Fitch Affirms Mineral Resources at 'BB'; Outlook Stable

(The following statement was released by the rating agency) Fitch Ratings-Sydney-16 December 2020: 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 rating reflects MIN's diversified cash flow stream from the external mining services business, internal projects, strong credit metrics, and the competitive cost position of its large-scale lithium assets in Australia. The company reported strong earnings in the financial year ended June 2020 (FY20), benefiting from a high iron ore price and an increasing contribution from its mining services business. The company's credit metrics are strong for its rating, strengthened with AUD1.2 billion in cash following the completion of the Wodgina transaction with Albemarle Corporation (ALB, BBB/Negative). This is counterbalanced however by risks of a potential delay in commercial production at the Kemerton hydroxide plant and the weak lithium market, which may delay MIN's monetising its downstream lithium project. The joint venture with ALB has reduced MIN's capital commitments to the project, nonetheless spodumene and hydroxide prices may put pressure on the company's cash flow profile. Key Rating Drivers Unique Profit-Sharing Model: MIN provides pit-to-port, life-of-mine services to mines. It acquires undeveloped resource assets that can benefit from its mining infrastructure services. MIN funds a mine's design and construction in return for equity, and then secures a life-of-mine contract for full pit-to-port services. It monetises part of its stake over the medium to long term, and reinvests the funds in its business. MIN's model eliminates the risk of contract loss, allows MIN to capture earnings from its profit share commodity operation and creates steady cash flow. Internal Projects Resilient: MIN's internal iron ore and lithium projects are resilient through the cycle. Fitch estimates the Koolyanobbing iron ore project's breakeven level is meaningfully below Fitch's long-term price of USD60/tonne. Mt Marion has minimum-guaranteed EBITDA, however, Iron Valley and Wonmana are susceptible to weak iron ore prices but the projects' EBITDA contributions are immaterial at our long-term price of USD60/t. Iron Valley also reported positive EBITDA in 2015 and 2016 at a time of low iron ore prices due to cost savings from a weak Australian dollar, diesel, royalty and shipping. Furthermore, MIN's external crushing contracts service tier 1 miners with competitive costs and provide stable cash flow. Therefore, Fitch believes around 85% of MIN's mining services EBITDA, including external contracts, deliver strong earnings through the cycle. MIN's mining services EBITDA alone will be able to achieve leverage of around 2x (gross debt/mining services EBITDA). ALB Partnership Reduces Risk: MIN's joint venture with ALB reduces its execution and capital commitments associated with the Kemerton lithium hydroxide plant. As part of the transaction with ALB, MIN has a 40% interest in two 25 kilo-tonnes per annum lithium hydroxide modules in Kemerton, Western Australia and will sell most of its hydroxide under long-term contracts with fixed and floor pricing arrangements. 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. Fitch believes MIN benefits from being an owner-operator that manages the business conservatively with a long-term focus. We expect MIN to fund growth capex from cash and do not expect any special dividend to shareholders. Fitch believes this will provide MIN with ample liquidity to fund growth capex. Fitch expects MIN's leverage, as measured by funds from operations (FFO) net leverage, to remain below 1x, even over FY21-FY22, underpinned by its mining services and iron ore businesses. Furthermore, MIN has ample liquidity headroom (about AUD900 million) to mitigate any potential misstep in execution with new projects. Commercial production of hydroxide is expected to generate strong cash flow from FY23, which could allow MIN to report strong free cash flow over the long term and possible positive rating action. 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-/Negative), which has similar scale but a less diversified business model with concentrated and 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: - Iron ore price in line with the Fitch price deck, adjusted for impurity discount; - Commercial production from the Kemerton hydroxide plant to start in FY22; - Dividend payout ratio at around 50% of net profit after tax and no special dividend distribution. RATING SENSITIVITIES Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade: - FFO net leverage remains 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. Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade: - FFO 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. We treat MIN's lease costs as operating expenses, in line with the change to our treatment of leases. Consequently, we have switched to use unadjusted metrics in our rating sensitivities, from lease-adjusted metrics. 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 Position: MIN received USD820 million in cash following the completion of the sale of Wodgina (60% sold) 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 an ample cash balance to meet the capex requirement over the next four years. 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 Mineral Resources Limited; Long Term Issuer Default Rating; Affirmed; BB; Rating Outlook Stable ----senior unsecured; Long Term Rating; Affirmed; BB 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 Model Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s). 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