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Rating Action:

Moody's upgrades Metalloinvest's rating to Baa3; stable outlook

01 Oct 2021

London, 01 October 2021 -- Moody's Investors Service ("Moody's") has today upgraded the rating of the $800 million backed senior unsecured notes issued by Metalloinvest Finance D.A.C., a wholly-owned indirect subsidiary of JSC Holding Company METALLOINVEST (METALLOINVEST or the company), to Baa3 from Ba1. At the same time, Moody's has withdrawn METALLOINVEST's Ba1 corporate family rating (CFR), Ba1-PD probability of default rating (PDR) and the stable outlook. Metalloinvest Finance D.A.C.'s outlook remains stable.

"The upgrade reflects METALLOINVEST's unique positioning as a vertically integrated mining and steel company with substantial share of value-added products (HBI, DRI, pellets, high quality steel), abundant reserve base, strong cash flow generation, track record of deleveraging and our expectation that the company will maintain modest leverage under various iron ore and steel price scenarios" says Denis Perevezentsev, a Vice President-Senior Credit Officer at Moody's.

RATINGS RATIONALE

The upgrade of METALLOINVEST's rating to Baa3 from Ba1 reflects a track record of deleveraging, high profitability, which the company has managed to sustain through the cycle owing to its vertically integrated business model and fairly high commodity prices, adhering to its financial and dividend policy with modest levels of debt, as well as corporate governance improvements, including reducing the share of loans issued to shareholders as well as amendments in the corporate structure, which have supported these improvements in transparency. While the company has long enjoyed a strong market position in iron ore in Russia due to the quality of its two major mines, this has been strengthened by the success of its mining segment; and while the company's financial policy was previously characterised by large dividends and loans to its shareholders, strong profitability over the last few years has improved financial flexibility enabling accelerated debt reduction, underpinned by a more conservative financial policy, now targeting net leverage below 1.5x through the cycle with capital spending to be funded entirely out of operating cashflows.

The company's unique vertically integrated business model and its status as the largest merchant hot briquetted iron (HBI) producer in the world with one of the lowest cash costs in the sector and stellar reserve base, which the company estimates at 14 billion tonnes, with an operating life of 140 years, will support strong financial results while the company's high value added products fit very well with the global decarbonisation trends. Moody's expects the company to continue delivering strong operating and financial performance, which will allow it to maintain modest levels of leverage under various iron ore and steel price scenarios. The company's financial policy requires its free cash flows after shareholder distributions to remain positive. The nature of the company's open pit mines with high quality ore grades supported by weak rouble exchange rate and the company's focus on operational efficiencies will support the company's performance through the cycle despite volatility in iron ore and steel prices. METALLOINVEST's leverage, as measured by Moody's adjusted debt/EBITDA declined to 0.8x as of 30 June 2021 from 1.5x as of year-end 2020. The deleveraging was achieved by a combination of Moody's adjusted EBITDA expansion to $4.4 billion in the last twelve months ending 30 June 2021 (2020: $2.6 billion) supported by debt reduction with Moody's adjusted debt declining to $3.4 billion as of 30 June 2021 from $3.8 billion as of year-end 2020.

Moody's expects iron ore prices to move gradually toward their $70-$80/ton average levels of 2016-19 beyond 2022. Tight iron ore supplies will keep prices above their historical norms through 2022, but prices have retreated from their peaks earlier in 2021 as supplies have increased and demand growth has decelerated. Restrictions on steel production in China limit future demand growth for iron ore. Iron ore prices peaked at above $230 per tonne in May 2021 and then contracted. Average iron ore prices of over $170/ton in 2021 were stronger than any time since 2008, but weakened to levels closer to $110-115/ton in September 2021 on Chinese government efforts to curb commodity prices and inflation. For environmental reasons, China is also easing its second half of 2021 production of steel, the main end market for iron ore, and margin compression of steel producers are leading to higher use of lower-quality iron ore for now. Iron ore prices have also eased with some recovery in supply in Australia and Brazil. Moody's uses a medium-term price sensitivity range of $85/tonne-$125/tonne for iron ore, which is the agency's baseline approximation for evaluating credit risk to companies within the sector.

