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I AGREE
03 Sep 2013
Hong Kong, September 03, 2013 -- Moody's Investors Service has downgraded to Ba1 from Baa3 Yanzhou Coal
Mining Co Ltd's issuer rating and the senior unsecured debt rating for
the USD bonds issued by Yancoal International Resources Development Co
Ltd, and guaranteed by Yanzhou Coal Mining Co.
At the same time, Moody's has withdrawn the issuer rating
and has assigned a corporate family rating of Ba1 to Yanzhou Coal.
The outlook for the ratings is stable.
RATINGS RATIONALE
"The downgrade reflects Yanzhou Coal's weakened level of profitability
which is beyond Moody's expectations, in turn due to depressed
coal prices and the operating loss evident at its Australian operations,"
says Alan Gao, a Moody's Vice President and Senior Analyst.
The company has been affected by falling coal prices, as evidenced
in its 1H 2013 results. The value of its sales suffered a 10.8%
decline on a year-on-year basis despite the fact that volume
sold rose 6.8%.
In addition, it is suffering losses at its Australian operations
due to high costs, low volume and the weakening Australian dollar.
Yancoal Australia reported a loss before tax of RMB6.3 billion
equivalent in 1H 2013.
Moody's expects Yanzhou Coal's profitability to stay weak
in the next 18 months because (i) coal prices, especially domestic
thermal coal prices, will remain depressed as China's economic
growth slows; and (ii) Yancoal Australia's operating loss will
take more time than expected to correct through a ramp-up in volumes
and improved efficiency.
In response to the challenging situation, Yanzhou Coal has started
to implement cost savings; reduce purchases of more expensive third-party
coal; improve the efficiency and output of its Australian mines;
plan the issuance of hybrid debt to improve funding and equity; and
cut capital expenditures to contain rises in debt.
But, Moody's believes that the benefits of such actions will
take time to materialize.
As a result, Moody's expects debt/EBITDA of 5x-5.5x
for 2103 and trending down to around 4.5X in 2014 and thereafter,
and (cash flow from operations -- dividends)/debt of 10%-15%
over the next 12 to 18 months. Such levels match those of peers
in the Ba range.
At the same time, Yanzhou Coal's Ba1 rating reflects the company's
(1) high-quality coal mines, with diversified mining assets
in China and Australia, and good related infrastructure; (2)
the competitive level of costs at its mines in Shandong; (3) long
operating track record and compliance with occupational health and safety
requirements; and (4) favorable position in China where demand for
coal is strong.
The rating also considers the increased operating and financial risks
from expansion in Australia. Resolving the weakness in the credit
metrics of its Australian operations has been hampered by the slow pace
of ramp-ups in production up due to soft demand. Furthermore,
the company is exposed to regulatory risks in China and Australia.
The rating also factors in Yanzhou Coal's status as a state-owned
enterprise in the strategic resources sector under the Shandong provincial
government. Support from the government helps the company manage
the incremental risks resulting from its transition to a more diversified
operation geographically, and enables it to access low-cost
domestic funding. The latter supports its credit profile.
Although Yanzhou Coal's cash balance fell to RMB10.2 billion
in June 2013 from RMB15.9 billion in December 2012, its liquidity
position remains strong. Such a cash balance and committed undrawn
bank facilities more than cover short-term debt of RMB8.4
billion and estimated annual capital expenditure of around RMB6 billion.
The stable outlook reflects Moody's expectation that Yanzhou Coal
will maintain a fairly strong liquidity position which acts as a buffer
against challenges in the current down cycle and ensures that debt-servicing
will not be affected by weakened profitability. Ownership and supervision
by the Shandong government will help the company secure good funding support
from domestic banks in the current down market. Furthermore,
Moody's expects Yanzhou Coal's management will adopt a prudent
approach in capital spending and investment to preserve its financial
profile.
Upward rating pressure will be limited, given that the company has
yet to recover profitability. However, upgrade pressure could
emerge over the medium term if it can: (1) turn around its Australian
operations; and (2) improve its cost structure and profitability.
Indicators of rating upgrade pressure include EBITDA margins above 20%;
adjusted debt/EBITDA below 2.5x - 3.0x, and
(cash flow from operations - dividends)/debt of more than 20%
on a sustainable basis.
On the other hand, downgrade pressure could emerge if Yanzhou Coal
(1) fails to improve debt leverage in 2014; (2) fails to turn around
its Australian operation and achieve cost-savings targets;
(3) experiences a material disruption in its operations due to non-compliance
with mining regulations; or (4) accelerates expansion, such
that debt leverage further increases and liquidity weakens.
Indicators for downgrade pressure include its cash balance falling below
5% of total assets; and/or adjusted debt/EBITDA continues
to exceed 4.5-5.0x; or (cash flow from operations
- dividends)/debt below 10% in 2014.
If the Shandong provincial government's indirect ownership through the
Yankuang Group drops to below 50%, Moody's would consider
this development as evidence that the relationship is weakening,
thereby possibly triggering a review of the ratings.
The principal methodology used in these ratings was the Global Mining
Industry Methodology published in May 2009. Please see the Credit
Policy page on www.moodys.com for a copy of this methodology.
Yanzhou Coal Co Ltd was listed in Shanghai, Hong Kong and New York
in 1998. It is 52.9%-owned by the Yankuang
Group, a state-owned enterprise (SOE) wholly owned by the
Shandong Provincial State-Owned Assets Supervision and Administration
Commission, and is one of the top coal mining groups in China.
It has 12 operating mines in Shandong Province, Shanxi Province
and Inner Mongolia. It also has 14 mines (9 in production and 5
in exploration) in Australia.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
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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
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For any affected securities or rated entities receiving direct credit
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Please see www.moodys.com for any updates on changes to
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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.
Alan Gao
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 downgrades Yanzhou Coal to Ba1, outlook stable
No Related Data.
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