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Rating Action:

Moody's changes Yanzhou Coal's B2 ratings outlook to stable from negative

 The document has been translated in other languages

13 Apr 2017

Hong Kong, April 13, 2017 -- Moody's Investors Service has changed to stable from negative the outlook on Yanzhou Coal Mining Company Limited's B2 corporate family rating, and on the B2 senior unsecured rating on the bonds issued by its subsidiary, Yancoal International Resources Development Co., Limited, and guaranteed by Yanzhou Coal.

At the same time, Moody's has affirmed both ratings.

RATINGS RATIONALE

"The change in Yanzhou Coal's ratings outlook to stable reflects our expectation that average thermal coal prices in China and Australia over the next 12 to 18 months will be higher than in 2016, which will in turn support the company's EBITDA recovery and debt deleveraging," says Gerwin Ho, a Moody's Vice President and Senior Analyst.

"While Yanzhou Coal's short-term debt levels are still material relative to its total debt, we expect the company will be able to refinance its short-term debt, as its parent is a key state-owned enterprise in Shandong Province," adds Ho.

Yanzhou Coal's core coal businesses improved in 2016, reflecting a recovery in coal prices since 2H2016 due to tightening supply in China (Aa3 negative). The company's average selling price for coal -- including externally purchased coal -- reached RMB391/ton in 2016, up 4% from RMB377/ton in 2015.

Moody's estimates that Yanzhou Coal's EBITDA in 2016 improved to about RMB9.7 billion, up 22% from RMB8.0 billion in 2015.

The improving EBITDA was also contributed by reduced losses at its subsidiary Yancoal Australia Limited (unrated), which reported an operating loss of AUD113 million in 2016, compared to AUD189 million in 2015.

Moody's expects that Yanzhou Coal will benefit from (1) a low-teen percentage rise in coal prices in 2017; and (2) increased sales volumes from its Zhuanlong Coal Mine in Inner Mongolia and phase two of the Moolarben Coal Mine in Australia.

Furthermore, Moody's expects the company will maintain the improved cost level seen in 2016, when coal unit cost fell to RMB253 per ton from RMB294 per ton in 2015.

In view of these positive developments, Moody's expects the company's debt/EBITDA to improve to 7.5x-8.0x in 2017 and 6.3x-6.5x in 2018 from 9.0x-9.9x in 2014-2015. The projected debt leverage for 2017 considers an increase in debt to fund a combination of debt and a rights issuance for its acquisition of Coal & Allied Industries Limited (unrated) in Australia.

Yanzhou Coal's B2 corporate family rating reflects its standalone credit profile and a two-notch uplift for expected parental support from Yankuang Group Corporation Limited (unrated), which is wholly owned by the Shandong Provincial Government.

The two-notch uplift factors in Yanzhou Coal's dominant position and strategic importance as Yankuang Group's flagship company and the continued support from the provincial government to both Yanzhou Coal and Yankuang Group. Yankuang Group has a track record of providing financial support to Yanzhou Coal.

Yanzhou Coal's underlying credit strength reflects: (1) its diversified coal mining assets and good related infrastructure; and (2) good quality coal and low-cost mining operations in Shandong Province.

On the other hand, its standalone credit profile also considers challenges, such as (1) the operating losses at Yancoal Australia Limited; (2) its fast growth and resulting high debt leverage; (3) execution and financial risks from its investments in the finance sector; and (4) its weak liquidity position.

The company's liquidity position is weak because it has to refinance high levels of short-term debt that totaled RMB30.7 billion out of total reported debt of RMB65.6 billion at end-2016.

Yanzhou Coal has a close association with its parent, Yankuang Group, which is a key state-owned enterprises of the Shandong Provincial Government and a designated investment holding company for the reform of the province's state-owned enterprises. Therefore, Moody's expects the company will be able to refinance its domestic bank and capital market debt.

The company's investment in Yancoal Australia Limited also demands continuous offshore funding. Moody's notes that the company announced on 6 April 2017 a subscription agreement with financial institutions relating to the issuance of USD500 million of senior perpetual capital securities. The issuance, which is expected to close on 13 April 2017, will cover the USD357 million of senior unsecured offshore bonds due in May 2017.

Upward rating pressure could arise if the company (1) can turn around its Australian operations; (2) improves its financial profile, such that adjusted debt/EBITDA falls below 7x and EBITDA/interest is maintained above 2.5x on a consistent basis.

On the other hand, downward rating pressure could emerge if Yanzhou Coal's liquidity and credit profile deteriorate due to (1) further substantial increases in short-term debt; (2) declines in coal prices or disruptions in its operations; or (3) a failure to turn around its Australian operations or obtain further waivers for covenant breaches.

Any material reduction in Yankuang Group's ownership in Yanzhou Coal would be negative to the ratings.

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.

Yanzhou Coal Mining Company Limited listed on the Shanghai, Hong Kong and New York stock exchanges in 1998. It was 56.6%-owned by Yankuang Group Corporation Limited at end-2016, a state-owned enterprise that is in turn wholly owned by the Shandong Provincial Government.

At 31 December 2016, Yanzhou Coal owned and operated 18 coal mines across China and Australia, including in Shandong and Shanxi Provinces and the Inner Mongolia Autonomous Region in China, as well as in Queensland, New South Wales and Western Australia.

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.

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.

Gerwin Ho
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

No Related Data.
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