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EnFitch Affirms Uzbekistan's Almalyk at 'BB-'; Outlook Stable
Fitch Ratings has affirmed JSC Almalyk Mining and Metallurgical Complex's (Almalyk) Long-Term Issuer Default Rating (IDR) at 'BB-' with a Stable Outlook.
Almalyk's rating is equalised with that of its sole parent, Uzbekistan (BB-/Stable). This is due to the strong ties between the company and the state under Fitch's Government-Related Entities (GRE) Rating Criteria. We assess Almalyk's Standalone Credit Profile (SCP) at 'b+', reflecting its small but increasing scale of operations, commodity diversification into copper, gold, zinc and silver, a favourable cost position of its main asset, long reserve life and moderate leverage.
Almalyk's current reliance on a single mine will decrease once the greenfield copper-gold Yoshlik project is commissioned. The execution and financial risks linked to the first stage of development (mining and concentrator) are reducing as it nears completion towards the end of 2024. The second stage of the project (smelter) is only expected to be finalised in 2026, so liquidity remains stretched due to expected negative free cash flow reflecting high capex and not yet finalised funding for the second stage. The rating also reflects concentration of operations in one country with a weak operating environment.
Key Rating Drivers
Responsibility to Support: We view 'Decision Making and Oversight' factor as 'Strong' as the company is 98% owned by the state, although it may consider selling a minority stake in the future. The state has tight control over the company, overseeing operating activity, the budget and investment programme. We assess precedents of support as 'Strong' as the government provided a USD1.0 billion equity injection for the Yoshlik project over 2017-2022 and a further USD0.3 billion is expected in 2024.
Almalyk will convert an about USD700 million loan provided by the Fund for Reconstruction and Development of Uzbekistan (FRDU) into equity in 2024. The state will not provide guarantees for new debt for Yoshlik, but we expect strong state support if there are any cost overruns or commodity price downturns. As of 2023, 24% of debt was guaranteed. Following the drawdown of other loans for Yoshlik, we expect this to decrease towards 16% in 2025.
Incentive to Support: We assess Almalyk's preservation of government policy role as 'Strong' as it is responsible for all copper produced in the country with around 60% of current volumes consumed internally. Almalyk is also the second-largest taxpayer, the second-largest exporter and one of the major employers in Uzbekistan. We view 'contagion risk' as 'Strong' as Almalyk is gradually increasing its share of external funding for the Yoshlik project as it expects the smelter to be financed by a foreign syndicate. We believe Almalyk's default could affect the ability of Uzbekistan and other GREs to borrow on international markets.
Yoshlik a Transformative Project: Yoshlik is a transformative copper, gold and silver project for Almalyk and the country's mining industry, which should double the company's production scale and asset diversification. Its first phase has a USD4.8 billion budget, and comprises a new mine and a processing plant that will substantially increase the company's copper output to 264,000 tonnes (t) by 2026 (up 78% from 2023) and gold output to over 800,000 ounces (oz) by 2026 (up 50%).
The second phase, which includes construction of a new copper smelting plant for approximately around USD1 billion, should increase Almalyk's smelting capacities. Until the smelter is completed, the company will be selling copper concentrate. Construction works have started and the tender process for equipment purchase is in progress. We expect the project to be funded by an international syndicate and loans from equipment suppliers.
Execution Risk: Almalyk has limited experience in delivering projects of this scale and is exposed to cost overruns and delays. Due to geopolitical issues and the pandemic, the project commissioning has been delayed by around one year. We expect that copper (concentrate) production at Yoshlik will start towards the end of 2024 and that smelter will be commissioned by end-2026. Given the current advanced stage of the project with around 60% of capex spent as of February 2024, risks for the first stage have reduced.
Moderate Leverage: Under Fitch's price assumptions and the company's ambitious capex programme, Fitch estimates Almalyk's EBITDA gross leverage to increase to around 2.4x in 2023-2026 from 2x in 2022. The company does not have any public leverage targets, but we view its projected leverage as moderate. We assume that the loan from FRDU will be converted to equity in 2024, given the advanced stage of the conversion process. If there is a delay, it will not impact the rating.
Average All-In Sustaining Cost Position: Almalyk's main asset Kalmakir has low cash costs due to its low cost base, by-product credits and 70% of its costs being local currency-denominated. CRU places Almalyk's Kolmakir mine in the lower second quartile of the global copper cost curve for all-in sustaining costs. The combined proven and probable reserve life for Kalmakir and Yoshlik mines, based on projected production, is high at over 60 years.
