(The following statement was released by the rating agency) Fitch Ratings-Sydney-April 08: Fitch Ratings has assigned Australia-based Mineral Resources Limited (MIN) a first-time Long-Term Foreign-Currency Issuer Default Rating (IDR) of 'BB'. The Outlook is Stable. Fitch has also assigned the company's proposed US dollar senior unsecured notes an expected 'BB(EXP)' rating. The proposed notes are rated at the same level as the IDR as they will be unconditionally, jointly and severally guaranteed by MIN and its subsidiaries, which represent more than 95% of group consolidated total assets and net income. Fitch does not believe the capital structure, which contains secured debt, impairs MIN's senior unsecured creditors, as secured debt is less than 2.0x-2.5x EBITDA (0.5x in the year ended June 2018 (FY18)). The final rating is contingent on the receipt of final documents materially conforming to information already received. MIN is a leading provider of diversified mining infrastructure services and Australia's largest specialist crushing contractor, servicing some of the world's largest mining companies; its external contracts accounted for around 40% of mining services EBITDA in FY18. MIN is also an integrated pit-to-port service provider for its mines, which use a joint-venture profit-sharing model. The segment accounted for around 60% of mining services EBITDA in FY18. MIN also has exposure to the fast-growing lithium industry through high-quality mines, which have large scale and a competitive cost positon. MIN's ratings reflect its strong business profile, which is supported by its stable cash flow base from internal mining services contracts, long-term external crushing contracts with diversified miners and low-cost lithium assets in Australia. However, the company's operating risk profile will be elevated over the next four years as it invests in a new hydroxide plant to move up the lithium value chain, which constrains its credit profile. A joint venture with the US-based chemical manufacturer, Albemarle Corporation (BBB/Stable), will significantly improve MIN's net leverage position, following a ramp-up in capex on its two lithium mines. However, Fitch expects some delay in the construction and commercial production of MIN's hydroxide plant due to the inherent complexity associated with hydroxide during the development and production phases, and the rigorous qualification and accreditation process required by customers.
KEY RATING DRIVERS Unique Profit-Sharing Model: MIN provides low-cost, pit-to-port, life-of-mine services to mines under its profit-sharing model, which involves the acquisition of undeveloped resource assets that can benefit from its mining infrastructure services. Specifically, 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 mine-to-port services. It monetises part of its equity share over the medium- to long-term and reinvests the funds to further develop its business. The model eliminates the risk of losing a contract or switching in its mining services business and allows the company to capture earnings from its mining operation, which uniquely positions MIN relative to peers. The steady cash flow from its profit-sharing model accounted for around 60% of its total mining services EBITDA in FY18. Albemarle Transaction Net Leverage Positive: MIN's joint venture with Albemarle, which saw the divestment of half of its Wodgina lithium mine for proceeds of USD1.15 billion, will improve its net leverage position and provide adequate funding for its proposed hydroxide plant. This transaction will support the company's credit profile. MIN expects the transaction with Albemarle to be completed during 2019, subject to regulatory approvals. We believe there would be high interest in the Wodgina mine, should the transaction not achieve regulatory approval. Strong Lithium Hardrock Portfolio: Fitch believes MIN is well positioned to capitalise on the strong demand for lithium over the long-term, as its lithium portfolio includes one of the largest lithium hard-rock deposits in the world, and both assets possess long reserve lives, competitive cost positions and strong offtake and equity partners. Long-term offtake with Ganfeng Lithium at its Mt Marion mine and the strategic importance of high-quality lithium resources to MIN's equity partners reduce volume risk. We expect low execution risk for MIN's Wodgina mine due to the company's established record of development and production of spodumene concentrate at Mt Marion. Owner-Operator; Conservative Financial Policy: MIN has a conservative capital structure and has maintained a net cash position in eight of the previous 11 years by implementing the founder's long-term strategy and benefitting from its deep understanding of the mining industry and its inherent cyclicality, in Fitch's view. We expect leverage, measured by FFO adjusted net leverage, to peak at 4x in FY19 and then fall in FY20 due to receipt of the proceeds from the sale of its Wodgina mine. The development of MIN's hydroxide plant will then see leverage increase to around 2x by 2022. We think MIN's target of gross debt/EBITDA below 2x is appropriate for its rating, based on its stable cash flow, which is underpinned by internal mining service contracts and the competitive cost position of its lithium mines. Risks and Opportunities From Hydroxide Plant: MIN plans to move up the lithium value chain by building a hydroxide plant at its Wodgina mine. The plant, if completed and commissioned, will improve the company's margin and cost competitiveness compared with brine-based hydroxide operations. However, the inherent risk associated with hydroxide could result in construction and commercial production delays. Although Albemarle brings some experience with hydroxide plants, the new plant must prove consistent supply that meets the physical and chemical properties required by