Fitch affirms Industrias Penoles at 'BBB'; Outlook Stable

Fitch Ratings - New York - 03 Oct 2024: Fitch Ratings has affirmed Industrias Penoles, S.A.B. de C.V.'s (Penoles) Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'BBB'. Fitch has also affirmed Penoles' senior unsecured notes at 'BBB.' The Rating Outlook is Stable.

Industrias Penoles, S.A.B. de C.V.'s ratings reflect our view that it will maintain average annual sales of more than two million gold-equivalent ounces, return its average cost position to the second quartile of the global cost curve, and sustain an average mine life of at least 10 years. Gross and net leverage ratios are forecast to average 2x and 1x, respectively, over the rating horizon. Fitch will continue monitoring the progress of new projects and the company's ability to replenish reserves of precious metals, which decreased over the last year.

Key Rating Drivers

 

Robust Business Profile: Penoles' credit profile benefits from large and diversified mining operations, as well as vertical integration from exploration and extraction through refining. Penoles is one of the largest refined silver producers worldwide, and one of the largest producers of refined gold, zinc and lead across Latin America.

Gold, silver and zinc accounted for 31%, 30% and 13%, respectively, of Penoles' 2023 revenue. The balance of revenue is generated from lead, copper and various chemicals and byproducts of the smelting process. Production is based in Mexico (BBB-/Stable), while advanced exploration expands to Peru and Chile.

Strong Recovery in Cash Flow: Fitch expects Penoles' EBITDA to increase to USD1.3 billion in 2024, up from an estimated USD697 million in 2023. The expected recovery in operating cash flow is primarily driven by higher metal prices and, to a lesser extent, improvements in cost structure and a more favorable FX rate. Penoles' EBITDA margin rose to 20.5% in 1H24 (14.9% in 1H23), despite not yet benefiting from the depreciation of the Mexican peso. The precious metals division led the recovery in profitability during the year.

Production is expected to remain above 2.3 million ounces of gold equivalent annually, assuming that lower projected production at Herradura is offset by favorable performance at Fresnillo, Saucito and full-year operation of the Pyrites Phase II project.

Improved Cost Position in 2024: Penoles' assets averaged between the second and third quartiles of the global gold cost curve, according to CRU Group data. All-in sustaining costs (AISC) for Juanicipio, San Julian and Cienega — which collectively represent approximately 50% of silver production — improved by nearly 34% per unit during 1H24. Saucito's costs improved slightly, while Herradura, which contributed around 50% of gold production, experienced higher cash cost per ounce due to longer haulage distances and deeper mines, increasing diesel consumption. Management resolved some operating challenges at Herradura and expects to recover lost production and improve costs in 2H24.

Positive FCF: Fitch estimates that Penoles' free cash flow (FCF) will turn positive in 2024 and 2025, reaching approximately USD350 million and USD150 million, respectively. Higher EBITDA, optimization of working capital through inventory control initiatives, and a reduction in capex to around USD550 million to USD600 million annually are expected to drive FCF. The projection assumes that dividend payments to controlling interests will resume in 2025 and that dividend payouts will remain aligned with cash flow generation.

Short Mine Life: Fitch estimates Penoles' average mine life at 11 years based on proven and probable reserves and 2023 production. Reserves of precious metals correspond to around 10 years of production and 17 years for base metals. Precious metals' low mine life risk is mitigated by Penoles' track record of operating for more than 100 years and holding mining concessions of around 1.1 million hectares in Mexico and South America. Penoles allocated USD233 million to exploration in 2023, a 7% increase from the year before, with most of it invested at Fresnillo Plc and brownfield projects in mining districts with current operations.

Leverage to Stabilize: Fitch projects that leverage, measured as net debt to EBITDA, will stabilize around 1x by YE 2024 and through 2025. Cash flow generation is expected to support Penoles' capital structure. We assume that the net debt balance will range between USD1.35 billion and USD1.2 billion throughout the projection horizon. Fitch's base-case assumptions do not account for significant expansion investments over the next three years; however, we believe the company has room to finance projects in advanced exploration stages, such as Rodeo and Tajitos.

Holding Company Debt: Penoles' 75% owned subsidiary, Fresnillo PLC, generates about 80% of the group's EBITDA and accounts for around 30% of its total debt as of June 30, 2024. The remaining cash flow comes from wholly owned subsidiaries, with remaining debt issued at the holding company level. Almost all of Fresnillo's production is sold to Penoles' metallurgical division for refining, and Fresnillo pays fees to Penoles for treasury management and other services. According to Fitch, Fresnillo's net leverage was below 0.5x as of June 2024. Fitch would view negatively if Fresnillo's net debt/EBITDA remained above 1.0x on a sustained basis, indicating a significant increase in prior ranking debt.

Derivation Summary

 

Penoles' ratings reflect its scale as the leading silver producer globally and one of the largest gold producers in Mexico. The company's business profile is supported by a diversified production base of precious and base metals mines across Mexico. Fitch Ratings expects Penoles' financial profile to remain solid during the rating horizon, with net debt/EBITDA consistently at or below 1.5x. Its financial flexibility is supported by a comfortable debt maturity schedule tilted toward maturities longer than five years.

