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Rating Action:

Moody's rates new Peñoles issuance under Certificados Bursátiles program

 The document has been translated in other languages

Global Credit Research - 12 Aug 2010

Up to USD600 million of debt instruments rated

New York, August 12, 2010 -- Moody's Investors Service has assigned a Baa2 senior unsecured foreign currency bond rating and a Aa1.mx national scale rating to Industrias Peñoles S.A.B. de C.V ( Peñoles) proposed new Certificados Bursátiles (Mexican long-term USD denominated local notes) in two separate issuances not to exceed 10 years and a joint amount not to exceed USD600 million. The notes will be guaranteed by the company's principal subsidiaries, excluding Fresnillo plc. In a related rating action, Moody's assigned a Baa2 global local currency Issuer Rating to Peñoles. The rating outlook is stable.

Peñoles' Baa2 global local currency Issuer Rating, senior unsecured foreign currency rating, and Aa1.mx national scale rating reflect the solid and stable position of the company within the mining industry in Mexico. Although its mines and metallurgical complex are all domiciled in Mexico, providing no geographic diversity, the rating considers the number of regions in which the company operates, the diversity of metals produced, and the integrated nature of its business footprint from mining through to smelting and refining. Peñoles is a leading producer of refined silver, with an approximate 11% market share globally and an important producer of lead and zinc within the Latin American region. In addition, mainly through its 77% owned Fresnillo plc subsidiary, the company produces approximately 416,000 ounces of gold, which will increase further once the Soledad-Dipolos and Saucito projects, currently in development, commence operations in 2010 and 2011, respectively. The company's gold and silver operations look to be favorably positioned on the lower end of the cost curve. Its Met-Mex metallurgical complex ranks within the top five metallurgical complexes globally and has the ability to treat complex ores. While revenues and earnings are derived primarily from the mining and metals operations, the company also produces a number of value-added chemicals used primarily in the powder detergent, steel, cement and fertilizer industries.

The ratings consider the relatively stable performance of the company over the last five years, with gross margins ranging between 23% and 30% and leverage, as measured by the debt/EBITDA ratio, using Moody's standard adjustments, not exceeding 1.8x, despite the volatility experienced in the metals markets over this time horizon. Given the continued focus on operating efficiency at Met-Mex, which includes carrying lower inventory levels, greater selectivity of third party feed, and maximization of internal feed, together with the improved metal price environment, we expect earnings and cash flow performance to strengthen measurably in 2010 over 2009. While we expect moderation in base metal prices, we expect gold prices to continue around the $1000/oz range in 2010. Given the company's first half performance to June 30, 2010, we expect that EBITDA could approximate at least MXN12 billion in 2010 resulting in a pro forma debt/EBITDA on the increased debt levels still below 1x.

However, the rating considers the significant dividend payout level of the company, generally between 30% and 50% of net income, the capital investment requirements to maintain and expand production levels, and the cyclical nature of the metals and chemical industries in which the company operates. In addition the rating considers the fact that Fresnillo, which as a result of its gold and silver production generates significant earnings and cash flow, is 77% owned. Peñoles' rating is not adjusted at this time for structural reasons relating to the less than 100% ownership in Fresnillo as Fresnillo is debt free and generates ample cash flow to cover capital expenditure requirements as well as dividends and remains a strategically important subsidiary to Penoles. To the extent these dynamics were to change, Peñoles' ratings could be negatively impacted.

Moody's Mexican National Scale Ratings (.mx) are opinions about the relative credit quality of the issuers and issuances within Mexico. The issuers and issuances rated Aa.mx show a very strong credit capacity and low probability of credit loss relative to other Mexican issuers. Moody's applies the numeric modifiers 1,2,3 in each broad rating category from Aa.mx to Caa.mx (i.e., Aa1.mx). The modifier 1 indicates a high category of the same broad rating category.

The stable outlook reflects our expectations that improving fundamentals in the markets that Peñoles serves will continue to show gradual improvement through 2010 and that metal prices will be, on average for the year, comfortably above 2009 levels. As a result, we expect performance to strengthen in 2010 and financial metrics to improve. The outlook also reflects our expectations that the company will continue to manage its financial structure in line with the conservatism that it has exhibited in the past and will continue to balance its dividend payout levels in consideration of its cash flow generation capability and capital expenditure levels, and maintain a conservative debt profile. The outlook also considers that a portion of the current cash position, retained from proceeds from the IPO of Fresnillo in 2008 and retained in the company to preserve liquidity during the late 2008, 2009 economic crisis, will be paid out in dividends, as originally anticipated. However, we expect the company to retain a sufficient cash position to comfortably cover operating and financial requirements.

The global local currency rating could be positively impacted should Peñoles' development project pipeline contribute to further diversification in its metals position thereby reducing the level of sensitivity to precious metals prices. In addition, the rating could be favorably affected should the company demonstrate the ability to sustain EBIT margins of at least 15%, operating cash flow minus dividends to debt of at least 25%, and free cash flow to debt of at least 7.5%.

The rating could be negatively impacted should the company's liquidity contract substantially, EBIT margins fall below 10%, or leverage, as measured by the debt/EBITDA ratio, exceed 3x, other than on an exceptional and short basis.

The principal methodology used in rating Peñoles was Moody's Global Mining Industry rating methodology published in May 2009 and available on www.moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Rating methodologies sub-directory on Moody's Website.

Moody's last rating action on Peñoles was June 2, 2010, when the Baa2 local currency rating and Aa1.mx national scale rating for a proposed up to MXN7,000 million issuance were withdrawn as the company decided not to proceed with the issue. Please refer to Moody's Withdrawal Policy on moodys.com.

Headquartered in Mexico City, Mexico, Peñoles is an integrated mining company involved in the extraction, smelting and refining of minerals, principally zinc, lead, silver and gold. The company is also involved in the production of chemicals such as sodium sulfate, magnesium oxide, ammonium sulfate and magnesium sulfate. The company's gold and silver interests are mainly conducted through its 77% owned subsidiary Fresnillo plc, a London Stock Exchange listed company. Consolidated revenues in 2009 were MXN44,813 million.

New York
Brian Oak
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Carol Cowan
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Investors Service
250 Greenwich Street
New York, NY 10007
USA

Moody's rates new Peñoles issuance under Certificados Bursátiles program
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