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Announcement:

Moody's changes China Metallurgical Group's outlook to negative

01 Mar 2012

Approximately USD500 million of debt securities affected

Hong Kong, March 01, 2012 -- Moody's Investors Service has changed to negative from stable the outlook on China Metallurgical Group Corporation's (CMGC) ratings.

At the same time, Moody's has affirmed CMGC's Baa2 issuer and senior unsecured ratings.

"The negative outlook reflects Moody's concern that CMGC's ratings could be under pressure from increasing debt leverage, that is debt/EBITDA above 8x, arising from its weakening profitability and slower cash returns from its property and nonferrous metal processing businesses," says Jiming Zou, a Moody's analyst.

On 30 January, CMGC's major operating subsidiary, Metallurgical Corporation of China Ltd. (MCC) indicated an estimated 20-30% drop in its net profit for 2011 versus a year ago, as a result of the weaker property development and volatile commodity prices.

CMGC's Property Development, which contributed strong earnings in the past, has become weaker amid tightening credit policy and government measures to rein in price hikes in the residential segment.

The smelting and processing of nonferrous metal, part of CMGC's Resources Development, has suffered from higher than expected losses due to falling commodity prices.

As a result, CMGC's debt leverage has increased further. Moody's estimates the group's debt/EBITDA to reach 9x--10x at end-FY2011.

In response to these adverse developments, CMGC has indicated its plan to scale down capital expenditures and to preserve cash, in its commitment to improving debt, which is monitored by the State Council's State-owned Assets Supervision and Administration Commission.

Moody's will monitor CMGC's order book, its improvement in profitability, the progress of its cash collections from Build-Transfer and Build-Operate-Transfer projects, and its debt reduction. If it is unlikely that CMGC can make real progress to improve its profitability and reduce debt within a reasonable period of time, Moody's will review its ratings.

CMGC's Baa2 rating continues to reflect its baseline credit assessment (BCA) of 11 -- equivalent to a Ba1 level on Moody's global rating scale -- and Moody's expectation of strong support by the Chinese government in case of financial distress.

Such expectation of strong support is based on CMGC's 100%-government ownership, supervision by the State Council's State-owned Assets Supervision and Administration Commission, and the company's key role in the development of the domestic steel industry.

CMGC also has strategic importance in the government's policy of developing social welfare housing and investing in overseas mining assets.

CMGC's BCA of Ba1 reflects (a) its track record, strong market position and large operating scale in the Chinese engineering and construction sector, particularly in the construction of steel plants; (b) its expansion into non-metallurgical construction, including property development and infrastructure projects, to mitigate the impact of the maturing metallurgical construction sector; (c) its strong order book, with a sales visibility of about two years; d) its good access to domestic banks and capital market financing.

On the other hand, CMGC's BCA is constrained by (a) its high debt leverage due to greater funding requirements for the Build-Transfer and Build Operating & Transfer contracts for property and infrastructure projects with municipal governments; (b) its substantial capital expenditure for resources development that makes debt de-leveraging unlikely in the near term; (c) its exposure to over-capacity evident in the Chinese steel industry; and (d) the execution and financial risks of its overseas green field resource projects.

The rating outlook could return to stable, if CMGC is able to improve debt level to Debt/EBITDA of 8x through generating positive operating cash flow and prudent capital spending.

CMGC's ratings could be under pressure for downgrade, if CMGC (a) fails to improve its debt leverage in the next 12 to 18 months; (b) loses significant market share in its core metallurgical market; (c) is unable to maintain its profit margin - EBITDA above 5% -- due to a fall in orders for engineering projects or fierce competition; (d) faces significant cost overruns or delays in its overseas resource projects, and which result in financial impairment; (e) implements aggressive debt-funded expansions; or (f) if there is a downgrade in China's sovereign rating, or a decline in ownership by the Chinese government.

The principal methodology used in rating China Metallurgical Group Corporation was the Global Construction Methodology published in November 2010 and Government-Related Issuers: Methodology Update published in July 2010. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

China Metallurgical Group Corporation (CMGC) is one of the largest engineering and construction companies in China, with a dominant market position in the construction of domestic steel plants. It is 100% owned by the State Council of the People's Republic of China.

The company has a business focus on engineering and construction, mainly in the metallurgical sector. The rest of the business consists of equipment manufacturing, resources development, property development and paper making.

The company is also engaged in the construction of social welfare housing for low-income families and the development of overseas metallurgical mines.

CMGC holds a 64.18% stake in Metallurgical Corporation of China Ltd (MCC), a company that is listed on both Hong Kong and Shanghai stock exchanges. MCC accounts for around 90% of CMGC's total assets.

REGULATORY DISCLOSURES

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

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history. The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

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.

Jiming Zou
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 changes China Metallurgical Group's outlook to negative
No Related Data.
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