Standard & Poor's Ratings Service Monday affirmed its 'BBB-' long-term corporate credit rating on Industrias Peñoles S.A.B. de C.V. (Peñoles) in the wake of Fresnillo PLC's IPO on the London Stock Exchange.
Fresnillo is Peñoles' precious metals business in Mexico and Latin America, and the world's largest producer of silver. It recently raised $1.77 billion in a London IPO.
S&P analysts Juan Pablo Becerra and Jose Coballasi, both of Mexico City, said, We believe that the IPO will not have an immediate impact on our rating on Peñoles because the issuer will continue to consolidate Fresnillo's operations, which we expect to be debt free. Nevertheless, if Fresnillo's operations take on debt, we will have to evaluate a possible structural subordinate of Peñoles' debt.
The issuer has indicated that it will use IPO proceeds to pay down approximately $550 million of its long-term indebtedness. Nevertheless, it will incur new debt to repay Peñoles' structured silver payable notes and senior unsecured notes, maintaining the current capital structure, the analysts said. They added that they will closely monitor Peñoles' use of proceeds from the IPO to evaluate its capital structure.
S&P said its Peñoles rating reflects its low-cost operating position, its vertically integrated operations, its relative product diversification, and its position as the world's largest refined silver producer and second-largest mining conglomerate in Mexico. These factors are offset by commodity price volatility, an aggressive dividend policy, and limited geographic diversification.
The analysts estimated that the company's average silver cash cost was in the range of $4 to $5 per ounce as of March 31, 2008. They also estimated that Peñoles' average cash cost for gold was about $250-$300 per ounce.
S&P noted that Peñoles' three main products (silver, gold and zinc) represent nearly 85% of the company's revenues, adding that the company continues to diversify.
Although Peñoles has relative product diversification, it has limited geographic diversification, since its main mines are located in the northern part of Mexico. This compares unfavorably with other global metal producers. Although Peñoles has attempted to increase its geographic diversification (e.g., the public tender offer to acquire the Peruvian mining company Milpo or exploration projects in Chile), the company has not been successful in its efforts, but we expect it to continue to seek potential targets.
S&P gave Peñoles a stable outlook, which reflects our expectation that Peñoles will further reduce its operating costs, mainly due to higher ore grades, and will maintain its strong cash-flow generation The analysts noted that the company has a cash position of $281 million as of March 31, and anticipated $200 million in capital expenditures this year.