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Rating Action:

Moody's upgrades Zangezur Copper Molybdenum Combine CJSC to B2; outlook stable

11 Jun 2021

London, 11 June 2021 -- Moody's Investors Service, ("Moody's") has today upgraded to B2 from B3 the corporate family rating (CFR) and to B2-PD from B3-PD the probability of default rating (PDR) of Zangezur Copper Molybdenum Combine CJSC ("ZCMC" or "the company"), one of the largest exploration and mining companies in Armenia. The outlook on all ratings has been changed to stable from developing.

RATINGS RATIONALE

The upgrade of the company's CFR to B2 from B3 reflects deleveraging, which the company will achieve by year-end 2021 even under conservative set of pricing scenarios, due to EBITDA expansion amid copper prices growth reinforced by planned debt reductions in 2021-22, resulting in substantial improvements in the company's credit profile, which suffered in 2019-20 amid increase in debt and leverage due to acquisition of a 75% of its own shares from the controlling shareholders for about $165 million in December 2019 and modification of the company's streaming contracts, which resulted in the outflow of about $41.5 million in Q1 2020 amid deteriorating market environment.

Average copper and ferromolybdenum prices recovered from the pandemic minimums of $4,700 per tonne of copper and $20 per kilogram of 65% ferromolybdenum as of early April 2020 (2019: $6,000 per tonne of copper and $26 per kilogram of ferromolybdenum). Copper and ferromolybdenum prices have strongly recovered since then and currently oscillate at about $9,800-$10,000 per tonne and above $40 per kilogram, respectively, compared with a $4,700-$7,900 per tonne and $21 per kilogram, respectively, in 2020.

Average copper prices started to strengthen since May-2020 after a prolonged decline brought by the COVID-19 pandemic disruptions. The average price reached $7,900 per tonne by the end of 2020 compared with $6,000 in January 2020. The upward trend continued in 2021. Strong demand growth and recovering global GDP as well as supply disruptions in large producing countries such as Chile and Peru, which together account for about 40% of world copper production, will support prices above $7,500 per tonne in 2021. Moody's does not anticipate major incremental capacity starting up in the coming years. Producers face structural declines in ore grades, increasing community opposition and larger capital spending requirements, largely replacing declining production volumes with brownfield projects.

Based on the assumption of average copper and ferromolybdenum prices in 2021-23 of about $7,500 per tonne and $26 per kilogram, respectively, the company's Moody's-adjusted EBITDA will grow to about $230 million in 2021 from $134 million in 2020. Lower copper head grades as per the mining plan in 2022 will lead to copper concentrate revenue falling to $290 million in 2022 from $370 million in 2021 increasing to over $300 million in 2023 on head grades improving. Less volatile sales of ferromolybdenum and molybdenum concentrate of $170 million - $190 million per year in 2021-23 should contribute to a more sustainable top line, which would amount to $580 million in 2021, $480 million in 2022 and over $500 million in 2023. EBITDA will fall to about $160 million in 2022 improving to $180 million in 2023 on copper head grades improving. The company's leverage, as measured by Moody's adjusted Debt/EBITDA, will fall to 1.3x as of 31 December 2021 from 3.1x as of year-end 2020. Strong free cash flow generation, augmented by planned debt reduction, which is in line with the current debt amortisation schedule, of up to about $250 million by year-end 2022 (including the liability for the acquisition of own shares, which should be repaid by year-end 2021 under the current agreement), should bring total Moody's adjusted debt in line with 2019 level by the first half of 2022. Moody's adjusted leverage will be sustained at about 2.0x-2.5x in 2021-23 under a range of price scenarios.

In October 2019 and December 2019 the company entered into agreement with its shareholders, CRONIMET Mining GmbH and Makur Erkati Gortsaran OJSC (Plant of Pure Iron), respectively, to acquire 60% and 15% of the share capital in ZCMC, respectively, for a total consideration of about $165 million. In accordance with the terms of the sales-purchase agreements (SPAs), ZCMC settled $65 million of the purchase consideration in December 2019 while the company had to pay the remaining $100 million in two installments: $50 million until the end of 2020 and $50 million until the end of 2021. The company's obligations to the sellers of ZCMC shares purchased in 2019 amounted to about $78 million as of 31.12.2020 and should be settled by the year-end 2021. The company is currently in discussions with the sellers and aims to reschedule the payment of the purchase price consideration targeting repayment of about $28 million in 2021, $12 million in 2022, $20 million in 2023 and $18 million in 2024. Moody's treats this obligation as a debt-like item and adds the amount of outstanding liability to the financial debt.

The acquisition of own shares in 2019 increased the company's leverage, as adjusted by Moody's, to about 4.0x as of 31.12.2019 compared with 2.3x as of 31.12.2018 and led to a pick-up in Moody's adjusted debt to AMD202 billion as of 31.12.2020 compared with AMD106 billion as of 31.12.2018. Expansion of EBITDA in 2020 caused the leverage to contract to about 3.1x by year-end 2020 offsetting to some extent increased debt balance.

Recognising the challenges, which the elevated debt could have on the company's credit profile, the company initiated a search for a strategic investor in 2019, to which it aimed offering up to 50% minus one share in the share capital of ZCMC before cancelation of treasury shares. Taking into account substantial increase in copper prices since when the company initiated the search of the strategic investor with the goal to farm out a minority stake in ZCMC, the company reconsidered its decision now focusing on organic deleveraging as its key strategic priority, although targeted equity raises to strategic partners are still possible, albeit the equity raise, if successful, is likely to be of a smaller size, while the deal closing does not have any particular deadline.

