The credit rating of JSC “Rosgeologia” (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 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 risk 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.
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.
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 less than 50% (the Company plans to further 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 capital injections to the Company annually from 2022 to 2024 in order to replenish its fixed production 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 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. The contract base shows that the Company has work until 2025, and currently amounts to RUB 70.5 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.). 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 1.3 bln in 2022, 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, in 2022 the ratio of adjusted total debt to FFO before fixed payments was be 4.3x The average annual value of this indicator is expected to decline to 3x in 2023–2025 as a result of lower leverage.
As of August 16, 2023, 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 Bank of Russia); the Company’s debt is denominated entirely in Russian rubles and balanced in terms of creditors.
According to ACRA’s estimates, in 2022 the FFO before fixed payments to fixed payments ratio was be 1.6x. The Agency predicts that this indicator will grow to an average of 2.3x in 2023–2025.
Small size of business and good profitability. According to ACRA’s assessments, the Company’s FFO before net interest payments and taxes increased to RUB 4.9 bln in 2022 (RUB 2.3 bln in 2021). This indicator will grow slightly in 2023–2025 and will be around RUB 5 bln. According to ACRA’s assessments, the FFO margin before net interest payments and taxes was 19% in 2022 (8% in 2021). The weighted average value of this indicator is expected to be around 18% in 2023–2025.
Good liquidity amid positive free cash flow (FCF). Taking into account the balance of funds in the Company’s accounts (RUB 4.4 bln as of August 18, 2023) and open credit lines (RUB 10.7 bln as of August 16, 2023), ACRA expects the Company’s short-term liquidity indicator to exceed 1.5x in 2023.
The Company’s FCF, calculated according to ACRA’s methodology, was negative in 2018–2021. According to the Agency’s calculations, the Company FCF was positive in 2022, and, as per ACRA’s forecasts, it will continue to be positive 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 was 15% in 2022. In 2023–2025, its weighted average value is expected to be 6%. ACRA also notes that a significant part of the Company’s investments is made through operating leases.
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. In view of the completion of that stage, the Company developed a strategy for 2020–2025, which 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, ACRA notes 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 regularly compiles consolidated audited IFRS financial statements.
key assumptions
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Further 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 2023–2025 in line with the Company’s projections;
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Annual investments made according to the plan;
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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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 for the issue, 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 ratings of JSC “Rosgeologia” and the bond issue of JSC “Rosgeologia” (RU000A103SV6) have 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 Financial Instruments under 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.