customers, which vary by cathode and electronic-vehicle manufacturers. The qualification process is likely to take around a year after commissioning the facility. MIN's commercial production schedule would not be met if it fails to manufacture a compliant product. Our leverage forecast assumes commercial hydroxide production from FY23 and captures full capex related to the plant, resulting in FFO adjusted net leverage of around 2x over the next four years and underpins our Stable Outlook. Secured Debt in Capital Structure: We forecast secured debt in MIN's capital structure for at least the next three years. MIN's proposed senior unsecured debt could be downgraded to the extent that the ratio of secured debt/consolidated operating EBITDA moves above 2.0x-2.5x, irrespective of any movement in the issuer's IDR. DERIVATION SUMMARY MIN's rating reflects its stable cash flow from internal mining contracts and strong lithium-mine portfolio. This compares favourably against its peer, PT ABM Investama Tbk (BB-/Negative), whose rating reflects a weakening coal contract mining business and higher counterparty risk. ABM's mines also have short reserve lives of around five years, against more than 20 years for MIN. These factors explain the one-notch rating differential between the two entities. MIN's rating again compares favourably with peer, PT Bukit Makmur Mandiri Utama (BB-/Stable), which has similar scale but a less diversified business model with concentrated counterparties. MIN's mining-service business has better earnings visibility due to its internal contracts. These factors result in a one-notch rating differential with MIN. KEY ASSUMPTIONS Fitch's Key Assumptions Within Our Rating Case for the Issuer - Gradual decline in the realised spodumene price over the next three years, then for the price to recover modestly in FY22 as demand outpaces new capacity expansion. - Iron-ore price in line with the Fitch price deck, adjusted for impurity discount. - Gradual ramp-up in export volume of spodumene concentrate from Mt Marion and Wodgina during FY20-FY21. - Wodgina transaction proceeds received during FY20. - Incorporated 100% of committed capex for hydroxide plant. - Commercial production from Wodgina hydroxide plant to start in FY23. - Dividend payout ratio at around 50% of net profit after tax. RATING SENSITIVITIES Developments that May, Individually or Collectively, Lead to Positive Rating Action Fitch does not expect positive rating action in the medium-term due to MIN's elevated operating risk profile stemming from its expected hydroxide plant investment at Wodgina. However, developments that may, individually or collectively, lead to a positive rating action include: - FFO adjusted net leverage falling below 2.0x on a sustained basis. - Neutral to positive free cash flow. - Successful completion of its hydroxide plant and established operational record, with the commercial production of hydroxide. Developments that May, Individually or Collectively, Lead to Negative Rating Action - Sustained delays and cost overruns in the hydroxide plant, which may lead to higher leverage or squeeze MIN's liquidity position. - FFO adjusted net leverage rising above 3.0x for a sustained period. - Negative developments in our long-term outlook for lithium. - Material loss of mining-service contracts and deterioration in the production volume of lithium mines at Mt Marion and Wodgina to below our expectations of around 450 kilotonne per annum (ktpa) and 750ktpa, respectively. - Investments in the hydroxide plant that elevate the business risk profile, which is not mitigated without an experienced joint-venture partner. LIQUIDITY Adequate Liquidity: MIN reported cash of AUD136 million with undrawn facilities of AUD125 million at end-2018. The company announced in January 2019 that it had increased its working-capital facility by AUD200 million. Thus, we estimate MIN had available funding of around AUD460 million at end-1HFY19. Its proposed bond, revolving, and working-capital facilities will extend its debt maturity profile. MIN expects to receive the sale proceeds of around USD1.15 billion from the sale of half of its Wodgina lithium mine interest by end-2019. Contact: Primary Analyst Leo Park Associate Director +61 2 8256 0323 Fitch Australia Pty Ltd Level 15, 77 King St, Sydney NSW 2000 Secondary Analyst Kelly Amato 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. 19 Feb 2019) https://www.fitchratings.com/site/re/10062582 Corporates Notching and Recovery Ratings Criteria (pub. 23 Mar 2018) https://www.fitchratings.com/site/re/10024585 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/10068991 Solicitation Status https://www.fitchratings.com/site/pr/10068991#solicitation Endorsement Policy https://www.fitchratings.com/regulatory ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE AT HTTPS://WWW.FITCHRATINGS.COM/SITE/REGULATORY. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Copyright © 2019 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch's factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch's ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided "as is" without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers. For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001 Fitch Ratings, Inc. is registered with the U.S. Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization (the "NRSRO"). While certain of the NRSRO's credit rating subsidiaries are listed on Item 3 of Form NRSRO and as such are authorized to issue credit ratings on behalf of the NRSRO (see https://www.fitchratings.com/site/regulatory), other credit rating subsidiaries are not listed on Form NRSRO (the "non-NRSROs") and therefore credit ratings issued by those subsidiaries are not issued on behalf of the NRSRO. However, non-NRSRO personnel may participate in determining credit ratings issued by or on behalf of the NRSRO.