Fitch affirms Kazatomprom at 'BBB-'; outlook stable
The international rating agency Fitch Ratings has affirmed
Kazakhstan-based National Atomic Company Kazatomprom's Long-term
foreign currency Issuer Default Rating (IDR) at 'BBB-' with stable
outlook, the rating agency reported on November 5.
The company's Long-term IDR affirmed at 'BBB-' with stable outlook,
Short-term IDR affirmed at 'F3', Foreign currency senior unsecured
rating affirmed at 'BBB-'.
"The ratings reflect Kazatomprom's standalone profile due to
limited links with its ultimate parent - Republic of Kazakhstan
(BBB+/ Stable). Its standalone profile primarily reflects the
company's leading position in global uranium mining, the fact that
most of its uranium production volumes have been contracted over
the medium term, and its competitive cash costs compared with those
of its global peers," the agency said.
At the end of the first half of 2014 Kazatomprom's cash and cash
equivalents stood at 17 billion tenge (180.87 tenge = $1) which,
together with short-term deposits of 3 billion tenge (mainly with
Kazakh banks) and available unused credit facilities of 20 billion
tenge, are not sufficient to cover short-term maturities of 116
billion that is mainly represented by the $500 million eurobonds
due in May 2015.
The company is currently negotiating new loans with the banks to
refinance the eurobonds and expects to conclude loan agreements by
end-2014.
In 2013 Kazatomprom reported funds from operations (FFO) gross
adjusted leverage of 2.4x and may exceed the negative rating
guidance of 2.5x at end-2014 on account of falling uranium prices
and an intensive capex programme of about 90 billion tenge over
2014-2018, which is likely to be partially debt funded. However,
the agency expects leverage reduction to about 2.4x during
2015-2017 as a result of a cutback in investment plans. This
supports the Stable Outlook.
Uranium oxide (U3O8) prices continued to fall in the first half of
2014 as a result of sustained oversupply of uranium products on the
market, and reached $28/pound, last seen in 2005. However, this
trend has started to reverse in the second half of 2014 as uranium
prices gradually increased to $35.65/pound in mid-October. In
Fitch's view, a sustained decline in uranium prices would have a
lasting negative impact on Kazatomprom's earnings given the
inclusion of spot price elements in its existing long-term sales
contracts. The agency does not expect prices to recover to pre-2013
levels in our projections for the company.
"Kazatomprom's ratings are constrained by limited diversification
and exposure to uranium price volatility. The latter could be
mitigated by the expected implementation of the company's vertical
integration strategy and shift to higher value-added products and
services in the long term, as well as by its strong market
position, low-cost production, contracted sales and ramped-up
production," the agency said.
Kazatomprom's investment-grade rating continues to be primarily
driven by its leading position in global uranium mining, stable
operating profile, the fact that most of its uranium production
volumes have been contracted over the medium term and its
competitive cash costs compared with those of its global peers,
according to Fitch. In 2013, Kazatomprom maintained its leading
position in global uranium mining with a market share of 21
percent.
Despite the closure of all nuclear power reactors in Japan and
about half in Germany, Fitch expects the use of nuclear power to
continue given its environmental advantages and ability to
contribute to the reduction of greenhouse and other gases and
substances.
"We expect uranium requirements to fuel reactors will continue and
may increase in the long-term, especially after putting into
operation about 70 power reactors that are currently under
construction worldwide, mainly in the developing countries.
Therefore we consider uranium sector fundamentals to be fairly
strong over the long term," the agency said.
Kazatomprom's reduction of FFO adjusted gross leverage to below
1.5x on a sustained basis could lead to positive rating actions.
However, Fitch does not forecast such deleveraging to take place in
the medium term due to Kazatomprom's intensive capex plans and
falling uranium prices.
Successful implementation of the vertical integration strategy,
while maintaining a sound financial profile, can also lead to
positive rating actions.
Failure by the company to secure refinancing by end-2014 and
deterioration of FFO adjusted gross leverage above 2.5x on a
sustained basis due to, among other things, a more aggressive capex
programme, acquisitions and/or lower-than-expected uranium prices
can lead to negative rating.