METALLOINVEST's unique vertically integrated business model with access to abundant reserves, developed infrastructure, fairly low energy costs and pelletising and HBI units, as well as its steel segment, incapsulates resilience of its financial results through the cycle. Metalloinvest's exposure to the volatility in iron ore prices is mitigated by its focus on high-grade iron ore, pellets and HBI, which are HVA iron ore products and accounted for 72% of iron ore product shipments in 2020 (2019: 72% and 2018: 71%). The prices of these products are less volatile, and they offer a premium compared with conventional iron ore concentrate. This justifies the company's focus on high value added products and explains the resilience of the company's metrics through the cycle and its strong positioning vis-à-vis peers which don't have substantial premium pellets or HBI/DRI capacities. Metalloinvest is the leading producer of merchant HBI and the second largest producer of pellets globally, with outputs of 4.6 mt and 27.6 mt, respectively, in 2020. The company benefits from the high quality of its iron ore concentrate, with an iron content of up to 70% and low levels of impurities. Moody's expects the fairly high premium for high-grade pellets and HBI to continue over the next twelve months even if benchmark iron ore prices decline, supported by the growing global demand for more efficient and less-pollutive steel feedstock. Metalloinvest is a low-cost producer of HVA iron ore products, solidly positioned in the first quartile of the global cost curve because of its vertical integration into high-grade iron ore mining and low energy costs. The company's low cost position is further supported by the weak rouble as more than 80% of its operating costs are denominated in roubles, while around 60% of its revenue is earned in hard currency.

Moody's estimates the company's capital spending in 2022-23, on average, of up to $0.9 billion per year under the iron ore price assumption (62% Fe, CFR China) of about $125 per tonne (2020: $502 million, as adjusted by Moody's), or up to $0.6 billion under the iron ore price assumption of $85 per tonne, with the increase in spending mainly related to the projects at the company's mining segment, which will increase the share of high value added products, increase the iron content in ore, will improve characteristics and output of pellets. Such projects include, inter alia, construction of HBI-4 unit at Lebedinsky GOK (LGOK), HBI unit, flotation facility and crushing and conveyor complex at Mikhailovsky GOK (MGOK) as well as a few projects at the company's steel segment aimed at reduction of steel costs. The launch of HBI units at LGOK (fully owned by the company) and MGOK (45% owned by the company and to be developed on a joint venture basis with the company's related party) will further the company's leadership positions in the HBI market, increasing the company's total HBI capacity to around 7.9 million tonnes per year by 2024 (on a pro-rata basis) from the current capacity of about 5 million tonnes per year and will further improve consolidated EBITDA margin of the company.

Despite this pick-up in capital spending Moody's estimates the company to maintain gross leverage, as measured by Moody's adjusted debt/EBITDA of below 2.0x in 2021-23 under iron ore price scenario of $85/tonne-$125/tonne. Lower iron ore prices will result in lower EBITDA, which would be somewhat offset by lower capital spending and dividend distributions, supportive for the credit metrics. The company monitors the level of its capital spending relative to the market environment and can effectively cap its capital spending if market environment deteriorates. Historically, annual capital spending has been around 20% of the company's EBITDA over the last three years and Moody's estimates that capital spending will equal, on average, about 20%-25% of the company's EBITDA going forward.

METALLOINVEST has strong liquidity and benefits from its balanced debt maturity profile. As of 30 June 2021, METALLOINVEST's liquidity comprised nearly $0.7 billion in cash and equivalents, and around $0.5 billion in available long-term committed credit facilities. Moody's expects the company to generate operating cash flow of about $3.5 billion in 2022 under the iron ore price assumption of $125/tonne ($2.6 billion under iron ore price assumption of $85/tonne). This liquidity will comfortably cover METALLOINVEST's capital spending of up to $0.9 billion in 2022 and shareholder distributions. Owing to proactive debt management, the company reduced its debt coming due in 2021-24 and as of 31 August 2021 the company does not have significant debt maturing in 2021-22. Moody's views the related refinancing risks as low because of the company's sustainable operating cash flow, and access to both domestic and international debt financing.

