Fitch Downgrades Autlán's Rating to 'BBB+(mex)' from 'A-(mex)'; Stable Outlook

This is an automated translation of the press release issued in Spanish

Fitch Ratings - Monterrey - 09 Sep 2024: Fitch Ratings has downgraded the long- and short-term national ratings of Compañía Minera Autlán, SAB de CV (Autlán) to 'BBB+(mex)' and 'F2(mex)' from 'A-(mex)' and 'F1(mex)', respectively. It has also downgraded the rating on the short-term portion of the dual debentures (CB) program for up to MXN600 million to 'F2(mex)' from 'F1(mex)'. The Outlook on the long-term rating is Stable.

The downgrade of Autlán's ratings reflects a greater deterioration than anticipated by Fitch in the company's cash flow generation and leverage, as well as a more pressured liquidity position.

The rating and Stable Outlook reflect the expectation of a recovery in EBITDA generation during the second half of 2024 and for the next year, a strengthening of the capital structure and an improvement in financial flexibility once the debt refinancing process is concluded. They also consider Autlán's competitive cost position and its leadership in Mexico.

The ratings are constrained by the concentration of metal and customer revenues, as well as the geographic concentration of its mining operations, which increases the risk in the event of production disruptions. To mitigate this, Autlán could import inputs in the event of any disruption, albeit at a higher cost.

KEY RATING FACTORS

Operating Cash Flow Under Pressure: Fitch anticipates EBITDA to recover in the second half of 2024, driven by higher revenues due to the resumption of operations of a major customer, higher ferroalloy prices and a more favorable exchange rate. A 26% reduction in revenues in the first six months of 2024 and the strength of the Mexican peso limited operating cash flow generation. The agency projects EBITDA (pre-IFRS 16) of around USD35 million for 2024, lower than the USD55 million previously forecast, but higher than the USD30 million in 2023. For 2025, EBITDA is projected to exceed USD50 million.

Negative Cash Flow: Free funds flow (FCF) is forecast to remain negative to neutral through 2025. The agency expects FCF to improve in the second half of the year, driven by higher operating cash flow and lower interest payments. FCF in the last 12 months to June 2024 was negative by USD13 million, mainly due to elevated capital expenditures (capex) of approximately USD40 million. Cash flow next year will largely depend on inventory management and payment to suppliers. Fitch's base case does not contemplate distributions to shareholders and sales of tangible assets.

Higher-than-expected Leverage: The agency projects that Autlán's gross leverage to EBITDA (pre-IFRS 16) will remain elevated at around 5 times (x) by the end of 2024, compared to the previous projection of 3.3x, due to lower operating cash flow, while total debt is expected to be between USD180 million and USD190 million. By the end of 2025, the gross and net leverage indicators are projected to improve to levels close to or below 3.5x and 2.5x, respectively, mainly due to a recovery in profitability.

Good Business Position: Autlán is the largest producer of manganese ferroalloys in the Americas and has significantly supplied the Mexican market. Its vertical integration and strategic geographic location allow it to serve its main markets in a timely manner and with a competitive cost structure. Fitch expects Autlán to benefit from investment projects that increase steel production capacity in Mexico and the United States (US) over the next three years.

Competitive Cost Structure: Autlán's plants are among the most efficient globally, ranking in the top quartile of the ferroalloy cost curve, according to CRU Group (CRU). Its production based on electric arc technology provides flexibility to adjust production according to demand. Autlán supplies approximately 80% of its manganese ore needs from its own mines. In addition, between 25% and 30% of its electrical energy comes from its hydroelectric plant. At the end of 2023, Autlán signed a new contract for the supply of energy at competitive costs, which should support its profitability.

Reserves Replacement Key to Strengthening Business Profile: Fitch considers the replacement of manganese reserves essential to strengthen Autlán's business position and its medium- and long-term growth strategy. At the end of 2023, Autlán had 7.3 million tons of reserves, equivalent to eight years of mine life. The company has increased its investments in mine preparation and estimates an increase in reserves in the coming years.

Concentration of Revenue by Client: In 2023, Autlán's five main clients contributed with nearly 70% of consolidated revenues. One of its main clients recently faced a strike that lasted for more than 50 days and another important client suspended its operations at the end of 2022 due to financial difficulties and there is currently no clarity on its resumption. Despite this, the portfolio and collections have remained in good condition. Exports to the US are made exclusively through a distributor, which represented more than 20% of revenues in 2023. This long-term business relationship has remained stable over the years.

Exposure to the Steel Industry: Autlán's management has focused part of its efforts on diversifying its operations to reduce its exposure to the steel industry. However, these other businesses still represent an insignificant part of the company's operating cash flow. New business initiatives include the manufacturing of inputs used in the production of batteries for the automotive industry.

