The credit rating outlook of JSC “HC “METALLOINVEST” (hereinafter, the Company, Metalloinvest) has been changed in view of a decline in the leverage and an upgrade in the assessments of coverage and FCF. In addition, according to the dividend policy approved by the board of directors of the Company, the FCF after all payments for shareholders, including corporate loans, shall be positive. In our opinion, the practice of issuance of corporate loans to shareholders, who subsequently repay such loans out of dividend, restricts the credit rating. At the same time, the Company’s conservative approach to its financial policy is confirmed by the sustainable decline in the corporate debt in 2020 and Q1 2021.
The credit rating reflects the Company’s strong market position and very strong business profile assessment determined by the Company's high-quality resource base, thanks to which the Company’s production cost is one of the lowest in the mining segment not only in Russia, but in the world as well. A high assessment of geographical sales diversification, strong corporate governance, and very strong financial profile support the Company’s rating.
Metalloinvest is a world-leading producer of hot-briquetted iron (HBI), leading producer and supplier of iron ore and metal products, one of the regional manufacturers of high-quality steel. The Company holds the world’s second largest proven iron ore reserves (about 13.8 mln tons as per JORC (IMC Montan), which guarantees about 136 years of operational life at current production levels.
The production assets of the Company are Lebedinsky GOK, Andrey Varichev Mikhailovsky GOK, Alexey Ugarov OEMK, and Ural Steel.
Key rating assessment factors
Strong market position. The Company is one of the Russia's largest steel manufacturer and the country's sole manufacturer of commercial HBI (the cleanest commodity in terms of impurities for smelting high-quality steel). The Company is one of the world’s ten largest iron ore producers and the second largest pellet producer in the world.
Very strong business profile. When assessing the business profile, ACRA considered Metalloinvest primarily a multi-profile mining holding company. Open-pit mining and up-to-date technologies for enrichment and processing iron ore concentrate provide the Company with one of the lowest production costs of pellets and HBI/DRI. The Company’s two iron ore deposits, which are located in regions least susceptible to climate and seismic risk factors, as well as geographic proximity of main production assets to key sales markets, ensure the diversification and continuity of production processes.
The medium assessment of product diversification reflects the Company's focus on iron ore production, as well as high iron ore processing (iron ore pellets, HBI, and DRI). The steel segment is an additional step in ensuring the diversification and expansion of the Company’s product portfolio.
Very strong geographical diversification. Metalloinvest delivers its final products (both ore and steel) to a wide geographical area. About 60% of the Company’s revenue comes from exports, most of which are generated by deliveries to Europe, Asia, and the Middle East.
Strong corporate governance. The Company has been consistently implementing its strategy: modernizing production assets, increasing the share of high added value products, improving energy efficiency and environmental friendliness, and reducing production costs. In 2019, the board of directors of the Company approved a dividend policy, according to which payments to shareholders are subject to a mandatory FCF remaining after capital expenses and sufficient to reduce the Company's debt burden.
The risk management system is at a high level for the corporate sector as it features all elements of risk management. The assessment of the Company’s management structure takes into account a Board of Directors that defines strategic goals and objectives and forms key committees for solving problems in the field of risk management, dividend policy, employee motivation, compensation systems, etc. Three of the ten Board members are independent. The assessment of the group’s structure takes into account its minor complexity, which is typical for vertically integrated holding companies. In terms of financial transparency, ACRA notes the high quality of audited financial statements, important aspects of which are disclosed in notes. In addition, the Company regularly publishes operating results on its website and holds conference calls with investors.
Very strong financial profile. ACRA assesses the scale of the Company’s business as very large for the Russian corporate segment (FFO before net interest payments and taxes is over RUB 100 bln). The Company’s profitability is at a high level, with the return on FFO before interest payments and taxes at 38.7% for 2020, which is due to a high-quality resource base and low production costs. ACRA expects the profitability to grow to 53% in 2021 and to decline to 38% in 2023 following a decrease in the world prices for iron ore. ACRA assesses the Company’s leverage as low. Total debt to FFO before net interest payments was just over 1.7x in 2020 against 2.0x in 2019. ACRA expects the Company’s leverage to be below 1.5x in the forecast period. The coverage ratio (FFO before net interest payments to interest payments) reached 10.6x in 2020 against 7.0x in 2019. This ratio is expected to go up to 20.6x in 2021 following a growth in FFO and a decline in interest payments.
ACRA assesses the Company’s liquidity as very high. In 2020, the Company had cash in its accounts in the amount of USD 437 mln. Taking into account the sustainably positive FCF and the availability of committed credit limits of about USD 800 mln, there is more than enough liquidity for the planned debt repayments in 2021.
Over the last two reporting years, the Company’s FCF after dividend payments has remained positive, which corresponds to the goals set by the Company’s Board of Directors in terms of financial risk management. Given the average annual investment expenditures of USD 0.6 bln expected in 2021−2024, as well as annual payments to shareholders, ACRA expects the Company to maintain a positive FCF in the forecast period. ACRA also notes the Company’s flexibility in the case of unfavorable market trends. The Company can reduce both the investment component in cash flows and the amount of payments to shareholders in order to avoid exceeding credit metrics over the comfortable target value.
