Fitch Affirms Uranium One at 'BB-'; Outlook Stable
OREANDA-NEWS. Fitch Ratings has affirmed Canada-incorporated Uranium One Inc.'s (Uranium One) Long-term foreign currency Issuer Default Rating (IDR) at 'BB-'. The Outlook is Stable. A full list of rating actions is at the end of this commentary.
Uranium One's IDR includes a three-notch uplift from Fitch's standalone assessment of 'B-' for support from its wholly state-owned parent, JSC Atomic Energy Power Corporation (Atomenergoprom, BBB-/Negative), and, ultimately, the Russian Federation (BBB-/Negative). Atomenergoprom is an integral part of State Atomic Energy Corporation Rosatom (Rosatom), the world's leader in integrated uranium production, nuclear power plant engineering, fabrication and construction, and a top nuclear power utility in Russia. We view the strategic and operational ties as strong between Uranium One and Atomenergoprom and ultimately Rosatom. More robust legal ties, eg, financial guarantees for a large portion of Uranium One's debt would result in a closer rating alignment between Uranium One and Atomenergoprom.
Uranium One's standalone creditworthiness is constrained by its small size, its dependence on dividends from its joint ventures (JVs) operating in Kazakhstan, and exposure to a single commodity and, largely, spot uranium prices. As Fitch expected, the company's funds from operations (FFO) adjusted gross leverage exceeded 15x in 2014 and is likely to remain above 8x in 2015 due to weak EBITDA generation and relatively low dividends received from JVs during the period of depressed uranium spot prices. Based on our conservative price forecast for triuranium octoxide (U3O8) increasing from USD37 per pound (lb) in 2016 to USD45/lb until 2019, we expect that Uranium One's FFO, which includes a proportionate share of dividends from JVs, will materially improve in 2016-2017 and its FFO adjusted gross leverage will drop to about 3.6x by end-2017, in line with our rating guidance.
KEY RATING DRIVERS
Strategic Uranium Mining Asset
Uranium One's low-cost position in extraction of U3O8 is important for Rosatom's group successful development. As Rosatom owns 36% of global uranium enrichment capacity, it needs low-cost feedstock to maintain enrichment profit margins and requires contracted uranium supply to attract reactor customers. With expected 2015 cash costs of USD13/lb, Uranium One is one of the lowest-cost uranium producers globally. Nearly all of its production comes from Kazakhstan from JVs with JSC National Atomic Company Kazatomprom (Kazatomprom, BBB-/Stable).
Rosatom's strong strategic and operational ties with Uranium One are key to the parent maintaining its long-term aim of being a leader across global nuclear markets. Uranium One has a strategic off-take agreement with Rosatom's subsidiary, to which it sells over half of its production predominantly at spot-based prices. Uranium One also acts as Rosatom's international marketing arm and has long-term off-take agreements with customers in Asia, the US and Europe.
'B-' Standalone Profile
Uranium One's standalone creditworthiness is constrained by its small size, dependence on production and dividends from the JVs, exposure to a single commodity and spot uranium prices and high current and expected FFO adjusted gross leverage. Uranium One depends almost exclusively on dividends from JVs to service its debt. In 9M15, it received USD53.6m in dividends from JVs, down from USD67.6m a year ago. At 30 September 2015, it had USD63.5m in dividends receivable from its JVs for 2014 results, while it used up USD112.4m in operating cash flows. In 2015, Uranium One expects that its total attributable production will reach 12.2m lbs of uranium.
As uranium prices have re-bounded in 2015, we expect that from 2016 Uranium One's incoming dividend stream will improve noticeably.
Based on uranium U3O8 futures prices of USD37/lb in 2016, USD40/lb in 2017, USD43/lb in 2018 and USD45/lb in 2019, we expect that in 2016 the company's FFO, including income from wholly-consolidated operations and a proportionate share of dividends from JVs, will start recovering. Uranium One's JVs have largely reached their design capacity and are generally debt-free, enabling them to distribute most of their free cash flow as dividends. We forecast that FFO-adjusted leverage will also improve to 3.7x at end-2016, and then to about 3.6x (gross) and about 2.7x (net) by end-2017.
JV's cash costs were down in 9M15 on tenge devaluation in August 2015 yoy, and we expect them to stay at around USD11/lb on average in the medium term, assuming a broadly stable exchange rate for the Kazakh tenge.