Corporate Governance Improving: Similar to other state-controlled companies in Uzbekistan Almalyk is improving its corporate governance. It started publishing IFRS financials (although interim results are not available) and re-estimated its reserves according to the JORC international standard. The company includes one independent director, while the board is dominated by state representatives. The proposed IPO has been pushed back.
Derivation Summary
Almalyk's peers include copper producers First Quantum Minerals Ltd. (FQM; B/Rating Watch Negative), Freeport-McMoRan Inc. (BBB/Stable), Hudbay Minerals Inc. (BB-/Stable) and precious metals producers such as Endeavour Mining plc (BB/Stable).
Almalyk's output (149,000t of copper and 0.5 million oz of gold) is higher than Hudbay's (132,000t of copper and 0.2 million oz of gold), but significantly smaller than that of FQM and Freeport, which are among the top 10 global copper producers. FQM produced 707,678t in 2023 and Freeport produced 1.2 million t.
Almalyk's Kalmakir mine is positioned in the second quartile on CRU global copper all-in sustaining cost curve, compared with the first quartile for Hudbay and the third quartile for FQM. Freeport's assets, on average, are slightly behind Almalyk's within the second quartile.
Almalyk's operational diversification is weaker than its peers, with more than 80% of production coming from a single mine. The company is also exposed to single-country operational risk, while peers have operations in multiple countries. Freeport in particular benefits from a wider diversification across geographies, with a more stable operating environment and more sizable assets with long reserve life.
Almalyk and Endeavour have the highest profitability levels among the peers, with EBITDA margins ranging between 40% and 50% through the cycle. Almalyk has higher EBITDA leverage than its peers due to its large ongoing investment project.
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Issuer
- Volumes in line with management assumptions, significantly increasing from 2025 when Yoshlik ramps-up
- Smelter commissioning in 2026
- Fitch's price deck for copper, gold and zinc
- Average EBITDA margin of 43% in 2024-2027
- Capex peaking during 2024-2026, then moderating through to 2027
- Dividends at 50% of net income
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
- Positive rating action on the sovereign
- EBITDA gross leverage below 1.5x on a sustained basis could be positive for the SCP but not necessarily the IDR
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
- Negative sovereign rating action
- Material weakening of ties with the state
- EBITDA gross leverage above 2.5x on a sustained basis could be negative for the SCP but not necessarily the IDR
- Unremedied liquidity issues
Uzbekistan (dated 23 February 2024)
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
External Finances: A marked worsening of external finances, for example, via a large and sustained drop in remittances, or a widening in the trade deficit, leading to a significant decline in FX reserves.
Public Finances: A marked rise in the government debt-to-GDP ratio or an erosion of sovereign fiscal buffers, for example, due to an extended period of low growth, loose fiscal stance or crystallisation of contingent liabilities.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
Macro: Consistent implementation of structural reforms that promote macroeconomic stability, sustain strong GDP growth prospects and support better fiscal outturns.
Public Finances: Confidence in a durable fiscal consolidation that enhances medium-term public debt sustainability.
Structural: A marked and sustained improvement in governance standards.
Liquidity and Debt Structure
Stretched Liquidity: Almalyk's standalone liquidity is stretched given its ambitious capex programme and negative free cash flow projected for 2024-2025. However, funding for the first stage of the Yoshlik project has been secured. The company has USD720 million available, which it plans to drawdown in 2024 for the completion of the first stage. A USD0.3 billion equity injection is also expected in 2024 from the state. Almalyk expects the second stage of the project - budgeted at USD1 billion - to be funded by loans from international banks. A delay in the receipt of state support or external funding could lead to further deferrals of stage two of the project.
Issuer Profile
Almalyk is a fairly small-sized metals producer with copper and gold accounting for 80% of total revenue (149,000 t copper and 544,000 oz produced in 2023) with first phase of its transformative copper and gold project under construction.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
Public Ratings with Credit Linkage to other ratings
Almalyk's rating is equalised with the sovereign's.
ESG Considerations
JSC Almalyk Mining and Metallurgical Complex has an ESG Relevance Score of '4' for Financial Transparency due to limited record of audited financial statements, which has a negative impact on the credit profile, and is relevant to the rating[s] in conjunction with other factors.
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