Key assumptions
- A moderate average annual decline in global iron ore prices within 2% in 2021−2024;
- A moderate recovery of global steel prices in 2021–2022 followed by a moderate decline in 2023−2024;
- Capital expenditures exceeding USD 0.6 bln in 2021−2024;
- Annual payments to shareholders ensuring the FCF.
Potential outlook or rating change factors
The Positive outlook assumes that the rating will most likely change within the 12 to 18-month horizon.
A positive rating action may be prompted by:
- The ratio of total debt to FFO before net interest payments going down below 1.0x;
- Cease of issuance of corporate loans to shareholders.
A negative rating action may be prompted by:
- Decrease in the return on FFO before interest payments and taxes below 30%;
- Increase in leverage above 2.0х;
- Decrease in FFO before fixed payments to fixed payments below 10.0x;
- FCF margin falling below 5%.
Rating components
SCA: аа+.
Adjustments: none.
Issue ratings
Credit rating rationale. The bond issues listed below represent senior unsecured debt of the Company. Due to the absence of either structural or contractual subordination of the issues, ACRA regards them as pari passu with other existing and future unsecured and unsubordinated debt obligations of the Company. According to ACRA’s methodology, the credit rating of the issues is equivalent to that of the Company, i.e. AA+(RU).
As per the methodology, the Agency applied a simplified approach, which takes into account the Company’s credit rating (higher than ВВВ-(RU)), as well as the presence of low leverage, high coverage or high liquidity, and pre-export financing (PXF), which share in the Company’s debt portfolio was 30% at the end of 2020.
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Interest-bearing non-convertible certified bearer bond subject to centralized title registration issued by JSC “HC “METALLOINVEST,” series 02 (RU000A0JTLJ3), maturity date: January 27, 2023, issue volume: RUB 5 bln — АA+(RU).
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Interest-bearing non-convertible certified bearer bond subject to centralized title registration issued by JSC “HC “METALLOINVEST,” series 03 (RU000A0JTLL9), maturity date: January 27, 2023, issue volume: RUB 5 bln — АA+(RU).
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Exchange-traded interest-bearing non-convertible certified bearer bond subject to centralized title registration issued by JSC “HC “METALLOINVEST,” series BO-03 (RU000A100YF3), maturity date: October 10, 2029, issue volume: RUB 10 bln — АA+(RU).
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Exchange-traded interest-bearing non-convertible certified bearer bond subject to centralized title registration issued by JSC “HC “METALLOINVEST,” series BO-04 (RU000A101EF3), maturity date: January 30, 2030, issue volume: RUB 10 bln — АA+(RU).
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Exchange-traded interest-bearing non-convertible certified bearer bond subject to centralized title registration issued by JSC “HC “METALLOINVEST,” series BO-07 (RU000A0JW5H6), maturity date: February 12, 2026, issue volume: RUB 5 bln — АA+(RU).
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Exchange-traded interest-bearing non-convertible certified bearer bond subject to centralized title registration issued by JSC “HC “METALLOINVEST,” series BO-09 (RU000A100B73), maturity date: April 16, 2029, issue volume: 5 bln — АA+(RU).
- Exchange-traded interest-bearing non-convertible certified bearer bond subject to centralized title registration issued by JSC “HC “METALLOINVEST,” series BO-10 (RU000A101R90), maturity date: May 23, 2030, issue volume: RUB 5 bln — АA+(RU).
Regulatory disclosure
The credit ratings were 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, and the Key Concepts Used by the Analytical Credit Rating Agency Within the Scope of Its Rating Activities. To assign a credit rating to the above bond issues the Methodology for Assigning Credit Ratings to Individual Issues of Financial Instruments under the National Scale of the Russian Federation was also applied.
For the first time, a credit rating was assigned to JSC “HC “METALLOINVEST” on September 15, 2020, and the credit ratings were assigned to the bonds (RU000A0JTLJ3, RU000A0JTLL9, RU000A100YF3, RU000A101EF3, RU000A0JW5H6, RU000A100B73, RU000A101R90) issued by JSC “HC “METALLOINVEST” on September 16, 2020. The credit rating and its outlook and the credit ratings of the bonds (RU000A0JTLJ3, RU000A0JTLL9, RU000A100YF3, RU000A101EF3, RU000A0JW5H6, RU000A100B73, RU000A101R90) issued by JSC “HC “METALLOINVEST” are expected to be revised within one year following the publication date of this press release.
The credit ratings were assigned based on the data provided by JSC “HC “METALLOINVEST”, information from publicly available sources, as well as ACRA’s own databases. The credit ratings are solicited, and JSC “HC “METALLOINVEST” participated in their assignment.
In assigning the credit ratings, ACRA used only information, the quality and reliability of which was, in ACRA's opinion, appropriate and sufficient to apply the methodologies.
ACRA provided no additional services to JSC “HC “METALLOINVEST”. No conflicts of interest were discovered in the course of credit rating assignment.