Penoles has a similar scale with annual sales around 2.5 million of gold equivalent ounces — of which roughly 1.9 million correspond to precious metals — and better product diversification than Kinross Gold Corporation (Kinross) (BBB/Stable) and AngloGold Ashanti plc (AGA) (BBB-/Negative), which individually have annual production of 2 million to 2.5 million ounces of gold, but smaller a scale than Agnico Eagle Mines Limited (Agnico Eagle) (BBB+/Stable) with 3.4 million ounces of gold per year.

However, these companies have a presence in several markets, whereas Penoles only operates in Mexico. Agnico Eagle benefits by operating in investment-grade countries with more favorable operating environments such as Canada, Finland, Australia and Mexico, while AGA's country risk is higher with 60% of its production in Africa. Penoles asset and product diversification is similar to Compania de Minas Buenaventura S.A.A. (BB-/Stable) with single country exposure, but the latter has a much smaller scale and a shorter mine life of four years.

Penoles' proven and probable reserves are relatively low at approximately 10 years based on annual production, but its life of mine is similar to other precious metals miners such as Agnico Eagle, Kinross and AGA. Penoles has a track record of reserves replenishment, world-class assets like Fresnillo — one of the world's longest continuously operated mines — and has a pipeline of projects in advanced stages of exploration, spearheaded by Fresnillo Plc.

In terms of financial strength, Penoles has slightly higher net leverage than Agnico Eagle and similar leverage to Kinross at 1x. Penoles' EBITDA margin is consistently lower than these companies given it operates a lower margin metallurgical division and the fact that its peers have a stronger cost position along the industry's cost curve. Penoles' rating is one notch below Southern Copper Corporation (SCC; BBB+/Stable), which has greater geographic cash flow diversification, overall scale and longer-term mine life, despite SCC's slightly higher through the cycle credit metrics.

Key Assumptions

 

Fitch's key assumptions within our rating case for the issuer include:

--Gold prices of USD2,100/oz in 2024, USD2,000/oz in 2025, USD1,800/oz in 2026;

--Silver prices of USD26.3/oz in 2024, USD25.0/oz in 2025, USD22.5/oz in 2026;

--Zinc prices of USD2,700/MT in 2024, USD2,600/MT in 2025, USD2,500/MT in 2026;

--Lead prices of USD2,100/MT in 2024, USD2,000/MT in 2025, USD1,800/MT in 2026;

--Gold sales volume between 955,000 oz in 2024 and 880,000 oz in 2026;

--Silver sales volume between 76.0 million in 2024 and 79.2 million oz in 2026;

--Zinc sales volume between 225,000 tonnes in 2024 and 245,000 tonnes in 2026;

--Average EBITDA margin around 22% through the forecast horizon;

--Capex of USD550 million in 2024, and USD600 million in 2025 and 2026;

--Total dividends, including dividends noncontrolling interests, of USD107 million in 2024, USD251 million in 2025 and USD234 million in 2026;

--Net debt of USD1.35 billion in 2024, decreasing toward USD1.2 billion in 2026.

RATING SENSITIVITIES

 

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

--Profitable geographic expansion in low-risk operating environments or continued diversification into base metals;

--Sustained net debt/EBITDA at 0.5x or below;

--Increased mine reserve life of 15 to 20 years on a consolidated basis;

--Material improvement in AISC of precious metals mines.

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

--Sustained deterioration in AISC at precious or base metal mines, resulting in weaker profitability as measured by sustained mining-only EBITDA margin below 25%, consolidated EBITDA margins below 20%, consolidated FFO margins below 15%, and persistent negative FCF generation;

--Expectations net debt/EBITDA will be greater than 1.5x on a sustained basis;

--Net debt/EBITDA sustained above 1.0x at its Fresnillo subsidiary, leading to more of a structural subordination of debt at Penoles;

--Debt funded shareholder-friendly activity;

--Reduced proven mine life reserves below 10 years.

Liquidity and Debt Structure

 

Sound liquidity: Penoles has a solid liquidity position with more than USD1.2 billion of cash and marketable securities as of June 30, 2024. The company has about USD335 million in short-term debt, which consists primarily of noncommitted credit facility. Penoles has USD650 million in bonds due in 2029, USD550 million due in 2049 and USD500 million due in 2050. The company's subsidiary, Fresnillo, has USD850 million due in 2050.

Issuer Profile

 

Penoles is the largest producer of refined silver worldwide, the largest gold miner in Mexico and an important base metals smelter and refiner in Mexico and internationally. It has mining concessions in Chile and Peru, and sells chemical products including sodium and ammonium sulphate.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

MACROECONOMIC ASSUMPTIONS AND SECTOR FORECASTS

Click here to access Fitch's latest quarterly Global Corporates Macro and Sector Forecasts data file which aggregates key data points used in our credit analysis. Fitch's macroeconomic forecasts, commodity price assumptions, default rate forecasts, sector key performance indicators and sector-level forecasts are among the data items included.

ESG Considerations

 

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.