Hong Kong, July 19, 2022 -- Moody's Investors Service has upgraded to B3 from Caa1 Tianqi Lithium Corporation's corporate family rating (CFR), and to Caa1 from Caa2 the senior unsecured rating on the bonds issued by Tianqi Finco Co., Ltd and guaranteed by Tianqi Lithium.
The outlook remains positive.
On 13 July, Tianqi Lithium completed its second listing on the Stock Exchange of Hong Kong. The net proceeds from the second listing were about HKD13 billion. The company indicates it will use HKD8.9 billion to repay outstanding debt related to its investment in Sociedad Quimica y Minera de Chile S.A. (SQM, Baa1 stable) and HKD1.7 billion to repay onshore borrowings.
"The upgrade of Tianqi Lithium's ratings reflects our expectation that the company's liquidity and capital structure will improve significantly as the company will use the majority of the HKD13 billion proceeds from its second listing on the Stock Exchange of Hong Kong to repay debt," says Gerwin Ho, a Moody's Vice President and Senior Credit Officer.
"The positive outlook reflects Tianqi Lithium's continued robust operating performance in terms of revenue and profitability, which if sustained, will strengthen the company's credit profile," says Ho.
RATINGS RATIONALE
Tianqi Lithium's B3 rating primarily reflects its volatile operating performance and weak financial management.
However, the rating considers the company's solid position in the lithium chemical industry and good profitability, which are driven by its supply of low-cost lithium minerals.
The company's rating is also constrained by its product concentration in lithium minerals and lithium chemicals, with limited revenue scale, exposure to regulatory risks and low effective ownership of its upstream lithium mineral business.
Tianqi Lithium's leverage rose significantly following its acquisition of a 23.8% stake in SQM in December 2018, which brought its total stake in SQM to 25.9%. Following the completion of SQM's capital increase in April 2021, Tianqi Lithium's stake in SQM reduced to 23.8% as of the end of 2021.
Moody's expects Tianqi Lithium's financial leverage — as measured by total debt to EBITDA and with SQM accounted for on an equity method basis — to improve to below 1.0x over the next 12-18 months, from 4.0x in 2021. The improvement reflects an increase in EBITDA and a reduction in debt levels.
The company's EBITDA increase is mainly attributable to a strong rise in lithium chemical prices, which reflect growth in demand for lithium chemicals driven by higher end-market demand, mainly relating to electric vehicles.
Moody's expects Tianqi Lithium's revenue to rise over 290% over the next 12-18 months from the level in 2021 to about RMB29 billion-RMB31 billion, reflecting a strong increase in lithium chemical prices and sales volume growth driven by better demand.
Likewise, the company's profitability, as measured by the EBITDA margin, will expand to around 82%-84% over the next 12-18 months from 71% in 2021, mainly reflecting strong lithium chemical prices and operating leverage.
Tianqi Lithium's effective stake in its upstream lithium mineral resource, the Greenbushes mine in Australia, reduced to 26% from 51% following IGO Limited's attainment of a 49% stake in Tianqi Lithium Energy Australia Pty Ltd (TLEA) in 2021. However, Tianqi Lithium has retained control over a majority of TLEA's board member appointments, which tempers the risks associated with its lower stake in, and access to, its subsidiary's cash flow. Revenues from the sale of lithium mineral from the Greenbushes mine made up 35% of Tianqi Lithium's consolidated revenue in 2021.
Tianqi Lithium's liquidity is very good. Moody's expects that the company's cash holding of RMB2.5 billion and marketable securities as of 31 March 2022, projected operating cash flow over the next 12 months and proceeds from its second listing on the Stock Exchange of Hong Kong will be sufficient to cover its short-term debt (including maturing long-term debt, shareholder loans and a USD bond maturing in November 2022) of RMB7.9 billion, capital spending and dividend payments over the same period. The company will use the proceeds from its second listing on the Stock Exchange of Hong Kong to repay the SQM investment-related borrowing, including the USD1.2 billion loan that will mature in November 2023.
Tianqi Lithium's senior unsecured bond rating is one notch lower than it would otherwise be because of the risk of structural subordination. This risk reflects the fact that most of the claims are at the operating subsidiaries and have priority over claims at the holding company. In addition, the holding company lacks significant mitigating factors for structural subordination.
Moody's credit assessment also takes into account the following environmental, social and governance (ESG) considerations.
The company benefits from global trends to reduce carbon emissions, because lithium is a core input in the manufacture of batteries used in electric vehicles. At the same time, its mining and chemical production operations are exposed to environmental and safety risks. Nonetheless, Moody's is not aware of any major environmental or safety incidents.
From a governance perspective, Tianqi Lithium's ownership is concentrated. Moreover, the company's debt-funded acquisition of a 23.8% stake in SQM and its inability to arrange refinancing to meet its debt obligations in November 2020 reflect weak financial management and an aggressive financial policy.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Moody's could upgrade the ratings if Tianqi Lithium (1) meets its financial obligations over the next six to 12 months, (2) demonstrates solid access to funding, (3) maintains the improvement in its operations in terms of revenue and profitability, supported by a favorable industry environment and (4) demonstrates prudent financial management in terms of investments, acquisitions and shareholder distributions.
On the other hand, Moody's could downgrade the ratings if (1) Tianqi Lithium does not meet its financial obligations, (2) the company's expected operational performance does not materialize or (3) its financial policy becomes more aggressive in terms of investment, acquisitions or shareholder distributions.
The principal methodology used in these ratings was Chemicals published in June 2022 and available at https://ratings.moodys.com/api/rmc-documents/389870. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.
Headquartered in Chengdu, Sichuan Province, Tianqi Lithium Corporation is a lithium chemical producer that mines, makes and sells lithium minerals and lithium chemicals. The company was listed on the Shenzhen Stock Exchange in August 2010 and the Stock Exchange of Hong Kong in July 2022.
REGULATORY DISCLOSURES
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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.
Gerwin Ho
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
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Clement Cheuk Yiu Wong
Associate Managing Director
Corporate Finance Group
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Client Service: 852 3551 3077
Releasing Office:
Moody's Investors Service Hong Kong Ltd.
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JOURNALISTS: 852 3758 1350
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