Volcan's ratings downgraded for second time in less than a month

The situation of Peruvian mining company Volcan is increasingly worrying the international market. 

The uncertainty surrounding governance concerns and the need for financial restructuring caused Fitch Ratings to lower Volcan’s long-term foreign and local currency issuer default ratings to 'B-' from 'B+', as well as its senior unsecured notes due in 2026.

The ratings have been placed on rating watch negative.

"The ratings downgrade is driven by increased liquidity pressure amid recent governance concerns that could thwart Volcan's ability to refinance in a timely manner while pressure mounts on FCF [free cash flow] generation from low zinc prices, high costs and capital expenditure needs to sustain volumes," Fitch said in a report.

"The negative watch reflects the challenges Volcan faces completing its refinancing strategy and pursuing additional alternatives to raise cash in the next two quarters in order to avoid further negative rating actions." 

In mid-September, Moody's reduced Volcan’s ratings from 'B2' to 'Caa1' due to weak operating prospects and cash generation capacity.

GOVERNANCE 

For Fitch, one of the main factors affecting the future of the polymetallic company is the "misalignment of priorities between Volcan's majority shareholder, Glencore, and minorities, such as Peruvian pension funds and the Picasso and Letts families." 

That became apparent after the general shareholders agreement to spinoff the Chancay megaport development, where Volcan has a 40% stake, which prompted high profile board and management changes. 

"The impact of these and further discrepancies on asset sales, liquidity facilities or liability management might affect the company's financial flexibility. Volcan called for a new general shareholder meeting for October 23 to vote for board changes," the report adds.

REFINANCING AND SALE OF ASSETS

Fitch also notes that Volcan is struggling to meet its financial obligations that come due next year. The company has to pay US$105mn in quarterly amortizations of US$35mn starting in 2Q24. At the end of the first half of 2023, Volcan had US$50mn in cash.

Regarding the sale of assets, Fitch estimates that the company could sell its 16% stake in Chilean cement producer Polpaico and its 13 hydroelectric plants near its mining facilities that, according to the company’s website, have capacity of 63MW.

FCF

Finally, Volcan’s Ebitda is expected to fall to US$235mn in 2023 after rising to almost US$300mn last year. In the case of capex, the figure will drop to US$190mn from US$222mn due to lower investments and the postponement of most of the Romina project to 2024.

"Volcan's FCF is expected to be marginally positive in 2023 and turn negative by US$55mn in 2024 after these changes," Fitch said.