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Rating Action:

Moody's upgrades ERG's rating to B3; stable outlook

28 Jul 2017

London, 28 July 2017 -- Moody's Investors Service (Moody's) has today upgraded to B3 from Caa1 the corporate family rating (CFR) and to B3-PD from Caa1-PD the probability of default rating (PDR) of Eurasian Resources Group S.a r.l. (ERG). The outlook on these ratings is stable.

RATINGS RATIONALE

Today's upgrade results from Moody's decision to raise ERG's baseline credit assessment (BCA), which is a measure of the company's standalone credit strength under Moody's government-related issuer (GRI) rating methodology, to caa1 from caa2. ERG's BCA has been raised reflecting an improvement in the company's liquidity and its overall financial metrics in 2016 versus 2015, as well as Moody's expectation of further improvement in the company's leverage and interest coverage metrics over the next 12-18 months.

As the Kazakhstan government owns a 40% stake in ERG, Moody's applies its GRI rating methodology. The B3 CFR reflects a combination of (1) a BCA of caa1; (2) the Kazakhstan's Baa3 foreign currency rating; (3) the high default dependence between ERG and the government; and (4) the moderate probability of government support in the event of financial distress.

ERG's liquidity improved as a result of the recent completion of debt restructuring with Sberbank (Ba1 stable, ba1) and Bank VTB, JSC (Ba1 stable, b1), the company's main lenders. As a result of debt restructuring, ERG extended the bulk of its debt maturities to 2022 from 2016-18, with an option of further automatic extension to 2025 subject to the company's compliance with certain financial covenants.

Following the restructuring, ERG is to repay $111 million of debt until the end of 2017, $237 million in 2018, $558 million in 2019, $1 billion in 2020 (including $500 million to the state fund "Samruk Kazyna"), $449 million in 2021 and $5.7 billion afterwards. In addition, Moody's expects ERG to make payments under the cash sweep, which is embedded in loan agreements with Sberbank and Bank VTB, of around $100 million in 2017 and over $250 million in the third quarter of 2018.

Moody's estimates that as of 30 June 2017, ERG's liquidity comprised more than $600 million in unrestricted cash and equivalents and around $900 million in operating cash flow, which Moody's expects the company to generate over the following 12 months. ERG also had access to the $507 million project financing, to be used to finance the company's RTR cobalt and copper project in the Democratic Republic of Congo (DRC, B3 stable). In addition, the company was to receive around $80 million in prepayments from its customers in the third quarter of 2017, which will be used to finance its equity contribution in the RTR project. This liquidity was sufficient to cover the company's debt maturities, cash sweep obligations, capex and anticipated dividend payouts over the following 12 months.

However, beyond the 12-month horizon ERG will likely need to procure additional external funding to cover the liquidity gap. Moody's views the company's refinancing risk as manageable, owing to its expected sustainable cash flow generation, status of the third-largest employer in Kazakhstan and social importance for the country's regions where the company operates. In addition, the rating agency expects that the company will be able to postpone part of capex and/or dividend payouts if needed to support liquidity.

Moody's expects the company to improve its leverage and interest coverage metrics over the following 12-18 months, with leverage declining towards or below 4.0x Moody's-adjusted debt/EBITDA by year-end 2017 from 5.6x at year-end 2016, and EBIT interest coverage growing towards 2.5x from 1.5x. The improvement in financial metrics will result from the increase in EBITDA on the back of higher commodity prices, weak tenge and lower interest expenses following the completed debt restructuring.

In addition to the improved liquidity and financial metrics, ERG's BCA takes into account (1) the company's good access to high-grade and long-reserve-life mining assets in Kazakhstan; (2) its competitive cost structure, owing to high-quality mines and efficient processing plants, particularly in the profitable ferroalloys core business; (3) the high degree of vertical integration in the alumina/aluminium, ferroalloys and iron ore concentrate/pellets value chains; (4) good operational and product diversification, with several operating mines and processing facilities in Kazakhstan and, for copper, in DRC; (5) solid market position in EMEA for ferrochrome, iron ore and aluminium; (6) high share of more than 90% of exports in the company's revenues; and (7) strong customer base and moderate customer diversification, with 10 largest customers representing 40%-45% of sales.

The BCA also factors in (1) the company's exposure to volatility in prices for commodities; (2) its negative free cash flow as a result of high capex; (3) its aggressive financial policy, with a large debt-financed expansionary capex programme along with dividend payouts, although dividend amounts are limited under the company's loan documentation with banks; (4) execution risks related to the company's development projects, which are common for mining companies; and (5) uncertainty regarding the outcome of pending UK Serious Fraud Office (SFO) investigation on ERG's past M&A transactions in Africa.

RATIONALE FOR STABLE OUTLOOK

The stable outlook reflects Moody's expectation that (1) the company will maintain adequate liquidity and prudent liquidity management, addressing its upcoming debt maturities in a timely fashion; and (2) its leverage and interest coverage metrics will remain commensurate with the current rating category. The stable outlook does not factor in the potential negative outcome of the SFO investigation, which we view as an event risk and would assess separately, if it were to occur.

WHAT COULD CHANGE THE RATINGS UP/DOWN

Moody's could upgrade ERG's ratings if the company were to (1) reduce its Moody's-adjusted debt/EBITDA below 4.5x on a sustainable basis; (2) generate sustainable positive free cash flow; and (3) maintain healthy liquidity and prudent liquidity management, addressing upcoming debt maturities in a timely fashion. Moody's could also consider an upgrade if it were to reassess the assumptions related to the degree of support from and dependence on the Kazakhstan government, based on potential new factors indicating a stronger support or lower dependence than currently factored in the rating. The status of the SFO investigation would also be assessed and taken into account at the time of an upgrade.

Moody's could downgrade the ratings if the company's (1) Moody's-adjusted debt/EBITDA remains above 5.5x on a sustained basis; (2) EBIT interest cover declines below 1.0x on a sustained basis; or (3) liquidity or liquidity management deteriorates materially. A reassessment of the probability of government support in the event of financial distress to a weaker level would also exert negative pressure on the rating. A negative outcome of the SFO investigation, resulting in material fines and penalties and high reputational damage, could also lead to a downgrade.

The methodologies used in these ratings were Global Mining Industry published in August 2014, and Government-Related Issuers published in October 2014. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

Eurasian Resources Group S.a r.l. (ERG) is the holding company of Eurasian Natural Resources Corporation Ltd (ENRC), a vertically integrated mining group with main operating assets in Kazakhstan, and a number of development assets in Brazil and Africa. The group is primarily focused on the mining and processing of ferroalloys, iron ore, aluminium, copper and cobalt. ERG is one of the world's largest ferrochrome producers and a major exporter of iron ore in Kazakhstan. In 2016, ERG generated revenue of $3.8 billion and Moody's-adjusted EBITDA of $1.3 billion. The Kazakh government (Baa3 stable) is ERG's largest single shareholder with a 40% stake. The company's three founding shareholders, Mr. Machkevitch, Mr. Ibragimov and Mr. Chodiev, own in aggregate a 60% stake.

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.

Artem Frolov
VP - Senior Credit Officer
Corporate Finance Group
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Victoria Maisuradze
Associate Managing Director
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No Related Data.
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