ENVIRONMENTAL, SOCIAL AND GOVERNANCE (ESG) CONSIDERATIONS

METALLOINVEST is exposed to environmental, social and governance (ESG) risks typical for a company in the mining sector. The environmental risks include, but are not limited to, air, soil and water pollution as a result of the processes used in the mining, processing and smelting of metals. Moody's generally views these risks, including water shortages and human-made hazards, as very high for mining companies. Such hazards may include wall collapses at the company's open-pit mines, flooding, underground fires and explosions, and cave-ins or ground falls at underground mines. All of the company's mines are open-pit mines. Another type of hazard common to the mining industry is the collapse or leakage of tailings dams. METALLOINVEST regularly inspects its tailings storage facilities.

Governance risks are an important consideration for all debt issuers and are relevant to bondholders and bank lenders because governance weaknesses can lead to a deterioration in a company's credit quality, whereas governance strengths can benefit its credit profile. METALLOINVEST is a privately held company with a concentrated ownership structure, which creates a risk of rapid policy changes, elevated shareholder distributions, transactions with related parties and other non-creditor friendly transactions. From that standpoint Moody's believes that the risks are mitigated by the fact that METALLOINVEST has public debt instruments and demonstrates a high level of public information disclosure and a track record of deleveraging. The risk that METALLOINVEST might favour shareholders' interests over debt providers' amid substantial dividend distributions is mitigated to some extent by the alignment of its distribution policy with its net leverage and free cash flow. Over the last two years the company managed to reduce the balance of loans provided to related parties, which it had used in lieu of or in addition to dividend distributions, and it also demonstrated a track record of adhering to its financial and dividend policy, which it adopted in 2019. Corporate governance is exercised through the oversight of independent members, who constitute three out of 10 seats on the board of directors, and through the relevant board committees.

RATIONALE FOR STABLE OUTLOOK

The stable outlook reflects Moody's expectation that, over the next 12-18 months, METALLOINVEST will sustain its modest leverage level, maintain strong liquidity and pursue a balanced financial policy.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Rating upgrade is unlikely over the medium-term given that the rating is on par with the sovereign rating of Russia while the company is in the midst of the elevated capital spending cycle, which is nevertheless subject to market conditions. Over time, Moody's could upgrade METALLOINVEST's rating if the company were to (1) generate positive FCF on a sustainable basis; (2) continue demonstrating a track record of balanced financial policy and prudent corporate governance, showing restraint and transparency with respect to shareholder distributions and maintaining its (CFO - dividends)/debt above 40%; and (3) maintain strong liquidity.

Moody's could downgrade the rating if (1) the company's Moody's-adjusted total debt/EBITDA were to rise above 2.75x on a sustained basis; (2) shareholder distributions or capital spending were to significantly exceed Moody's current expectations; (3) the company's capital spending exceeds the level of operating cash flows or the company does not calibrate the level of shareholder distributions in case market environment deteriorates which would result in the negative free cash flows after shareholder distributions on a sustained basis; or (4) operating performance and liquidity were to deteriorate substantially. A downgrade of Government of Russia's (Baa3 stable) sovereign rating could also lead to a downgrade of METALLOINVEST's rating.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Mining published in September 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1089739. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

METALLOINVEST is Russia's largest producer of high-quality iron ore, pellets and HBI/direct reduced iron. The company has one of the world's largest iron ore reserves, which it estimates at 14 billion tonnes, with an operating life of 140 years. In 2020, Metalloinvest produced 40.4 million tonnes (mt) of iron ore, 27.6 mt of pellets, 7.8 mt of HBI/direct reduced iron, 2.3 mt of pig iron and 5.0 mt of crude steel. In the last twelve months ending 30 June 2021, the company generated revenue of $8.4 billion (2020: $6.4 billion) and Moody's-adjusted EBITDA of $4.4 billion (2020: $2.6 billion). METALLOINVEST is wholly owned by the Russia-domiciled USM Metalloinvest LLC (a part of the Holding Company USM LLC), Alisher Usmanov (49%) is the major beneficiary of the Holding Company USM LLC.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288435.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

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.

Denis Perevezentsev, CFA
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Limited, Russian Branch
7th floor, Four Winds Plaza
21 1st Tverskaya-Yamskaya St.
Moscow 125047
Russia
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Victoria Maisuradze
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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