Fitch Revises Solway Investment’s Outlook to Positive; Affirms ‘B-’ IDR (Fitch Inc)

(The following statement was released by the rating agency)

LONDON, June 21 (Fitch) Fitch Ratings has revised Swiss-based Solway Investment Group’s Outlook to Positive from Stable, while affirming the company’s Long- and Short-Term Issuer Default Ratings (IDR) at ‘B-’ and ‘B’, respectively.

The Outlook revision reflects the mining company’s improved liquidity position, debt reduction and continuing ramp-up of key project Fenix, which will secure higher absolute (and potentially more stable) operating cash-flows over the next three years.

KEY RATING DRIVERS Fenix Ramp Up Solway has recently completed its low-cost nickel project Fenix in Guatemala, following delays in the ramp-up of the planned capacity due to power constraints.

All power generation is expected to be switched to coal from heavy oil in 2016 (vs. 2015 as we previously expected). The smelter also requires further works for the optimisation of electricity equipment, which will enable production volumes to reach full capacity (20,000t p.a.) by end-2017. The company’s ability to deliver on this will be key to achieving Fitch-forecasted financial metrics.

By end-2016 we expect a minimum production of 14,000t to be achieved. Low Prices Impact Profitability The downturn in commodity prices, and particularly nickel, has negatively impacted Solway’s profitability. We have significantly lowered our expectations for Solway’s earnings for the next three years from our forecasts in June 2015, based on revised nickel price assumptions of USD9,000/t-USD12,000/t vs. USD16,500/t-USD19,000/t.

We now expect the company to generate approximately USD400m EBITDA over 2016-2019 (vs. USD1bn forecasted in 2015). Asset Disposal Improves Credit Metrics In November 2015 Solway disposed of its Macedonian lead and zinc mine SASA for USD180m. The proceeds were partly used for debt repayment (USD152m repaid in 2015), with the remaining amount being paid as dividends.

Despite the dividend leakage the sale of SASA and subsequent debt reduction has significantly improved the company’s credit metrics. Fitch believes that the company is now focusing on the improvement of Fenix smelter and will not make larger acquisitions until the project is finalised.

Smaller acquisition activity is more likely, such as a non-controlling equity stake it acquired in 1Q16 in a chrome development project in the Philippines for less than USD1m. Fitch believes that total investment required for this project to date has been limited (around USD10m) and will not have a significant impact on the company’s future capex plans.

Solway is planning to raise a USD75m pre-export finance (PXF) facility in 2Q16, of which USD30m will be spent on Fenix and the remainder for other working capital purposes. Positive Structural Changes The company’s operating profile has improved since 2014 with the Fenix and KurilGeo projects generating positive cash flows. Fenix is ramping up and will add USD13m-USD20m in EBITDA in 2016 and between USD70m-USD80m p.a. to the company’s EBITDA from end-2017 to 2019, based on our updated nickel price assumptions.

KurilGeo contributed USD46m of EBITDA in 2015, and is set to contribute a further USD33m in 2016 and USD20m per year until 2019. The company’s Macedonian copper asset is showing stable operating performance; however, due to low copper prices and improvement works its cash flow generation will weaken substantially from 2016 (USD10m expected in 2016-2017 vs. USD24m in 2015).

The Ukrainian nickel processing plant (PFP) is also expected to generate positive FCF, using nickel ore form Guatemala, with an approximately USD20m p.a. in EBITDA contribution in 2016-2019. Small Scale; Adequate Diversification Solway is a small mining company with USD524m revenues in 2015, producing ferronickel, copper and gold (zinc and lead production sold in November 2015).

In 2015, cash generation from KurilGeo mine partly offset the fall of profitability of nickel assets. Solway operates in countries with ‘high’ and ‘medium’ risk relative to mining operations (Ukraine, Macedonia, Guatemala and Russia), although this is partially mitigated by geographical diversification.

Below-average Corporate Governance Solway has recently changed its company registration to Swiss. The Swiss company – Solway Investment Group GmbH – holds the company’s core operating assets (Fenix, KurilGeo, Bucim and PFP). Despite the potential benefit of the new company structure to corporate governance, limited public information disclosure continues to constrain the rating.

The weak current corporate governance profile largely reflects Solway’s private company status. KEY ASSUMPTIONS – Nickel mid-cycle price assumptions: USD9,000/t in 2016, USD10,500/t in 2017 and USD12,000/t in 2018;

- Fenix to reach full capacity by end-2017
- No disruptions to KurilGeo and Bucim operations;
- USD75m new PXF facility signed in 2016
- No further M&A activity until end-2017
- USD58m capex in 2016 and USD23m in 2017
- USD10m dividend payments in 2016 and USD5m per year thereafter
- No shareholders loans RATING SENSITIVITIES Positive:

Future developments that could lead to a positive rating action include:
- Sustained positive FCF from Fenix
- FFO-adjusted gross leverage sustainably below 2.0x (2015: 1.6x).
- Strengthening of the liquidity profile with a minimum available cash balance of USD30m
-Improvement of corporate governance, including greater transparency and information disclosure.

Negative: Future developments that could lead to a negative rating action include:
- Further delays in key Fenix ramp-up
- Sustained negative FCF
- Deterioration of the liquidity profile


Liquidity has improved in 2015 due to the sale of SASA for USD180m and USD50m release of working capital (due to equipment purchased for Fenix being moved from inventory to constructed assets).

The company repaid USD152m in debt maturities and paid USD24m dividends to shareholders, leaving its cash balance unchanged from 2014 (USD46m reported cash as of end-December 2015 vs. USD47m in 2014).

Fitch treats USD28m of reported 2015 USD46m cash as restricted on the basis that USD13m is used as collateral for commodity price-hedging transactions and USD15m to maintain the minimum level of operations.

For 2016-2019 we expect Solway to generate positive FCF (USD137m) mainly due to Fenix, which will allow the company to improve its cash balance. The new USD75m PXF financing will add to the company’s liquidity even though USD30m of this facility will be directed to Fenix capex. At end-December 2015 Solway had USD49m debt (excluding financial guarantees), including USD29m short-term maturities.

The PXF will be amortised in 2018-2019, when Fenix should have reached full capacity and start generating cash flows to cover debt repayment.

Contact: Principal Analyst Maria Yakushina Associate Director +44 20 3530 1315
Supervisory Analyst Peter Archbold, CFA Senior Director +44 20 3530 1172
Fitch Ratings Limited 30 North Colonnade London E14 5GN Committee Chairperson Raymond Hill Senior Director +44 20 3530 1079
Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103,

Summary of Financial Statement Adjustments

-Fitch treated USD60m of financial guarantees given by Solway Investment Group to banks on behalf of Razno import as debt and adjusted the total debt amount by USD60m accordingly
-Fitch treated USD15m cash out of the available cash balance at 31 December 2015 as restricted to maintain the minimum level of operations


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