• We expect Kazakhstan-based mining group Eurasian Natural Resources Corp. PLC (ENRC) to reduce its investment spending in 2013-2014 and adopt a more conservative financial policy.
• We therefore expect the group's 2013 funds from operations to debt and absolute debt to stabilize, assuming management is able to deliver on disposals and other actions.
• We are affirming our ratings on ENRC at 'BB-/B'.
• The negative outlook reflects the possibility of a downgrade in 2013 if the group fails to improve liquidity in the next several months, contain debt, and further improve its weak governance.
PARIS (Standard & Poor's) Feb. 28, 2013--Standard & Poor's Ratings Services said today it affirmed its 'BB-/B' long- and short-term corporate credit ratings on Kazakhstan-based mining group Eurasian Natural Resources Corp. PLC (ENRC). The outlook remains negative.
The affirmation reflects our expectation that management will moderate its investment appetite in 2013-2014 and prevent debt from rising through disposals and other actions, while improving its liquidity and governance. Near-term deviations from these assumptions would lead us to lower the ratings.
The affirmation factors in ENRC's significant cuts to its 2013 capital expenditure (capex) program. We project that adjusted debt will stabilize in 2013 at about $5.8 billion, which will likely require some disposals of noncore assets or other management action to balance potentially negative free operating cash flow (FOCF). The affirmation also factors in our expectation of a near-term improvement in liquidity, which we currently see as "less than adequate" under our criteria. Specifically, we expect a revision of the covenant threshold under the group's $2 billion long-term facility from Sberbank soon, an increase in the amount of committed credit lines, and further improvement in the group's maturity profile later in 2013. Management and the board's ability to deliver on their plans to raise the group's corporate governance standards and improve management's depth and breadth will be an additional crucial element in maintaining the rating at the current level.
Under our revised forecast, we see ENRC's adjusted debt stabilizing at about $5.8 billion in 2013 with funds from operations (FFO) to debt in a range from 20% to 25%, compared with our 2012 forecast at the lower part of the range. We factor in no new acquisitions and capex of only $1.7-1.8 billion in 2013. Underlying 2013 assumptions are high carbon ferrochrome prices of $0.93/pound and iron ore prices coming down to an average $120/metric ton. The contribution from ENRC's copper and cobalt assets in the Democratic Republic of the Congo (DRC) will be modest for the next couple of years, but we foresee substantial upside from these assets after 2014, provided the company successfully manages associated the high country and project risks.
Our assessment of management and governance as "weak" according to our criteria takes ENRC's previous track record into account. That said, we view the group's 2012 initiatives positively, including the appointment of a new chairman and senior independent director, commitment to raising corporate governance standards, and intention to improve management's depth and breadth.
The rating continues to reflect our assessment of the groups business risk profile as "fair." Commodity price and exchange rate volatility, the capital intensity of ENRC's business, and project risks related to its sizable investment plan constrain the group's business risk profile.
The rating reflects the group's stand-alone credit quality. Although ENRC is 11.6% government owned, we see a "low" likelihood that the Republic of Kazakhstan (BBB+/Stable/A-2) would provide timely and sufficient support to ENRC in the event of financial distress.
The negative outlook continues to reflect the possibility of a downgrade in 2013 if the company fails to improve liquidity in the next several months, including increasing the covenant threshold, as we currently anticipate. We might also consider a downgrade over the next six to 12 months if we were to see a significant increase in debt because of higher-than-assumed negative free cash flow without disposals or other actions, such that FFO to debt remained below 20%.
We might revise the outlook to stable if the group's FFO-to-debt ratio remained comfortably within the 20% to 25% range and we saw a marked improvement in liquidity and a positive track record in management and governance.