The outlook on the credit rating of JSC “Rosgeologia” (hereinafter, Rosgeo, or the Company) has been changed from Negative to Stable due to ACRA’s positive expectations regarding the Company’s 2022 financial results, its successful implementation of partner programs, and the investment of budget funds in the Company.
In 2022, the Agency expects Rosgeo’s revenues to decline by 11.5% compared to 2021 due to a number of contracts being postponed by clients until 2023 in view of the changing external economic situation, and the completion of several contracts with foreign clients. At the same time, the Company’s financial stability is supported by proceeds from junior partner exploration projects. Therefore, ACRA expects the Company to be able to maintain its operational and functional stability for at least the next 12 months.
Rosgeo 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.
Rosgeo’s credit rating 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 state’s low level of support for the Company and the average degree of dependence on homogeneous risk factors (according to ACRA’s methodology).
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 good profitability (largely thanks to the successful implementation of partner programs), medium leverage, and a good liquidity position. Among other things, the rating is constrained by the small size of business and the level of industry risks. In ACRA’s opinion, the credit risk in the geological exploration industry is above medium because this industry is linked to the commodity cycle to a significant degree. This has a negative impact on the Company’s credit rating.
key assessment factors
The state’s low level of support for the Company and the medium degree of dependence on homogeneous risk factors are due to the share of revenues from government contracts, which is about 50% (the Company plans to reduce it by increasing the share of commercial contracts), as well as low risks to the budget in the event of a default of the Company, and the low impact of disruption to the Company’s activities on the social situation in the country. At the same time, the level of support is influenced by significant strategic and operational control by the state: the government determines the Company’s development strategy, investment plans, and dividend policy. The Company’s strategic importance is based on the fact that 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. Rosgeo has been used to create a geological exploration holding company, which 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. In 2022, the Government of the Russian Federation issued a directive on providing the Company RUB 4 bln annually from 2022 to 2024 to replenish its fixed assets.
The medium degree of dependence on homogeneous risk factors is determined by the level of government contracts in the Company’s revenues, the relatively low level of subsidies received, the absence of major dividend payments to the state, as well as the absence of dependence of the state and the Company on one sector of the economy, and exposure to similar credit risks.
Strong business profile and good product and geographic 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 2024, and currently amounts to RUB 71.4 bln (taking into account contacts with a high possibility of being signed). 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.). Three of the largest clients accounted for 41% of the Company’s revenues in 2021. The Company’s fixed assets are characterized by a high degree of physical wear and tear, which influences growth of the need for capital investments. The Company is currently working to reduce the degree of wear and tear of fixed assets by updating them at the expense of the provided budget investments (additional capitalization), as well as the investment program implemented by the Company at its own expense.
Medium leverage and low coverage. In view of the Company’s operating lease expenditures increasing from RUB 0.9 bln in 2020 to RUB 1.5 bln in 2021, and in order to take them into account to compare credit ratings under different asset ownership models, ACRA applied leverage and coverage assessment indicators that take into account operating lease expenses, namely, total debt adjusted for operating lease to FFO before fixed payments (interest payments and operating lease expenses) and FFO before fixed payments to fixed payments.
According to ACRA’s assessments, which are based on the Company’s projections, in 2022 the ratio of adjusted total debt to FFO before fixed payments will be 2.4x (mainly due to proceeds from partner projects). The average annual value of this indicator is expected to decline to 1.9x in 2023–2024 as a result of lower leverage.
As of August 24, 2022, the Company’s debt included bank loans, targeted loans, and commercial bonds. 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 is denominated entirely in Russian rubles and balanced in terms of creditors. The Company issued its first bond, worth RUB 6 bln, on September 30, 2021.
According to ACRA’s projections, which are based on the Company’s forecast, in 2022 the FFO before fixed payments to fixed payments ratio will be 2.9x due to higher proceeds from partner projects this year. The Agency predicts that this indicator will decline in the future due to lower revenues from partner projects than in 2022.
Small size of business and good profitability. According to ACRA’s assessments, the Company’s FFO before net interest payments and taxes will increase to RUB 7.9 bln in 2022 (RUB 2.3 bln in 2021). This indicator will fall in 2023–2024 because its growth in 2022 is largely driven by proceeds from partner projects, the size of which will decline in the future. According to ACRA’s assessments, which are based on the Company’s forecast, its FFO margin before net interest payments and taxes will increase to 30% in 2022 (8% in 2020). This indicator is expected to decline in 2023–2024.
