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Rating Action:

Moody's downgrades Yanzhou Coal's Ba2 ratings to Ba3; outlook stable

 The document has been translated in other languages

03 Nov 2015

Hong Kong, November 03, 2015 -- Moody's Investors Service has downgraded the corporate family rating of Yanzhou Coal Mining Co. Ltd. and the senior unsecured debt ratings of Yancoal International Resources Development Co., Ltd and Yancoal International Trading Co., Limited to Ba3 from Ba2.

The ratings outlook has been changed to stable from negative.

RATINGS RATIONALE

"The downgrade reflects Yanzhou Coal's weakened credit profile owing to declining thermal coal prices, which are unlikely to recover in the near term," says Dylan Yeo, Moody's Lead Analyst for Yanzhou Coal.

Yanzhou Coal is negatively affected by the weak thermal coal prices. The Qinhuangdao 5500 thermal coal price index fell to an average price of RMB464 per tonne in the six months ended June 2015 from the average price of RMB701 per tonne in 2012.

In Moody's view, a turnaround in thermal coal prices is unlikely because China's (Aa3 stable) economy will continue to be slow in 2016.

Yanzhou Coal has reduced its operating costs through downsizing its workforce, tighter controls over raw material consumption and optimizing its operating processes.

In addition, it has cut losses at its Australian subsidiary -- Yancoal Australia Limited (unrated) -- which achieved a 95% reduction in EBIT losses in 1H 2015 compared with 2013.

But its credit metrics have been materially affected by the continued weakness in thermal coal prices.

The company's net debt/EBITDA increased to 7.5x in the 12 months ended 30 June 2015 from 6.4x at end-2014.

Moody's expects this debt leverage ratio to exceed 9.0x in 2016 as it needs to ramp up its more cost efficient mines to combat the low thermal coal prices.

Such high debt leverage positions the company's standalone credit profile closer to Moody's-rated global peers in the mid-B level.

Yanzhou Coal's standalone credit profile reflects its low-cost mines and good infrastructure supporting thermal coal demand in the economically strong Shandong Province, as well as the company's interest in mining assets in China and Australia (Aaa stable).

In addition, it considers the company's state-owned status and significant scale that enable it to have good access to bank finance and capital markets in China.

"We expect the provincial government of Shandong will continue to provide a high level of support to Yanzhou Coal and its parent, Yankuang Group Corporation Limited (unrated)," says Yeo.

Yanzhou Coal's Ba3 rating factors a 2-notch uplift for parental support, reflecting Yanzhou Coal's dominant position and strategic importance as Yankuang's flagship company. It also reflects Yankuang's track record of providing financial support, including guarantees on about 20% of Yanzhou's outstanding debt and asset injections.

Yankuang is a large provincial state-owned enterprise (SOE) that is wholly-owned by the Shandong State-owned Assets Supervision and Administration Commission (SASAC) (unrated).

As one of the top mining companies in China, its large scale in the strategic resource sector as well as extensive work force enable it to minimize the regulatory risks evident in China and enjoy good access to low-cost funding.

Moreover, Yankuang is a key corporation that will engage in the SOE reform initiative under the direction of the Shandong SASAC.

Moody's expects any likely extraordinary government support will pass through Yankuang to Yanzhou Coal, as the group accounts for almost one quarter of total coal production in Shandong.

Yanzhou's strong liquidity position enables it to weather through the coal cycles. It reported cash of RMB21.4 billion at end-September 2015, which together with internally generated cash flow, is adequate to fund internal cash needs in the next 12 months, including maintenance capital expenditure and short-term debt maturities.

The stable rating outlook reflects Moody's expectation that Yanzhou Coal will be prudent in its capital expenditure and maintain its strong liquidity position, which includes stable financing at its Australian subsidiary.

Upward rating pressure could arise if the company (1) can turn around its Australian operations; (2) improves its financial profile, such that its net adjusted debt/EBITDA is below 6.0x and EBITDA/interest is maintained above 2.5-3.0x on a consistent basis.

On the other hand, downward rating pressure could emerge if Yanzhou Coal's credit profile deteriorates further due to failure to turn around its Australian operations, a material disruption in its operations due to non-compliance with mining regulations, or material weakening in its liquidity profile.

Indicators for downward rating pressure include net debt/EBITDA continuously exceeding 9.0x--10x on a sustained basis.

Any material reduction in the 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 Credit Policy page on www.moodys.com for a copy of this methodology.

Yanzhou Coal Mining Co. Ltd. was listed in Shanghai, Hong Kong and New York in 1998. It is 56.52%-owned by the Yankuang Group Corporation Limited, a state-owned enterprise that is wholly owned by the Shandong State-Owned Assets Supervision and Administration Commission.

At end-2014, the company owned and operated 20 coal mines across China and Australia. It also owned abundant coal resources in China's Shandong and Shanxi provinces, the Inner Mongolia Autonomous Region, as well as in the Australian states of 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 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.

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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.

Dylan Yeo
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's Ba2 ratings to Ba3; outlook stable
No Related Data.
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