Hong Kong, May 13, 2022 -- Moody's Investors Service has affirmed Tianqi Lithium Corporation's Caa1 corporate family rating (CFR) and Caa2 senior unsecured rating on the bonds issued by Tianqi Finco Co., Ltd and guaranteed by Tianqi Lithium.
At the same time, Moody's has changed the outlook on the ratings to positive from negative.
"The outlook revision to positive from negative reflects a meaningful improvement in Tianqi Lithium's operations in terms of revenue and profitability and a reduction in its debt level. These developments have lowered the company's leverage and improved its liquidity, and if sustained, will further strengthen the company's credit profile," says Gerwin Ho, a Moody's Vice President and Senior Credit Officer.
RATINGS RATIONALE
Tianqi Lithium's Caa1 rating primarily reflects its volatile operating performance and strained capital structure as a result of its sizeable debt burden with near-term maturities; tight liquidity, which Moody's projects will improve; and weak financial management.
However, the rating considers the company's solid position in the lithium chemical industry and good profitability, which are driven by its supply of low-cost lithium minerals. However, the company's weak capital structure offset these strengths.
The company's rating is also constrained by its product concentration in lithium minerals and lithium chemicals, with limited revenue scale, exposure to regulatory risks and low effective ownership of its upstream lithium mineral business.
Tianqi Lithium's leverage rose significantly following its acquisition of a 23.8% stake in Sociedad Quimica y Minera de Chile S.A. (SQM, Baa1 stable) in December 2018, which brought its total stake in SQM to 25.9%. Following the completion of SQM's capital increase in April 2021, Tianqi Lithium's stake in SQM reduced to 23.8% as of the end of 2021.
Moody's expects Tianqi Lithium's financial leverage — as measured by total debt to EBITDA and with SQM accounted for on an equity method basis — to improve to about 1.0x over the next 12-18 months, from about 4.0x in 2021. The improvement reflects an increase in EBITDA and a reduction in debt levels. Nonetheless, the company's capital structure remains weak and its operating performance has been volatile.
Tianqi Lithium's proposed second listing on the Stock Exchange of Hong Kong, if completed, will help the company to improve its capital structure.
The company's EBITDA increase is mainly attributable to a strong rise in lithium chemical prices, which reflect a growth in demand for lithium chemicals driven by a rise in end-market demand, mainly relating to electric vehicles.
Moody's expects Tianqi Lithium's revenue to rise about 150% over the next 12-18 months from the level in 2021 to about RMB18 billion-RMB20 billion, reflecting a strong rise in lithium chemical prices and sales volume growth driven by better demand.
Likewise, the company's profitability, as measured by EBITDA margin, will expand to around 79%-81% over the next 12-18 months from about 71% in 2021, mainly reflecting strong lithium chemical prices and operating leverage.
Tianqi Lithium's effective stake in its upstream lithium mineral resource, the Greenbushes mine in Australia, reduced to 26% from 51% following IGO Limited's attainment of a 49% stake in Tianqi Lithium Energy Australia Pty Ltd (TLEA) in 2021. However, Tianqi Lithium has retained control over a majority of TLEA's board member appointments, which tempers the risks associated with its lower stake in, and access to, its subsidiary's cash flow. Revenues from the sale of lithium mineral from the Greenbushes mine made up 35% of Tianqi Lithium's consolidated revenue in 2021.
Tianqi Lithium's liquidity will be adequate over the next 12 months. Moody's expects that the company's cash holding of RMB2.5 billion and marketable securities as of 31 March 2022 and projected operating cash flow over the next 12 months will be sufficient to cover its short-term debt (including maturing long term debts and shareholder loans) of RMB7.9 billion, maintenance capital spending and dividend payments over the same period. However, Tianqi Lithium also has a USD1.2 billion loan that will mature in November 2023. Moody's will monitor Tianqi Lithium's plans to refinance this 2023 maturity.
Moody's credit assessment also takes into account the following environmental, social and governance (ESG) considerations.
The company benefits from global trends to reduce carbon emissions, because lithium is a core input in the manufacture of batteries used in electric vehicles. At the same time, its mining and chemical production operations are exposed to environmental and safety risks. Nonetheless, Moody's is not aware of any major environmental or safety incidents.
From a governance perspective, Tianqi Lithium's ownership is concentrated and only a minority of its board consists of independent directors. Moreover, the company's debt-funded acquisition of a 23.8% stake in SQM and its inability to arrange refinancing to meet its debt obligations in November 2020 reflect weak financial management and an aggressive financial policy.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Moody's could upgrade the rating if Tianqi Lithium (1) makes further significant progress on servicing its debt obligations, in particular those due over the next 12-18 months, (2) further improves its liquidity and capital structure, (3) demonstrates solid access to funding, and (4) maintains the improvement in its operations in terms of revenue and profitability, supported by a favorable industry environment.
On the other hand, Moody's could downgrade the ratings if Tianqi Lithium's expected improvement in operations, capital structure and liquidity does not materialize or if its financial policy becomes more aggressive.
The principal methodology used in these ratings was Chemical Industry published in March 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1152388. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
Headquartered in Chengdu, Sichuan Province, Tianqi Lithium Corporation is a lithium chemical producer that mines, makes and sells lithium minerals and lithium chemicals. The company was listed on the Shenzhen Stock Exchange in August 2010.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
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The first name below is the lead rating analyst for this Credit Rating and the last name below is the person primarily responsible for approving this Credit Rating.
Gerwin Ho
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
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China (Hong Kong S.A.R.)
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Clement Cheuk Yiu Wong
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Releasing Office:
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
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China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
