Hong Kong, July 08, 2021 -- Moody's Investors Service has upgraded to Caa1 from Caa2 Tianqi Lithium
Corporation's corporate family rating (CFR), and to Caa2 from Caa3
the senior unsecured rating on the bonds issued by Tianqi Finco Co.,
Ltd and guaranteed by Tianqi Lithium.
The outlook remains negative.
"The upgrade of Tianqi Lithium's ratings reflects better recovery
prospects for creditors due to an improvement in capital structure after
the debt reduction and a more favorable operating environment,"
says Gerwin Ho, a Moody's Vice President and Senior Credit Officer.
"However, the negative outlook reflects the uncertainties related
to Tianqi Lithium's refinancing of its sizable maturities over the
next 12-18 months and its access to funding," adds Ho.
In an announcement dated 6 July, Tianqi Lithium stated that IGO
Limited had paid USD1.4 billion to its subsidiary Tianqi Lithium
Energy Australia Pty Ltd (TLEA), thus becoming a 49% shareholder
in TLEA.
Tianqi Lithium also indicated in the same announcement that it had repaid
USD1.2 billion in principal (along with associated interests) of
its USD1.9 billion debt that will come due in November.
This repayment was supported by proceeds it had received from IGO Limited.
RATINGS RATIONALE
Tianqi Lithium's Caa1 rating primarily reflects its strained capital structure
as a result of its sizeable debt burden, elevated leverage,
weak liquidity 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; although these
strengths have been offset by the company's weak capital structure.
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
in its upstream lithium mineral business.
Tianqi Lithium's leverage has increased significantly following its acquisition
of a 23.8% stake in Sociedad Quimica y Minera de Chile S.A.
(SQM, Baa1 negative) 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 was reduced to 23.8%.
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 about 6.3x over the next 12-18
months, reflecting an improvement in EBITDA and a reduction in debt
levels. Nonetheless, the company's capital structure
remains weak.
The company's EBITDA increase is mainly attributable to a robust recovery
in lithium chemical prices, which reflect a growth in demand for
lithium chemicals driven by a recovery in the global economy and a rise
in end-market demand, including electric vehicles.
Moody's expects Tianqi Lithium's revenue to rise about 76%-78%
over the next 12-18 months from the level in 2020 to about RMB5.7-5.8
billion, reflecting a strong rise in lithium chemical prices and
sales volume growth driven by better demand.
The company's profitability, as measured by EBITDA margin,
will expand to around 60%-62% over the next 12-18
months from 47.8% in 2020, mainly reflecting strong
lithium chemical prices and operational leverage.
Tianqi Lithium's effective stake in its upstream lithium mineral
resource, the Greenbushes mine in Australia, has been reduced
to 26% from 51% following IGO Limited's attainment
of a 49% stake in TLEA. 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. The introduction of IGO Limited
also provides Tianqi Lithium with a partner that has local mining experience.
Tianqi Lithium's liquidity remains weak. As of 31 March 2021,
the company's cash reserves — including restricted cash —
of RMB1.2 billion were insufficient to cover its short-term
debt of RMB24 billion, which included a USD1.9 billion loan
maturity that is due in November.
The company's liquidity, as measured by cash to short-term
debt, will likely remain well below 1.0x over the next 12-18
months. This is despite its repayment of USD1.2 billion
of the USD1.9 billion maturity, supported by proceeds from
IGO Limited's investment, and the possible extension of the
remainder of the maturity to November 2022. The company also has
a USD300 million bond that matures in November 2022.
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
and only a minority of its board consists of independent directors.
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 change the outlook to stable if the Tianqi Lithium
(1) makes significant progress on servicing its debt obligations,
in particular those due over the next 12-18 months, (2) improves
its liquidity and capital structure, (3) demonstrates solid access
to funding, and (4) continues to see improvements in its operations
in terms of revenue and profitability, supported by a favorable
industry environment.
Moody's could downgrade the ratings if the recovery prospect for Tianqi
Lithium's debt holders will likely weaken.
The principal methodology used in these ratings was Chemical Industry
published in March 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1152388.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
Headquartered in Chengdu, Sichuan Province, Tianqi Lithium
Corporation is a lithium chemicals producer that mines, makes and
sells lithium minerals and lithium chemicals. The company was listed
on the Shenzhen Stock Exchange in August 2010.
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Gerwin Ho
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
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China (Hong Kong S.A.R.)
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Clement Cheuk Yiu Wong
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Corporate Finance Group
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