The credit rating of Rosgeo (hereinafter, Rosgeo, or the Company) has been set at A(RU), which is two notches higher than the Company’s standalone creditworthiness assessment (SCA), which ACRA determined at bbb+. This is due to the medium level of systemic importance of Rosgeo for the economy of the Russian Federation and the substantial influence of the state on the Company’s creditworthiness.
Rosgeo’s SCA is based on its strong business profile, which stems from the Company’s role as an executor of government contracts for the reproduction of the country’s mineral resource base, the increasing share of its participation in commercial projects, a stable market position due to good business diversification, both in terms of performance of various types of geological exploration activities and due to its presence in various Russian regions and foreign markets, as well as adequate corporate governance. The Company’s financial profile is characterized by moderate profitability, average leverage, and a good liquidity position. The rating is constrained by the small size of business, industry risks, and a negative free cash flow (FCF). In ACRA’s opinion, the credit risk in the geological exploration industry is above average because this industry is linked to the commodity cycle to a significant degree. This has a negative impact on the credit rating of the Company.
Rosgeo is a state-owned company that was founded according to Order of the President of the Russian Federation No. 957 dated July 15, 2011 in order to carry out comprehensive geological study of subsoil and reproduction of the mineral resource base of the Russian Federation. The Company is engaged in geological prospecting and identification of the resource potential of promising territories of Russia, its continental shelf and the water areas of its internal seas, and the bottom of the World Ocean, Arctic and Antarctic, localization and assessment of the resource potential of the unallocated subsoil fund in developed and new areas, as well as government monitoring of the state of subsoil.
The Company is listed as one of the country’s strategic enterprises.
Key rating assessment factors
Medium systemic importance of Rosgeo for the Russian economy and high influence of the state on the Company’s creditworthiness. Rosgeo is the only company in Russia that carries out a complete spectrum of geological exploration activities on the formation of a prospecting reserve under the state order for the replenishment of subsoil reserves, which is the basis for its systemic importance. In addition, Rosgeo is being used to create a state geological exploration holding company, which currently includes around 40 geological enterprises and research institutes across the country. The Company’s geological prospecting activities cover hydrocarbons (oil and gas), solid minerals (coal, gold, diamonds, etc.), and other resources such as water.
The high level of state influence on the Company’s activities. The government determines the Company’s development strategy, its investment plans and dividend policy, and also has significant influence on its operational and financial activities and regularly provides financial support. 50% of the Company’s revenues comes from state contracts. From 2011 to 2018, the Company was provided with around RUB 2 bln in the form of capital injections and subsidies. The Russian government is currently looking at providing an additional RUB 25 bln in capital to the Company; the timeframe for the provision of these funds is unclear.
Strong business profile and good product and geographical diversification. Rosgeo’s activities are focused on early-stage geological exploration. The Company has extensive experience in carrying out geological exploration both on land and on shelves, including transition zones. In addition, Rosgeo possesses unique technology and is the only company in Russia that carries out parametric drilling. The contract base shows that the Company has work until 2023, and currently amounts to RUB 86.9 bln. In the past, the contract base has demonstrated a slight degree of volatility due to fluctuations in minerals markets, which has been partially offset by the diverse range of minerals that the Company can search for. The Company operates throughout Russia and in a number of foreign countries (India, Uzbekistan, Mongolia, Equatorial Guinea, Benin, etc.). Its operations are concentrated on a major client, the Federal Agency for Mineral Resources. The Company’s fixed assets are characterized by a high degree of physical wear and tear, which influences growth in the need for capital investments.
Average leverage and adequate coverage. ACRA expects the ratio of adjusted total debt (taking into account lease contract obligations) to FFO before fixed payments to fall to 3.4x in 2020 (from 9.4x in 2019) and amount to RUB 14.2 bln (RUB 11.2 bln in 2019). In 2021–2022, the average annual value of this indicator is expected to decline to 2.2x. The expected increase in debt in 2020 is mainly due to the planned increase in debt under lease contracts for geological exploration equipment. The decline in leverage in the forecast horizon is related to expected growth of FFO before net interest payments due to income from signed contracts.
When determining leverage, ACRA uses the indicators of the adjusted total debt, which includes debt under lease contracts. The adjustment is applied in connection with the transition of the Company from the asset ownership model to the use of leasing instruments.
As of September 1, 2020, the Company’s debt included bank loans, loans, and lease obligations. Loans comprised the lion’s share of the debt portfolio. Interest rates are fixed and floating (tied to the key rate of the Central Bank of Russia); the Company’s debt, which is mainly bank debt, is denominated entirely in Russian rubles and balanced in terms of creditors. A peak in repayments is currently scheduled for 2021; the Company does not have any sureties or guarantees. The Company is currently carrying out a strategy to transition from short-term borrowing to long-term borrowing. The Company’s plans until the end of the year include refinancing short-term debt in order to avoid the peak in repayments in 2021, and reduce the volume of debt to be repaid in 2022.
