(The following statement was released by the rating agency) Link to Fitch Ratings' Report(s): https://www.fitchratings.com/site/re/10103721 Fitch Ratings-Sydney-December 02: Fitch Ratings has assigned Australia-based Altura Mining Limited (AJM) a first-time Long-Term Foreign- Currency Issuer Default Rating (IDR) of 'CCC+'. The Outlook is Stable. Fitch has also assigned the company's proposed US dollar senior secured notes an expected rating of 'CCC+(EXP)' and a Recovery Rating of 'RR4'. The proposed notes are issued by Altura Lithium Operations Pty Ltd and are guaranteed by AJM. The proposed notes are rated at the same level as the IDR as they will be guaranteed by AJM. The net proceeds from the proposed note issuance will be used to refinance USD143 million of existing secured notes due August 2020. The final rating is contingent on the receipt of final documents materially conforming to information already received. The 'CCC+' IDR reflects the company's high interest burden and looming debt maturity should the company fail to sell contracted volume and maintain its floor price over the next 12-24 months. AJM's rating also reflects its small scale of operations and single product focus. These are counterbalanced by AJM's competitive operating costs compared with those of Australian hard-rock peers. Fitch believes AJM's credit profile will benefit over the next two years from higher production volume, which lowers AJM's fixed costs per tonne and thus improves its cash-generating ability. The floor price in its offtake contracts provides some hedge against weak spodumene market conditions. Key Rating Drivers Weak Balance Sheet; Strong Lithium Asset: Fitch expects AJM's cash costs to improve to around USD345 per tonne in the financial year ending 30 June 2020 (FY20), although we forecast free cash flow (FCF) to be negative. The strain on the cash flow reflects the company's highly leveraged balance sheet. This negates its competitive operating costs and reduces AJM's all-in cost competitiveness. AJM's mine has competitive operating costs compared with other Australian hard-rock mines and has demonstrated it could produce at nameplate capacity within a short period. The product quality is evidenced by strong interests from offtake partners. Small Scale, Weak Liquidity: AJM is a small scale spodumene producer with 220ktpa production capacity and reserves of around 45mt, which provides for a long mine life but is considered small in global context. In addition, the company's liquidity is weak. Fitch forecasts AJM to generate negative FCF and the company does not have any committed undrawn liquidity lines. AJM's weak liquidity position during a downturn in the spodumene market reduces the company's financial flexibility to absorb losses from unforeseen events. Floor Price and Offtake: Fitch believes that AJM will try to maintain the floor price in the company's offtake contracts and will seek alternative offtake partners to minimise the risk of a reduction in the floor price to below USD550/tonne. AJM's offtake contracts, which cover 100% of production volume, have floor a price of USD550/tonne that provides downside protection. The floor price improves visibility of AJM's cash flow when the market price for spodumene is under pressure. The floor price arrangement in each offtake contract has varying length and the earliest expiry of the floor price arrangement is July 2020. AJM's ability to maintain its floor price whilst selling contracted volume over the next 12-24 months will be the most important factors that will determine its credit profile. Many hard-rock miners in Australia have reported reduced sales and production volumes, at the request of their offtake partners. We expect that AJM will cut sales volumes to about 85% of capacity, although the company has not announced any reduction in volume, in the context of the current market and actions by other Australian hard-rock miners. Fitch believes such supply rationalisation in the industry is likely to alleviate pressure on short-term spodumene pricing and support price recovery over the medium term. Credit Metrics Remain Weak: We expect funds from operations (FFO) fixed-charge coverage to remain below 1x in FY20 and FY21, and then improve as we expect the spodumene price to recover from the current trough and AJM to increase sales volume. Fitch also expects AJM's FFO adjusted leverage to be around 9x in FY20 and FY21, due to its leveraged balance sheet and the weak spodumene price and sales volume. However, Fitch expects the company's credit metrics to improve over time as the company increases its sales volume and the market price for spodumene recovers. 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 metric and business profile. AJM is smaller in scale and asset diversification compared with other junior miners in the single 'b' space, but that is partially offset by the company's relatively long mine life and competitive mining cost position. AJM has better cost position and long reserve life than Petropavlovsk plc (B-/Positive). However, these are offset by AJM's weak coverage metric and liquidity position as well as its high leveraged balance sheet. These factors underscore the one-notch rating differential between the two entities. AJM has similar cost position when compared with Gran Colombia Gold Corp. (B/Stable). However, the latter has short reserve life and higher country risk as Fitch scored Gran Colombia Gold's country risk relative to mining operation at 'b' (AJM 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 - Gradual decline in the realised spodumene price over the next two years, then for the price to recover modestly from FY22 as demand outpaces supply in the spodumene market. - Production volumes and grades in line with management guidance; sales volume around 15% lower than its nameplate capacity in 2020 and then improves gradually thereafter. - Capex of around AUD6 million a year in FY20-FY22. KEY RECOVERY RATING ASSUMPTIONS - The recovery analysis assumes AJM would be liquidated in a bankruptcy rather than continue as a going-concern because it is an asset-heavy company. The analysis is based on audited accounts as of 30 June 2019. - Liquidation Approach: The liquidation estimate reflects Fitch's view of the value of inventory and other assets that can be realised in a reorganisation and distributed to creditors. Fitch assumed: - 10% administration claims; - 75% recovery from accounts receivable; - 50% recovery from inventories; and - 51% recovery from net property, plant and equipment. - These assumptions result in a recovery rate for senior secured notes within the 'RR4' range, which maps to a senior secured rating of 'CCC+' in line with our Corporates Notching and Recovery Ratings Criteria. RATING SENSITIVITIES Development That May, Individually or Collectively, Lead to Positive Rating Action: -FFO fixed charge coverage improves to above 1.5x on a sustained basis -FFO adjusted leverage improves to below 4x on a sustained basis Development That May, Individually or Collectively, Lead to Negative Rating Action: -Failure to refinance its debt maturing in August 2020 -Deterioration of liquidity profile Liquidity and Debt Structure Weak Liquidity: AJM's only available liquidity is cash on hand of AUD22 million against total debt outstanding of USD143 million at end-September 2019. We expect AJM to generate negative FCF in FY20 and FY21. The successful completion of the company's proposed bond issue will address the upcoming debt maturities and also provide some liquidity headroom. AJM has successfully raised equity from strategic partners (downstream players) which are interested in securing products reliably. We understand that AJM is in conversation with a number of parties in regards to potential offtake variations and additions which may typically attach to an equity position in the company. 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. Altura Mining Limited; Long Term Issuer Default Rating; New Rating; CCC+; RO:Sta Altura Lithium Operations Pty Ltd ----senior secured; Long Term Rating; Expected Rating; CCC+(EXP) 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/10103619 Solicitation Status https://www.fitchratings.com/site/pr/10103619#solicitation Endorsement Policy https://www.fitchratings.com/regulatory ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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