Low-Cost Position Beneficial
Uranium One mines nearly all of its uranium from its Kazakhstan's JVs using the in-situ leaching or recovery (ISR) method. In 9M15 the company had cash costs of USD13/lb, flat yoy, while its 3Q15 cash costs were only USD10/lb on 40% YTD Kazakh tenge depreciation. The company sells its uranium predominately at spot-based prices, which distinguishes it from some other miners eg, Kazatomprom, which sell their uranium at a mix of long-term and spot prices. Uranium One's realised price increased in 9M15 to USD37/lb, up from 32/lb in 9M14.
Uranium Future Brightens
In June 2014 spot uranium prices touched a multi-year low of USD28/lb, before improving to about USD36/lb by end-2014. In 10M15 average spot uranium prices were USD36.7/lb, up from USD32.4/lb in 10M14.
Despite the fact that two Japanese nuclear reactors - Sendai 1 and Sendai Unit 2 - have been restarted recently and more are expecting approvals, Uranium One expects mild upward price pressure through end-2015 as suppliers have had to lower offer prices to compete with available mid-term material. UxC, a nuclear consultancy, estimates that global primary production will increase in 2015 by 6m lbs U3O8 (or by 4%) to 151m lbs U3O8. Combined with secondary supplies, aggregate supply in 2015 will total 191m lbs U3O8, or 17m lbs higher than UxC's base case demand of 174m lbs U3O8.
UxC's long-term growth outlook for global uranium demand remains positive, as it forecasts 2030 uranium demand of 264m lbs U3O8, a 52% increase on 2015. There are currently 67 reactors under construction in 15 countries with total generating capacity of 66 gigawatts (GW). In total, there are 440 reactors in 31 countries with 380GW of operable nuclear generating capacity, providing about 12% of global electricity supply.
Fitch's key assumptions within our rating case for Uranium One include:
- 3% average annual growth in attributable uranium production and sales in 2016-2019.
- U3O8 prices of USD36/lb in 2015, USD37/lb in 2016, USD40/lb in 2017, USD43/lb in 2018 and USD45/lb in 2019.
- Average USD/KZT exchange rate equal to 282.5 in 2016 and 297.5 thereafter.
- Net working capital changes and capex in line with management's projections.
- Dividends from JVs growing in 2016-2019 due to increasing uranium prices and relatively weak tenge exchange rate.
Positive: Future developments that could lead to positive rating action include:
- Stronger legal linkage with the parent, ie, financial guarantees for a large portion of Uranium One's debt or cross default provisions that would include Uranium One.
- Improved financial profile, e.g., FFO-adjusted gross leverage of below 3x and FFO fixed charge cover of at least 4x on a sustained basis (end-2014: 15.3x and 0.9x, respectively), which would be positive for Uranium One's standalone profile.
Negative: Future developments that could lead to negative rating action include:
- Weakening linkage with the parent, eg, the inability to obtain timely refinancing from the parent company or its subsidiaries, which could result in Fitch reviewing the current level of parental support.
- Weak liquidity due to lower than expected dividends from JVs as a result of sustained depressed uranium prices.
- Failure to improve the financial profile by end-2017 including FFO-adjusted gross leverage of above 4x and FFO interest coverage of less than 2x based on mid-cycle uranium price assumptions, which would be negative for the standalone profile.
Uranium One had USD132m of unrestricted cash at 30 September 2015, while the company's short-term debt was negligible USD8m. We estimate that Uranium One's FCF will be broadly neutral in 2015 provided that in 4Q15 it receives USD64m of remaining JVs dividends for 2014. Uranium One's repayments will amount to approximately USD81m under its rouble bond due in 2016 and around USD389m under its rouble bond due in 2020 , including amounts under cross currency swaps. Other long-term debt of the company includes USD267m dollar-denominated notes due in 2018, and a USD50m related party loan due in 2020.
FULL LIST OF RATING ACTIONS
Uranium One Inc.
- Long-term foreign currency IDR: affirmed at 'BB-'; Outlook Stable
- Long-term local currency IDR: affirmed at 'BB-'; Outlook Stable
- Foreign currency Short-term IDR: affirmed at 'B'
- Local currency Short-term IDR: affirmed at 'B'
- Senior unsecured rating: affirmed at 'BB-'
Uranium One Investments Inc.'s USD300m 6.25% notes due 2018
- Senior unsecured rating: affirmed at 'BB-' with the RR4 recovery rating.