Hong Kong, November 14, 2014 -- Moody's Investors Service has assigned a first-time B1 corporate
family rating to Hengshi Mining Investments Limited.
The rating outlook is stable.
RATINGS RATIONALE
"Hengshi's B1 corporate family rating reflects Moody's expectation
that it can perform according to its production capacity and will maintain
high profit margins relative to its global peers," says Franco Leung,
a Moody's Vice President and Senior Analyst.
The company is significantly expanding capacity that could increase production
at a compound average growth rate (CAGR) of 20%-30%
over the next 24 months.
Its ability to execute is reflected by its success in increasing iron
ore production to 10 million tons per annum in 2013 from 3.8 million
tons in 2012.
At the same time, Hengshi maintains a relatively high profit margin,
given its ability to produce high quality iron ore products.
Moody's believes that it will continue to operate mainly on an open-pit
basis at its existing mines as its open-pit probable reserves are
relatively large, measuring around 210 million tons at end-2013.
In addition, production quality is high when compared with its global
mining peers, as evidenced by its output of 66% TFe grade
iron ore concentrates at its Gufen mine, Wang'ergou mine and
Shuanmazhuang mine.
As a result, its adjusted EBITDA margin is high, standing
at about 53% for the 12 months ended June 2014 and at an average
of around 39% during 2011-2013.
But Moody's expects that the company's profit margins will
decline as steel demand in China will remain weak in the next 6--12
months. Benchmark iron ore (62% Tfe) prices in China fell
significantly to around $80 in October from around $130
early in 2014.
However, the fall in profit margins will be partly offset by the
company's changing product mix, with an increasing focus on
producing concentrates, which command premium selling prices.
In particular, the company plans to produce a greater volume of
higher margin concentrates, supported by its planned expansions
in processing capacity.
Consequently, future sales of concentrate -- which is processed
from ore -- will become a major revenue source, taking
over the sales of preliminary concentrates and unprocessed ore.
"On the other hand, Hengshi's rating is constrained
by its small operating scale and single-product profile,
as well as its geographic and operational concentration,"
adds Leung.
Given its focus on a single commodity, its credit profile and financial
metrics are highly susceptible to changes in iron ore prices. This
means a limited cushion in the event of a material and sustained drop
in such prices.
In addition, the company keeps transportation costs at competitive
levels for its customers, as many of them are located close to its
mines. Thus, Hengshi's sales are fairly concentrated
on a few customers.
Its top five customers accounted for about 50% of its total sales
in 2013. The largest accounted for about 25% of total sales.
The company will therefore be susceptible to adverse changes in steel
demand in and around Hebei Province.
Moody's expects Hengshi's credit metrics to weaken over the
next 12-18 months, as it will undertake investments and capital
expenditures but its credit profile will support a high single-B
rating.
Hengshi is one of the regional iron ore mining companies designated by
the Hebei provincial government to consolidate small or inefficient mines
in Laiyuan County. It has a track record of consolidating and integrating
mining resources within the area and ramping up production.
As Hengshi consolidates mines in the region, acquires new ones and
expands its processing and production capacity in the next 12 --
18 months, its credit metrics will weaken from the strong levels
reported in 2013, as Moody's expects it will take on more
debt.
Under the scenario of a continued weakness in iron ore prices, Moody's
sees Hengshi's debt/EBITDA peaking in the 3x-4x range in
the next 12 months compared with 0.3x for the 12 months ended June
2014.
Hengshi's rating is further constrained by the limited diversity
of available funding channels due to its short listing history.
It is developing funding channels both onshore and offshore.
Its liquidity position is strong, as evidenced by its end-June
2014 cash balance of RMB514 million. This total is more than sufficient
to cover its short-term debt of RMB118 million.
The stable rating outlook reflects Moody's expectation that Hengshi
can implement its expansion plan to increase sales of high-grade
iron ore concentrate and control its costs of operations to achieve a
credit profile consistent with a high single-B rating.
Positive rating pressure could emerge if Hengshi can: (1) successfully
grow production and extend the mine lives of its existing operations;
(2) reduce customer concentration; (3) keep its costs of operations
under control; (4) maintain adjusted debt/EBITDA to below 2.5x-3.0x
on an sustainable basis; and (4) improve access to funding through
diversifying its channels.
However, the rating could face negative pressure if: (1) there
is evidence that the current weak fundamentals for iron ore will deteriorate
further; (2) there are any material cost increases and/or delays
to its project deliveries that will negatively affect production levels;
or (3) its liquidity profile and/or credit metrics weaken.
Specifically, indicators for downgrade pressure would include adjusted
debt/EBITDA above 4.5x on a consistent basis.
The principal methodology used in this rating was Global Mining Industry
published in August 2014. Please see the Credit Policy page on
www.moodys.com for a copy of this methodology.
Listed on Hong Kong Exchange in November 2013, Hengshi Mining Investments
Limited was founded by Mr. Li Yanjun in 2004. Mr.
Li Ziwei is the settlor of a family trust which holds 72.4%
of the company as at end-June 2014.
The company owns four iron ore mines in Hebei Province. The mines'
iron ore probable reserves totaled 316 million tons at end-June
2014.
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 rating action on the support provider and in relation to each particular
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 rating action, and
whose ratings may change as a result of this 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.
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.
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.
Franco Leung
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077
Gary Lau
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077
Releasing Office:
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077
Moody's assigns first-time B1 rating to Hengshi; outlook stable
