Press Releases / 18.10.2016

Press Release as of 18.10.2016

AK&M Rating Agency has assigned an 'A' sub-level 3 national scale credit rating to South Ural Mining and Processing Company LLC. The outlook is stable.

The 'A' rating indicates that the Company qualifies as a highly creditworthy enterprise. The risk of a failure to meet obligations in time is low, the full or partial debt restructuring risk is minimal.

South Ural Mining and Processing Company LLC was established in 2002 on the basis of a slag dump processing shop previously operating as part of Orsk-Khalilovsky Metallurgical complex. In 2005, the Akkermanovsky Mine and the limekiln department previously belonging to the same metallurgical complex were merged into South Ural Mining and Processing Company LLC. In 2013, the company launched the facility "Furnace lines for processing waste from mining, metallurgical production, combined heat and power plants into construction materials and concrete products." The company currently specializes in the production and sales of a wide range of high-quality cement.

The key positive rating drivers for South Ural Mining and Processing Company LLC include strong market positions in the regional and all-Russian market, advanced production technologies, steady revenue growth and an acceptable debt profile in terms of currency denomination. Besides, the rating is supported by the high investment appeal of the construction project "Furnace lines for making dry-mix concrete from mining and metallurgical production waste." Finally, we appreciate a high probability of the company's support from one of Russia's leading metallurgical holdings which initiated building up production of cement at South Ural Mining and Processing Company and holding an indirect equity stake in it.

In 2015, South Ural Mining and Processing Co. became one of Russia's top 10 cement production leaders increasing its share in the domestic market from 2.4% to 2.9%. The company increased production by 6.8%, which is one of the best results in the cement industry where both production and consumption actually fell. The Company's share in the key area of operation (Russia's Volga Federal District and adjacent territories) exceeds 11%. Aggregate revenue increased by 12.4% to reach RUB 6.3 billion. The strong market positions lay a foundation for the strengthening of the Company's financial viability.

South Ural Mining and Processing Co. LLC effectively produces dry-mix cement based on a state-of-the-art technology and modern equipment. Each of its two processing lines have a designed production capacity of 3,000 tonnes of clinker per day. For feeding the production lines, the Company uses own waste from mining, metallurgical production, combined heat and power plants. According to experts, the dry-mix process reduces heat consumption for clinker burning 1.5 to 2 times, with a higher yield of end product. This provides the company with certain competitive advantages over competitors using the conventional wet-mix process.

Considering the construction, launch and subsequent operation of the "Furnace lines" as a standalone investment project, AK&M Rating Agency appreciates its satisfactory key economic indicators. According to RA AK&M experts, the aggregate investment (approximately RUB 13 billion) is expected to have paid off by 2024-2025; net cash flow accumulated by 2030 (the forecasting horizon for Russia's long-term social and economic development and the construction materials industry development strategy) is projected at ca. RUB 18 billion (in current prices). We also note the relatively low technology, finance and environment-related risks of the project.

The rating is also supported by an acceptable debt profile in terms of currency denomination. As of June 30, 2016, the Company's obligations denominated in foreign currency (Euro) accounted for a mere 8.6% of its loan debt. This is of special importance given that most of the Company's products are sold in the domestic market.

The rating of South Ural Mining and Processing Co. LLC is constrained by a high debt burden, operating losses, scarcity of current assets, and low balance-sheet liquidity.

The Company's debt burden has stayed extremely high in recent years. From 8.0 as of December 31, 2015, its net loan debt to OIBDA ratio increased to 9.0 at the end of H1 2016. The whole cash flow from operations and intra-group borrowings are spent on the servicing of bank loans, without repaying the principal. However, the Company expects to further improve business profitability by changing the sales strategy, cutting transport and production costs, so as to achieve a consistent debt reduction.

Interest payments arising from the currently high debt burden are substantially exceeding the Company's operating profit, with the result that South Ural Mining and Processing Co. remains an unprofitable business. As of June 30, 2016, uncovered loss almost reached RUB 1.8 billion, net asset value was below zero (RUB -1,640 million).

Another risk factor, in our view, is a poorly structured portfolio of current assets. With short-term liabilities being substantially (2-2.5 times) above the amount of current assets, the Company faces apparent liquidity constraints. As of June 30, 2016, its current liquidity ratio was a mere 42.3%, absolute liquidity ratio was 0.2%.

Another point of concern is a considerable reduction in revenues and operating profit in the first half of 2016 (by 16% and 40% year-to-year, respectively), which calls certain aspects of the Company's development strategy into question and can cause a (downward) revision of the key projected performance indicators on the medium-term and long-term horizon.

Established on October 23, 2002, South Ural Mining and Processing Company LLC is currently one of the biggest cement producers in Russia. The Company is based in Novotroitsk city (Orenburg region). Besides cement, the Company sales limestone, metal-containing products, slag dump processing products.

According to interim RAS statements, revenue of South Ural Mining and Processing Company LLC for H1 2016 was RUB 2.65 billion; as of June 30, 2016, its assets amounted to RUB 15.24 billion, authorized capital was RUB 150 million.

This press release refers to the Statement of assignment of a credit rating to South Ural Mining and Processing Company LLC based on the Credit Rating Methodology for Project Financing Companies AK&M Rating Agency, 2016).

AK&M Rating Agency has assigned a credit rating to South Ural Mining and Processing Company LLC for the first time. All rating action announcements are available on the website.

The rating is valid until October 2016. AK&M Rating Agency may revise the rating and/or the outlook during this period if circumstances fundamentally influencing the Company's creditworthiness are revealed.

For estimation purposes, we completely rely on the reliability of information provided by the Rating Entity. The rationale for AK&M Rating Agency's judgment on the rating may include information acquired from other sources we deem to be reliable; however, the agency does not check the input data exhaustively and disclaims all responsibility for their possible errors.

The rating, along with any information and conclusions provided in this press release, only conveys our creditworthiness opinion and shall not be construed as a recommendation to make any investment decisions.

AK&M Rating Agency shall not be held liable for any interpretations, inferences and consequences related to the application of results of the rating estimation procedure by any third parties.

AK&M Rating Agency is a leading independent national rating agency engaged in rating activities since 1993.


AK&M Rating Agency

Ul. Gubkina 3, Moscow, Russia

Phone no.: (495) 916-70-30, fax no.: (499) 132-69-18.