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Rating Action:

Moody's Assigns Caa1 CFR to Baffinland Iron Mines Corporation

09 Dec 2016

$350 Million of debt rated

Toronto, December 09, 2016 -- Moody's Investors Service ("Moody's") assigned ratings to Baffinland Iron Mines Corporation (Baffinland), consisting of a Caa1 corporate family rating (CFR), Caa1-PD probability of default rating and a Caa1 senior secured rating to its proposed US$350 million senior secured notes. The ratings outlook is stable. Baffinland will use proceeds from its proposed notes to repay its existing bank project debt and provide some cash on the balance sheet. This is the first time Moody's has assigned ratings to Baffinland.

"Baffinland's Caa1 rating reflects the startup nature of this very small iron ore mine on Baffin Island, north of the Arctic Circle, with weak liquidity and expected negative free cash flow as it proceeds with expansion", said Jamie Koutsoukis, Moody's analyst.

Assignments:

..Issuer: Baffinland Iron Mines Corporation

.... Probability of Default Rating, Assigned Caa1-PD

.... Corporate Family Rating, Assigned Caa1

....Senior Secured Regular Bond/Debenture, Assigned Caa1(LGD3)

Outlook Actions:

..Issuer: Baffinland Iron Mines Corporation

....Outlook, Assigned Stable

RATINGS RATIONALE

Baffinland's Caa1 corporate family rating is driven by a concentration of cash flows from one metal (iron ore), which is volatile, at a very small single mine in a remote location above the Arctic circle (northern Baffin Island) with shipping constraints, a lack of an operating track record, execution risk on the planned mine expansion and negative free cash flows expected over the rating horizon. Leverage is also likely to exceed 10x by 2018 using Moody's $45/tonne price sensitivity for iron ore, before trending towards mid-single digits once higher production commences from a planned expansion project.

Baffinland started production in late 2015 with $1.8 billion of capital invested to date, largely funded with equity from its two owners. It is a simple open pit operation with a very low stripping ratio today (<0.5x) and very high grade (67% Fe) and quality, which is crushed into premium Direct Ship Ore (75% of production) and super sinter fines (25%) then shipped from its nearby port to Europe (80 days/year ice-free shipping window) which sold, at prevailing market rates, by Arcelor, to European steel mills. At current production levels, and using Moody's iron ore price range of $45-55/tonne, and assuming a cash cost in the low $40 range, fob Milne, Baffinland would produce approximately breakeven cash flow after interest and maintenance capital expenditures. The company plans to spend about $1.6 billion on an expansion of the mine from the 5 million tonnes per year (Mtpa) run rate today to 12 Mtpa capacity in 2019 and 18 Mtpa in 2021. This expansion is intended to reduce the cash cost/tonne below $20, which would become competitive with the global iron ore miners. Assuming Baffinland funds this expansion with $450 million of equity, with the remainder being funded by debt and operating cash flow, leverage may exceed 10x in 2018 when the debt is added, before trending towards mid-single digits once additional production come on stream and produces EBITDA.

Baffinland has weak liquidity. Moody's expects that the company will generate over $200 million of negative free cash flow in 2017 (using Moody's $45/tonne price assumption), due to substantive growth spending. The company will have about $43 million of cash following the new notes offering, but it has no credit facility, though the notes indenture will allow for one going forward. We expect liquidity needs will be funded through additional equity and/or debt, although those sources are not committed.

The notes will be co-issued by Baffinland Iron Mines Corporation and Baffinland Iron Mines LP, a limited partnership and will be senior secured obligations of both. The proposed notes are rated at the same level as the corporate family rating (CFR, Caa1). The Caa1 senior secured notes rating reflects a one-notch downward override from the loss given default model implied rating. Because the senior secured notes are the only debt instruments in the capital structure, Moody's believes a rating in line with the CFR is more appropriate as accounts payable may not provide a meaningful loss absorption cushion in a default scenario.

The stable outlook reflects Baffinland's owners' intention to provide equity contributions for the company's planned expansion and Moody's belief the company will not commit to expansion capital expenditures before funding is committed and it will adjust or slow capital spending should market conditions deteriorate.

The ratings could be lowered if Baffinland experiences any significant operational difficulties, adverse iron ore market conditions, or a lack of committed funding for growth capital expenditures. A downgrade would also be considered if adjusted Debt/ EBITDA is expected to be much higher than 10x.

Upward rating pressure is limited at this time due to the significant capital expenditures required over the next several years and the single site concentration risk. That said, ratings could be upgraded once the company successfully expands its productive capacity and is able to demonstrate an improved operating cost profile, reduced leverage and adequate liquidity.

Baffinland owns the Mary River iron ore mine at the northern end of Baffin Island in the Nunavut Territory, Canada. It is 55% owned by Nunavut Iron Ore (which in turn is owned by The Energy & Minerals Group) and 45% owned by ArcelorMittal. Production commenced in late 2015 and it is currently producing five million tonnes/year on an annualized basis.

The principal methodology used in these ratings was Global Mining Industry published in August 2014. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The rating has been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

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Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Jamie Koutsoukis
Vice President - Senior Analyst
Corporate Finance Group
Moody's Canada Inc.
70 York Street
Suite 1400
Toronto, ON M5J 1S9
Canada
(416) 214-1635

Donald S. Carter, CFA
MD - Corporate Finance
Corporate Finance Group
(416) 214-1635

Releasing Office:
Moody's Canada Inc.
70 York Street
Suite 1400
Toronto, ON M5J 1S9
Canada
(416) 214-1635

No Related Data.
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