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Volcan Compania Minera S.A.A. y Subsidiarias -- Moody's affirms Volcan B1 ratings; stable outlook

Rating Action: Moody's affirms Volcan B1 ratings; stable outlookGlobal Credit Research - 12 Jan 2022New York, January 12, 2022 -- Moody's Investors Service ("Moody's") has today affirmed Volcan Compania Minera S.A.A. y Subsidiarias (Volcan)'s B1 corporate family rating (CFR) and senior unsecured ratings. The outlook is stable.The rating affirmation reflects the company's recently announced liability management to refinance Volcan's $410 million in senior unsecured notes due February 2, 2022 with proceeds of a $400 million syndicated facility signed on December 29, 2021. Upon closing, the company's liquidity will be adequate as Volcan will not have material debt maturing in the next two years. Liquidity will be further supported by the company's cash on hands at $177 million as of September 2021 and a $50 million committed credit facility that is fully available until October 2022.The company's refinancing risk materially increased following the announcement that the company's board agreed to delay the $400 million equity injection previously expected by 3Q21 and prompting the company to look for alternatives with very little cushion. Moody's sees Volcan's tolerance to high debt levels and high refinancing risk as an aggressive financial policy.Absent the equity injection, debt will not be reduced, putting some pressure on the company's credit metrics. Nonetheless, the company will be able to self-fund the expansion of Romina's project, which will demand funding for $135 million in the 2022-2024 period.The stable rating outlook reflects Moody's expectation that Volcan's liquidity will remain adequate and that the company's operating performance will continue improving on the back of more favorable metal prices and its competitive cost position supporting adequate credit metrics.Affirmations:..Issuer: Volcan Compania Minera S.A.A. y Subsidiarias.... Corporate Family Rating, Affirmed B1....Senior Unsecured Regular Bond/Debenture, Affirmed B1Outlook Actions:..Issuer: Volcan Compania Minera S.A.A. y Subsidiarias....Outlook, Remains StableRATINGS RATIONALEThe B1 incorporates Volcan's competitive cost position, operational diversification in terms of metals produced and assets; and its status as a leading producer of zinc and silver globally, with some of the largest zinc reserves. Glencore plc (Glencore, Baa1 stable) became a controlling shareholder of Volcan in November 2017, with positive implications for Volcan's strategy, operations and corporate governance standards.However, Volcan's ratings are constrained by the company's modest scale (revenue of $843 million for the last twelve months ended September 2021) compared with that of its global peers and its concentration in one country, as well as its high earnings volatility because of its exposure to commodity prices, historically tight liquidity and aggressive financial policies.Higher average base and precious metals prices provided the company with some cushion to cover higher than expected costs during 2021. Volcan's cash cost increased due to additional expenses related to COVID-19, lack of personal, inflation, supply chain delays, among other factors. Volcan put in place a plan called "Volcan Avanza" to achieve a 10% cost reduction to around $47/ton compared to $51.7/ton for the nine months as of September 2021. In 2019, Volcan managed to reduce costs to $44/ton from $62/ton in 2016. Through "Volcan Avanza", the company already identified $35 million in costs they can reduce and manage involving reconfiguration of machines and managers in the units and implementing Glencore standards to improve efficiency in the mines.The new syndicated facility will benefit from the guarantee of the subsidiaries generating at least 90% of EBITDA and will rank at the same level of the company's $475 million senior unsecured notes due 2026. This facility will materially improve Volcan's liquidity, since it includes a 2-year grace period followed by seven equal quarterly amortizations plus a $160 million balloon payment in Q1 2026. With this, the company will have no major debt maturing in the next 2 years.While Moody's expects Volcan to generate neutral free cash flow in 2022 and negative $55 million in 2023, related to expansion capex at Romina, the company's $177 million of cash on hands as of September 31, 2021, its $50 million committed line, plus the lack of dividend distribution in the foreseeable future should protect liquidity. Cash is expected to remain at around $100 million in line with the company's target.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSThe ratings would be downgraded if Volcan's liquidity deteriorates, including negative free cash flow on a sustained basis, or aggressive financial policies, particularly if these prompt the need to fund the gap with additional debt. Moody's adjusted EBIT margins falling below 6%, interest coverage measured as EBIT/interest expenses below 1.5 time and debt/EBITDA above 4 times on a sustained basis would prompt a negative rating action.Evidence of a more balanced financial policy including timely refinancing of short term debt and debt reduction from current levels are necessary conditions for a ratings upgrade. Volcan's ability to improve its cost position, while continue investing for growth and achieving higher scale could prompt a positive rating action. An upgrade would also require an EBIT margin above 10% and a total adjusted debt/EBITDA below 3.5x on a sustained basis.The principal methodology used in these ratings was Mining published in October 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1292752. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.Volcan is a Peruvian mining company which primarily produces zinc and lead concentrate and some copper concentrate, all with high silver content. The company operates through five operating units including eight operating mines, six concentrator plants and one leaching plant for silver oxide production. All of Volcan's operations are located in Peru and it reported revenue of $843 million for the last twelve months ended September 2021. Volcan is a holding company listed on the stock exchanges of Lima, Santiago and Madrid (Latibex). Since November 2017, Glencore has a controlling stake of 55% in Volcan's Class A voting shares, which is equivalent to a 22% economic interest in Volcan.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Rosa Morales Asst Vice President - Analyst Corporate Finance Group Moody's de Mexico S.A. de C.V Ave. Paseo de las Palmas No. 405 - 502 Col. Lomas de Chapultepec Mexico, DF 11000 Mexico JOURNALISTS: 1 888 779 5833 Client Service: 1 212 553 1653 Marcos Schmidt Associate Managing Director Corporate Finance Group JOURNALISTS: 0 800 891 2518 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 © 2022 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.CREDIT RATINGS ISSUED BY MOODY'S CREDIT RATINGS AFFILIATES ARE THEIR CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND MATERIALS, PRODUCTS, SERVICES AND INFORMATION PUBLISHED BY MOODY’S (COLLECTIVELY, “PUBLICATIONS”) MAY INCLUDE SUCH CURRENT OPINIONS. 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