RATING DERIVATION

Fitch compares Autlán to Eramet SA (Eramet) [BB Stable Outlook], a global leader in ferroalloy production with annual sales of 635,000 tonnes. Eramet operates on multiple continents and products such as manganese, nickel, mineral sands and lithium, while Autlán, the leader in manganese ferroalloys in North America, has lower scale and diversification. Both companies are in the first quartile of the global cost curve by CRU. Eramet has manganese reserves with a mine life of more than 20 years, considerably larger than Autlán's. Fitch projects that Eramet's EBITDA margin will be above 20% by 2025, with net leverage to EBITDA close to 2x and interest coverage of 4.7x. For Autlán, an EBITDA margin of 15%, a net leverage to EBITDA of 2.7x and an interest coverage of 1.7x are projected.

When compared to national peers, Minera Frisco, SAB de CV (Minera Frisco) [BBB+(mex) Negative Outlook] has a higher operating cash flow scale and broader product diversification. Both companies have asset concentration and a mine life of less than 10 years. In the case of Autlán, the company has operated the mines located in the Molango manganese district in the state of Hidalgo for more than 50 years and the company projects a significant increase in reserves in the coming years. In terms of the financial profile, Fitch estimates that Minera Frisco's EBITDA margin will reach 34% by 2024, while net leverage and interest coverage metrics will be around 5.6x and 2x, respectively.

KEY ASSUMPTIONS

Fitch's key assumptions considered in the base rating case:

--Average ferroalloy price of USD1,350 per tonne during 2024 and USD1,450 in 2025 and 2026;

--ferroalloy sales volume of 194,000 tons in 2024, 204,000 tons in 2025 and 222,000 tons in 2026;

--Consolidated revenues of approximately USD320 million in 2024, USD360 million in 2025 and USD390 million in 2026:

--Consolidated EBITDA margin (pre-IFRS 16) of 11% in 2024, 15% in 2025 and 16% in 2026;

--Average annual capex of USD19.5 million between 2024 and 2026;

--dividends are not considered over the projection horizon;

--Total debt of USD190 million at the end of 2024 and decreasing to USD175 million in 2026.

RATING SENSITIVITY

Factors that could, individually or collectively, lead to positive rating action/upgrade:

--increase in scale and profitability;

--increased product diversification to further mitigate the volatility of the steel industry;

--extension of mine life and reserve levels;

--consistently generating positive FCF and solid liquidity position.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

--a perception of liquidity pressures;

--a sustained negative generation of FCF (after distributions to shareholders);

--a weakening in the competitive cost position;

--a sustained reduction in current levels of manganese ore reserves and mine life with low recovery prospects;

--interest coverage close to or less than 1x;

--the expectation of gross and net leverage above 4x and 3x, respectively, on a sustained basis.

LIQUIDITY

Refinancing Would Provide Flexibility: Autlán is refinancing a large portion of its debt to improve its maturity profile and enhance its financial flexibility. The financing terms reduce the amount of the debt service reserve and have a two-year grace period, which would allow it to preserve liquidity. The refinancing includes a three-year revolving credit line and a simple credit facility with increasing amortizations and an average term of five years. The company expects to complete this refinancing by the end of September. As of June 30, 2024, Autlán had total debt of $178 million, of which $89 million was short-term, and a cash and temporary investments balance of $36 million, excluding restricted cash.

ISSUER PROFILE

Autlán operates four business divisions. Its main division is dedicated to the extraction, production and marketing of manganese ore and ferroalloys, essential for the manufacture of steel. In addition, it has a mining unit for the extraction of precious metals, mainly gold. Since 2020, following an acquisition, it has entered the market for electrolytic manganese dioxide, used in alkaline batteries. It also operates a hydroelectric plant to supply energy to its ferroalloy operations.

STAKE

The rating(s) mentioned were requested and were assigned or monitored at the request of the issuer(s) or rated entity(ies) or a related third party. Any exceptions will be indicated.

CRITERIA APPLIED ON A NATIONAL SCALE

--Corporate Finance Rating Methodology (December 22, 2023);

--National Scale Grading Methodology (December 22, 2020).

REGULATORY INFORMATION – MEXICO

LAST RATING UPDATE DATE: 11/1/2023

INFORMATION SOURCE(S): It was provided by the issuer or obtained from public information sources.

IDENTIFY INFORMATION USED: Audited financial statements, quarterly reports, issuer projections, among others.

PERIOD COVERED BY FINANCIAL INFORMATION: Until June 30, 2024.