According to ACRA’s assessments, in 2020 the FFO before net interest payments to interest payments ratio should grow to 4.2x (1.3x in 2019). ACRA expects this indicator to continue growing in the future.
Small size of business and moderate profitability. According to ACRA’s assessments, in 2020, the Company’s FFO before net interest payments and taxes should increase to RUB 3.8 bln (RUB 1.6 bln in 2019). This indicator should continue to grow in 2021–2022. Its growth stems from the growth of income from signed contracts and optimization of operating expenses, as well as due to the development of new areas (partnership programs, gold mining, etc.). The total volume of geological exploration work until 2023 amounts to RUB 86.9 bln. The Company’s FFO margin before interest payments and taxes in 2019 declined to 6% (from 9% in 2018); its annual average value is expected to increase to 18% in 2020–2022. This growth will be driven by falling operational costs amid an increase in the contract base and the development of new areas of business.
Good liquidity amid negative FCF. Taking into account the balance of funds in the Company’s accounts (RUB 5 bln as of September 1, 2020), open credit lines (RUB 10.6 bln as of the same date), and available credit limits (RUB 16.5 bln as of the same date), ACRA expects the Company’s short-term liquidity indicator to exceed 1.5x in 2020. The qualitative liquidity assessment is not at the maximum level because the Company does not have any public debt, including eurobonds.
In 2018–2019, the Company’s FCF was negative (RUB -3.2 bln in 2019), including due to the fact that the volume of investments exceeded operating cash flow. The annual average ratio of capital expenses to revenue for the aforementioned period was 9%.
According to ACRA’s forecasts, in 2020–2022, the Company’s FCF will turn positive and have an average annual value of RUB 3.6 bln.
Adequate corporate governance. The Company’s strategy is clear and consistent, includes specific targets and detailed roadmaps, and has measurable performance indicators. The 2014–2020 strategy was aimed at developing the Rosgeo holding, a stage which is currently being completed, and as a result the Company had to develop a strategy for 2020–2025. This strategy is based on measurable financial and non-financial targets. The risk management structure of the Company includes a risk map that describes risks and how to mitigate them, budget rules, financial and credit policies, provisions on the risk management system, and a declaration on accepting a preferred risk target system. The Company has a single treasury. The Company’s management structure complies with corporate governance standards, and there are regulatory documents, including provisions on the audit committee, board of directors, executive board, and a code of corporate governance. However, it is noteworthy that the structure of corporate governance and risk management is in line with Russian practice. Rosgeo includes a large number of legal entities, which is due to production needs and the specific nature of geological exploration work. The Company compiles consolidated audited IFRS financial statements and releases them to the public.
Key assumptions
- Continued implementation of the Company’s strategy until 2025;
- Contractual obligations are carried out in full and on time;
- ACRA reviewed development scenarios for the Company excluding the RUB 25 bln capital injection;
- Annual growth of production prices not exceeding the growth of revenue;
- No divided payments in 2020–2022;
- Annual investments made according to the plan.
Potential outlook or rating change factors
The Stable outlook assumes that the rating will most likely stay unchanged within the 12 to 18-month horizon.
A positive rating action may be prompted by:
- FFO before net interest payments and taxes exceeding RUB 5 bln amid simultaneous growth of FFO margin before interest payments and taxes above 15% and adjusted total debt (including lease contract obligations) to FFO before fixed charges declining below 2x;
- FCF margin turning positive amid simultaneous growth of FFO before net interest payments and taxes above RUB 5 bln and growth of FFO margin before interest payments and taxes above 15%;
- Significant growth of the Company’s systemic importance for the Russian economy.
A negative rating action may be prompted by:
- FFO before net interest payments and taxes falling below RUB 0.5 bln;
- FFO margin before interest payments and taxes falling below 12% amid simultaneous growth of adjusted total debt (including lease contract obligations) to FFO before fixed charges to above 3.5x;
- Substantial decline in the value of the contract base;
- Substantial deterioration in access to external sources of liquidity;
- Substantial decline of the Company’s systemic importance for the Russian economy.
Rating components
SCA: bbb+.
Support: state — SCA plus 2 notches.
Issue ratings
There are no outstanding issues.
Regulatory disclosure
The credit rating has been assigned under the national scale for the Russian Federation based on the Methodology for Credit Ratings Assignment to Non-Financial Corporations Under the National Scale for the Russian Federation, the Methodology for Analyzing Relationships Between Rated Entities and the State, and the Key Concepts Used by the Analytical Credit Rating Agency within the Scope of Its Rating Activities.
A credit rating has been assigned to Rosgeo for the first time. The credit rating of Rosgeo and its outlook are expected to be revised within one year following the publication date of this press release.
The credit rating was assigned based on the data provided by Rosgeo, information from publicly available sources, as well as ACRA’s own databases. The credit rating is solicited, and Rosgeo participated in its assignment.
No material discrepancies between the provided data and the data officially disclosed by Rosgeo in its financial statements have been discovered.
ACRA provided no additional services to Rosgeo. No conflicts of interest were discovered in the course of credit rating assignment.