Good liquidity amid positive FCF. Taking into account the balance of funds in the Company’s accounts (RUB 6.9 bln as of September 1, 2022) and open credit lines (RUB 3.5 bln as of September 22, 2022), ACRA expects the Company’s short-term liquidity indicator to exceed 1.5x in 2022.
The Company’s FCF, calculated according to ACRA’s methodology, was negative in 2018–2021 (RUB -0.6 bln in 2021). According to ACRA’s forecasts, which are based on the Company’s projections, its FCF will turn positive in 2022–2024 due to the receipt of budget investments tied to the volume of the Company’s investments.
The Company’s ratio of capital expenditures to revenues was 4% in 2020–2021. This indicator is expected to grow to a medium value (15%) in 2022–2024.
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
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Continued implementation of the Company’s strategy until 2025;
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Contractual obligations carried out in full and on time;
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Annual growth of production prices not exceeding the growth of revenues;
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Dividend payments in 2022–2024 not exceeding the Company’s projections;
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Annual investments made according to the plan;
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The Company’s projections for 2022 are no worse than actual results for 2022 under IFRS.
potential outlook or rating change factors
The Stable outlook assumes that the rating will highly likely stay unchanged within the 12 to 18-month horizon.
A positive rating action may be prompted by:
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Weighted FFO before net interest payments and taxes exceeding RUB 5 bln amid simultaneous decline of weighted adjusted total debt to FFO before fixed payments to below 2x;
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Weighted ratio of FFO before fixed payments to fixed payments exceeding 3x and ratio of weighted capital expenditures to revenues falling below 10%;
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Significant growth of the Company’s systemic importance to the Russian economy.
A negative rating action may be prompted by:
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Significant negative deviation of the Company’s financial results as of the end of this year (according to IFRS) from the forecast indicators in the Company’s forecast for 2022;
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Weighted FFO before net interest payments and taxes falling below RUB 0.5 bln;
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Weighted FFO margin before net interest payments and taxes falling below 8%;
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Weighted adjusted total debt to FFO before fixed payments exceeding 5x;
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Substantial decline of the value of the contract base;
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Substantial deterioration of access to external sources of liquidity;
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Substantial decline of the Company’s systemic importance to the Russian economy.
RATING COMPONENTS
SCA: bbb+.
Adjustments: none.
Support: state — SCA + 2.
issue ratings
JSC “Rosgeologia”, series 01 (RU000A103SV6), maturity date: September 26, 2024, issue volume: RUB 6 bln — A(RU).
Rationale. The issue represents senior unsecured debt of Rosgeo. In accordance with the methodology, ACRA applied the detailed approach to estimate the recovery rate, which belongs to Category II. Therefore, the credit rating of the issue is equivalent to that of the issuer (Rosgeo), i.e. A(RU).
regulatory disclosure
The credit rating of JSC “Rosgeologia” 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, Methodology for Analyzing Rated Entities Associated with a State or a Group, and the Key Concepts Used by the Analytical Credit Rating Agency within the Scope of Its Rating Activities. The Methodology for Assigning Credit Ratings to Individual Issues of Financial Instruments on the National Scale for the Russian Federation was also applied to assign the credit rating to the above issue.
The credit rating of JSC “Rosgeologia” and the credit rating of the bond issue (RU000A103SV6) of JSC “Rosgeologia” were published by ACRA for the first time on November 9, 2020 and October 4, 2021, respectively. The credit rating of JSC “Rosgeologia” and its outlook and the credit rating of the bond issue (RU000A103SV6) of JSC “Rosgeologia” are expected to be revised within one year following the publication date of this press release.
The credit ratings were assigned based on data provided by JSC “Rosgeologia”, information from publicly available sources, and ACRA’s own databases. The credit ratings are solicited, and JSC “Rosgeologia” participated in their assignment.
In assigning the credit ratings, ACRA used only information, the quality and reliability of which were, in ACRA’s opinion, appropriate and sufficient to apply the methodologies.
ACRA provided no additional services to JSC “Rosgeologia”. No conflicts of interest were discovered in the course of credit rating assignment.
