydroxide plant over the next 12-24 months. We forecast the company's leverage, measured by FFO adjusted net leverage, to remain below 2x, on average, over the next four years. Unique Profit-Sharing Model: MIN provides low-cost, pit-to-port, life-of-mine services to mines under its profit-sharing model, in which it acquires undeveloped resource assets that can benefit from its mining infrastructure services. MIN funds the design and construction of a mine in return for equity in the project and then secures a life-of-mine contract for full pit-to-port services. It monetises part of its stake and reinvests the funds in its business. The model eliminates the risk of contract loss in its mining services business, allows MIN to capture earnings from its profit share commodity operation and generates steady cash flow. Owner-Operator; Conservative Financial Policy: MIN has a conservative capital structure and was in a net cash position in seven of the last 10 years by implementing the founder's long-term strategy and benefitting from its deep understanding of the industry and its cyclicality, in Fitch's view. The potential development of additional hydroxide conversion facilities and investment in other commodity projects will result in negative FCF over the next few years. However, we think MIN's target of gross debt/sustainable EBITDA below 2x is appropriate for its rating, based on its stable cash flow, which is underpinned by internal mining services contracts and the cost competitiveness of its lithium mines. Risks from Hydroxide Plants: MIN's margin and cost competitiveness will improve compared with brine-based hydroxide operations once the hydroxide plant starts operation. Albemarle Corporation (BBB/Stable), which will market the plant's products, has experience with hydroxide plants, but the new facility must provide consistent supply that meets the requirements of customers, which include cathode and electric-vehicle makers. The qualification process is likely to take around a year after the plant's commissioning. MIN's commercial production schedule will not be met if it fails to manufacture a compliant product and if there is a delay in the commissioning of the plant. Benefits from New Hydroxide Plants: MIN has 40% equity in the first two trains at the Kemerton hydroxide plant (capacity of about 50,000 tonnes per year), after revising the terms of its stake sale in the Wodgina mine. This allows MIN to diversify its commodities business and sell hydroxide at least 12 months earlier than planned. Fitch believes cash flow from Kemerton and further hydroxide plant development will enhance MIN's business profile. It will become a leading lithium miner globally and diversify its cash flow. MIN's current iron ore business lacks the scale and cost competitiveness of its lithium segment. Secured Debt in Capital Structure: We expect MIN's capital structure to include secured debt for at least the next three years, however, this should stay below 1x EBITDA. MIN's senior unsecured debt could be downgraded if the ratio of secured debt/consolidated operating EBITDA moves to 2.0x-2.5x or above, irrespective of any movement in the issuer's IDR. Derivation Summary MIN's rating reflects its stable cash flow from internal mining services contracts and strong lithium-mine portfolio. This compares favourably against its peer, Indonesia-based PT Bukit Makmur Mandiri Utama (BB-/Stable), which has similar scale but a less diversified business model with concentrated and relatively lower quality counterparties. MIN's mining-services business has better earnings visibility due to its profit sharing model. These factors underscore the one-notch rating differential between the two entities. The rating on PT ABM Investama Tbk (B+/Negative) reflects a weakening coal contract-mining business and higher counterparty risk. ABM's mines also have short reserve lives of around five years, against the more than 20 years for MIN's lithium mines. These factors explain why ABM is rated two notches lower than MIN. 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, then the price to recover modestly from FY22 as demand outpaces supply in the market.
- Iron ore price in line with the Fitch price deck, adjusted for impurity discount. - Commercial production from Kemerton hydroxide plant to start in FY22. - Dividend payout ratio at around 50% of net profit after tax. RATING SENSITIVITIES Developments that May, Individually or Collectively, Lead to Positive Rating Action - FFO adjusted net leverage falling below 2.0x for a sustained period - Successful completion of its Kemerton hydroxide plant, with an established operational record following commercial production of hydroxide. - Neutral to positive free cash flow. Developments that May, Individually or Collectively, Lead to Negative Rating Action - FFO adjusted net leverage rising above 3.0x for a sustained period. - Delays and cost overruns in any further development of hydroxide plants for a sustained period, which may lead to higher leverage or squeeze MIN's liquidity position. - Negative developments in our long-term outlook for lithium. - Material loss of mining service contracts. Liquidity and Debt Structure Strong Liquidity Position: Following the completion of the sale of its Wodgina mine (60% sold), MIN received USD820 million in cash and is back in a net cash position in FY20. The company also has access to committed undrawn bank facilities of AUD250 million. Fitch believes the company has ample cash balance to meet its capex requirement over the next three years. ESG Considerations Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of 3 - 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 our ESG Relevance Scores, visit www.fitchratings.com/esg Mineral Resources Limited; Long Term Issuer Default Rating; Affirmed; BB; RO:Sta ----senior unsecured; Long Term Rating; Affirmed; BB Contacts: Primary Rating Analyst Leo Park, Associate Director +61 2 8256 0323 Fitch Australia Pty Ltd Level 15 77 King Street Sydney NSW 2000 Secondary Rating Analyst Kelly Amato, CFA Director +61 2 8256 0348 Committee Chairperson Vicky Melbourne, Senior Director +61 2 8256 0325
Media Relations: Leslie Tan, Singapore, Tel: +65 6796 7234, Email: leslie.tan@thefitchgroup.com; Peter Hoflich, Singapore, Tel: +65 6796 7229, Email: peter.hoflich@thefitchgroup.com. Additional information is available on www.fitchratings.com Applicable Criteria Corporate Rating Criteria (pub. 19 Feb 2019) https://www.fitchratings.com/site/re/10062582 Corporates Notching and Recovery Ratings Criteria (pub. 14 Oct 2019) https://www.fitchratings.com/site/re/10090792 Sector Navigators (pub. 23 Mar 2018) https://www.fitchratings.com/site/re/10023790 Additional Disclosures Dodd-Frank Rating Information Disclosure Form https://www.fitchratings.com/site/dodd-frank-disclosure/10105867 Solicitation Status https://www.fitchratings.com/site/pr/10105867#solicitation Endorsement Policy https://www.fitchratings.com/regulatory ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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