In December 2019, the company modified its streaming agreements with two of its streaming customers in such a way that it accrued a contract asset (and obligation) of about $44 million in exchange for the right to settle the streaming obligation by cash rather than deliveries of copper concentrate with substantial discount, which shall save the company about $15-$20 million per annum of cash flows at copper price USD 6,000 per tonne (the company's estimate) and will positively impact its working capital dynamics. The company's obligation under streaming contracts reduced substantially to $36 million as of 31 December 2020 (31 December 2019: $105 million), while the company has a fairly flexible maturity profile on its streaming obligations until 2031. Moody's does not view ZCMC's streaming transactions as debt financing. Therefore, the agency does not add the initial streaming payments to ZCMC's debt because Moody's views them more as a minority equity interest in a project or a forward sale transaction, with the underlying liability similar to deferred revenue.

ZCMC has an adequate liquidity. As of 31 March 2021, the company had about $7.5 million of cash, supported by long-term overdraft and revolver facilities from local banks totaling around $11 million. Moody's expects the company to generate operating cash flow of around $150-$180 million over the next 12 months under the assumption of copper and ferromolybdenum prices of $7,500 per tonne and $26 per kilogram, respectively. This liquidity is sufficient to comfortably cover the company's cash outflows, namely its short-term debt maturities of around $64 million and capital spending requirements of about $37 million, as well as payments to its former shareholder of around $78 million, which is currently being negotiated by the company with the goal to spread out the maturities until 2024. The company's debt as of 31 March 2021 also includes about $73.6 million outstanding facility from Trafigura PTE due 2022-23. Prepayment from Trafigura PTE is offset through the delivery of copper concentrate on market terms over more than 3 years from date of the facility receipt. Prepayment from Trafigura PTE is accounted for as debt in the company's financial statements. The company has a track record of refinancing its upcoming debt maturities with its relationship banks even under fairly stressful market conditions and is likely to be able to refinance part of its short-term maturities in case of need.

RATIONALE FOR THE STABLE OUTLOOK

The stable outlook reflects Moody's expectation that the company will be able to reduce its leverage below 2.5x-3.0x over the next 12-18 months through a combination of EBITDA growth and planned debt repayments, supported by favorable global demand and prices for copper, while maintaining healthy liquidity over the same period.

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

Moody's could upgrade the ratings if the company (1) reduces absolute amount of Moody's adjusted debt (including liability for the acquisition of own shares) by $150 million - $200 million compared with year-end 2020; (2) demonstrates resilience in its credit metrics to different price scenarios, with debt/EBITDA, as adjusted by Moody's, falling towards 2.5x; and (3) consistently demonstrates prudent liquidity management with liquidity cushion sufficient to weather volatility in copper and molybdenum prices over 18 months horizon.

Moody's could downgrade the ratings if (1) the company's leverage, as measured by Moody's adjusted debt/EBITDA, deteriorates to above 3.5x on a sustained basis; (2) weak liquidity is not timely addressed; or (3) operating metrics (production, metal content, recovery) materially weaken.

ENVIRONMENTAL, SOCIAL AND GOVERNANCE (ESG) CONSIDERATIONS

ZCMC's mining activities are exposed to environmental and safety risks, in particular to the potential collapses or leakages of tailings dams. However, these risks are somewhat mitigated by the company's operational track record and continuous investments focusing on increasing beneficiation efficiency, expanding capacity for the tailings dams and enlarging processing capacity within the grinding process. The company operates Artsvanik tailings dam with the design capacity of 390 million cubic meters (m3) and actual volume of 250 million m3, which is located 36 kilometers from ZCMC on the Artsvanik river, where the company performs ongoing restoration works and which will operate until at least 2031, with annual fill-in volume of 12 million m3. The second tailings dam, Hanqasar, which is located on the river Geghi, is not currently operational, and will be subject to restoration works in 2022-25. New tailing facility is being planned in-pit, at the mined out part of the mine, which the company estimates will allow for water reusage possibility as it will be close to its current mining operations and will allow to reduce ZCMC's environmental footprint.

ZCMC has a concentrated ownership structure with 25% of the company owned by the company's management and a private investor, and 75% of the company's shares being treasury shares, which the company expects to cancel during 2021. The company's board of directors lacks independent members. ZCMC used to have substantial related party transactions, which included molybdenum processing under tolling scheme and molybdenum sales, which were conducted with the companies under common control on an arm's length basis. Inter alia, molybdenum concentrate was processed at the Plant of Pure Iron and AMP Holding LLC under a tolling arrangement at a fixed fee into ferromolybdenum and was exported by ZCMC on an arm's length basis to Cronimet group of companies, which used to be ZCMC's direct parent and the company under common control, respectively. Following acquisition of a 75% stake in the company from its former shareholders, Makur Erkati Gortsaran OJSC (Plant of Pure Iron) and CRONIMET Mining AG, the transactions related to molybdenum processing and molybdenum sales via the above mentioned entities continue, however only AMP Holding LLC could be considered as a related party as its controlled by the company's management.

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.

COMPANY PROFILE

Zangezur Copper Molybdenum Combine CJSC (ZCMC) is one of the largest exploration and mining companies in Armenia. The company principally produces copper concentrate and molybdenum from its single open-pit mine. The company generated revenue of $476 million and Moody's-adjusted EBITDA of $134 million in 2020. ZCMC is privately owned by the company's management and a private investor (25%), while 75% of the company's shares are treasury shares, which the company expects to cancel during 2021.

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_1263068.

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.

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Denis Perevezentsev, CFA
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Limited, Russian Branch
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Victoria Maisuradze
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
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Releasing Office:
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No Related Data.
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