Moody’s Investors Service has downgraded by one notch the corporate family rating and the probability of default rating of First Quantum Minerals Ltd to B1 and B1-PD, respectively.
Moody’s has also rated the company’s outlook to negative.
The downgrade reflects the company’s weakened financial profile, characterized by deteriorating credit metrics towards levels no longer commensurate with the previous Ba3 rating, and a liquidity profile that remains adequate only assuming full support from lenders.
Moody’s however expects lenders to be supportive of the company’s request to amend its financial leverage covenant before a potential breach at the next testing date.
The downgrade assumes that the company’s financial debt, after peaking at approximately $6 billion in 2014, will likely remain at least at a similar level or even increase over the next 18 to 24 months.
It however notes that the company remains committed to execute an important multi-year expansion plan, requiring a large amount of capital expenditure.
The further deterioration of key credit metrics in 2015, from the already weak levels of 2014, is driven by the combined effect of a number of negative developments including material negative development in the application in Zambia from January 2015 of a new royalty-based tax regime, which will directly affect operations costs as higher royalties are classified among cost of sales.
Moody’s expects that management will not sufficiently mitigate such adverse developments, despite actions being taken to reduce costs and moderate capital expenditure.
It says the large new Sentinel copper mine and the new smelter in
Zambia will add scale, support operating profitability and provide additional operating cash flows to fund the still high capital expenditure planned for 2016 and 2017 potentially up to $2 billion per annum in order to complete the large Cobre Panama project, which will keep free cash flows negative until project completion.
The negative outlook reflects the risk that FQM’s credit metrics may deteriorate more sharply than anticipated in the next 12 months, towards levels not commensurate with the current rating, or that deleveraging may occur much later than currently anticipated by the rating agency.
The negative outlook also takes into account a range of potential risks, such as serious liquidity issues in the unlikely event that FQM’s lenders do not support the company in its covenant amendment process and a worsening of operating conditions for the mining industry, in general or more specifically in Zambia.