2008-04-18 23:10:27 -
- Fitch Ratings has affirmed the following ratings of Samarco Mineracao S. A. (Samarco):
--Foreign currency Issuer Default Rating (IDR) at 'BBB';
--Local currency IDR at 'BBB';
--National scale rating at 'AA+'(bra).
The Rating Outlook on the IDRs is Stable. The Rating Outlook for the 'AA+'(bra) national scale rating has been revised to Positive from Stable.
These rating actions reflect Samarco's strong financial profile and solid ownership structure comprising two industry-leading parent companies. The ratings also consider Samarco's favorable competitive position as low-cost producer and exporter of iron ore pellets, as well as the positive outlook for the iron ore industry over the near- to medium-term.
Historically, Samarco has maintained a low levered capital structure with a total debt to operating EBITDA ratio of less than 1.0 times (x) over the period 2003-2005. Samarco is completing the construction of a second pipeline and concentration plant, and a third pelletizing plant with a capacity of 7.5 million tons. The pelletizing plant began operations in April 2008 and the start-up of the pipeline and concentration plant is expected in May 2008. The project cost was approximately US$1.4 billion and is more than 97% completed. As a result of the investments in this project, Samarco's total debt has increased to US$1.3 billion (BRL2.4 billion) as of Dec. 31, 2007, from US$340 million (BRL800 million) at year-end 2005. At year-end 2007, the company's credit ratios remained strong for this high point in the investment and price cycle; EBITDA in 2007 totaled US$548 million (BRL1.1 billion) and leverage, as measured by total debt to operating EBITDA, was 2.4x, compared with 1.3x, and 0.5x in 2006 and in 2005, respectively.
In 2008, Fitch expects Samarco to generate export revenues of approximately US$3.0 billion (BRL5.3 billion) and operating EBITDA of close to BRL2.4 billion (US$1.5 billion) from the sale of approximately 20 million tons of pellets. Samarco's credit ratios are expected to return to less than 1.0x in 2008 as a result of the higher sales volume from the expansion output and continued high pellet prices.
Iron ore pellet producers continue to benefit from the on going annual increases in pellet prices. In 2008, the benchmark price of pellets increased approximately 87% to US$150 per ton. A similar extraordinary price increase of 86% also took place relatively recently in 2005, while other years had more modest increases such as 5% and 19% in 2007 and 2004, respectively. Due to constraints in mining and logistics and continued strong demand by China for imported iron ore, pellet prices are expected to remain high compared with historical levels.
Samarco's competitive business position, strong ownership profile, and export revenues relative to U.S. dollar-denominated debt allow the company to be rated 'BBB' on a foreign currency basis, or one notch above the 'BBB-' country ceiling of Brazil. Companhia Vale do Rio Doce (Vale), the world's largest iron ore producer and exporter, jointly controls Samarco with BHP Billiton Ltd. (BHP Billiton) in Brazil. Vale dominates the iron ore industry, along with BHP Billiton and Rio Tinto. Fitch believes Samarco's two shareholders, with combined operating EBITDA in 2007 of close to US$30 billion, would support Samarco in the event of a sovereign-related liquidity crisis. Historically, shareholders have allowed Samarco to adjust dividend payments in accordance with the company's cash needs. In addition, Samarco exports essentially all of its production and therefore generates significant U.S. dollar-denominated revenue of about US$1.2 billion currently. About US$3.0 billion in export revenue is expected in 2008 and beyond. Exports sales proceeds should be able to cover future U.S. dollar-denominated debt service payments by a multiple of more than 10x.
Samarco's ratings also incorporate the potential volatility of its revenue stream, primarily due to the company's exposure to conditions in the world steel industry and, to a lesser extent, the location of the company's production assets in Brazil. Relative to the major iron ore producers, the company lacks diversity in its iron ore product mix. During troughs in the industry cycle, pellets become susceptible to the supplies of substitutes such as steel scrap and lower grade iron ore products. Also, unlike its main competitors which produce a diversified mix of metals, Samarco's mines only iron ore.
Samarco is the third-largest iron ore miner in Brazil and ranks as the world's second-largest exporter of iron ore pellets. Iron ore pellets are a high-margin main raw material input used in the steel production process. Samarco mines relatively low-grade itabirite iron ore in the State of Minas Gerais in southeastern Brazil. Iron ore is processed into concentrate and transported from Samarco's mines via a 396-kilometer slurry pipeline to the company's pelletizing plants near its Atlantic port facility. The concentrate is then processed into pellets and pellet feed. Essentially all of Samarco's pellet and pellet feed sales of 16 million natural metric tons in 2007 were exported to Asia, including China (40%), the Middle East/Africa (28%), Europe (17%), and North and South America (15%). In 2007, Samarco captured a 19% share of the Brazilian pellet export market of 50 million tons and a 14% share of the global seaborne iron ore pellet trade of approximately 103 million tons.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site
Fitch Ratings
Anita Saha, CFA, +1-212-908-0858, Chicago
Joe Bormann, CFA, +1-312-368-3349, Chicago
Ricardo Carvalho +55-21-4503-2600, Rio de Janeiro
Media Relations:
Christopher Kimble, +1-212-908-0226, New York
