TEXT - S&P revises Uranium One outlook to developing
Overview -- Toronto-based uranium miner Uranium One Inc. has agreed to be acquired by its majority shareholder, JSC Atomredmetzoloto, for C$1.3 billion. -- As a result, we are revising our outlook on Uranium One to developing from stable and affirming our 'BB-' long-term corporate credit rating on the company. -- The elimination of Uranium One's minority shareholders and associated Toronto Stock Exchange listing could portend some changes to the company's strategic direction and financial policies. -- The developing outlook reflects our view that we could raise or lower the rating on Uranium One depending on the potential changes to the company's strategic direction and financial policies. Rating Action On Jan. 16, 2013, Standard & Poor's Ratings Services revised its outlook on Uranium One Inc. to developing from stable. At the same time, Standard & Poor's affirmed its 'BB-' long-term corporate credit rating on the company. We base the outlook revision on Uranium One's agreement to be acquired by its majority shareholder, JSC Atomredmetzoloto (ARMZ), for C$1.3 billion The developing outlook is partially based on the potential for an improvement in the company's credit quality related to possible enhancements, in our view, of parental or government-related support due to the prospect of greater integration between Uranium One and ARMZ. Conversely, the outlook also reflects several downside risks associated with the proposed deal including potential changes to the company's asset profile, financial policies and financial flexibility, and uncertain regulatory responses in several jurisdictions. A developing outlook means that we could raise or lower the rating over a period of about one year. Rationale The rating on Uranium One reflects our view of the company's narrow operating and geographic diversification, exposure to foundering uranium spot prices, relatively short collective mine life, limited track record, and reliance on residual cash flows from its joint venture mine operations. This is somewhat offset, in our opinion, by Uranium One's attractive cost profile, increasing production base, relatively low debt leverage, and a resilient long-term demand outlook for uranium from a growing worldwide nuclear reactor fleet. Standard & Poor's assesses Uranium One's stand-alone credit profile (SACP) at 'b+'. Majority shareholder ARMZ is a wholly owned subsidiary of Atomic Energy Power Corp. (BBB/Stable/A-2), which in turn is a wholly owned subsidiary of State Atomic Energy Corp. Rosatom (not rated), a state-owned entity of the Russian Federation (foreign currency: BBB/Stable/A-2). We view the proposed acquisition as providing an opportunity to strengthen the alignment of interests between Uranium One and majority shareholder ARMZ, which could lead to stronger incentives for the majority holders to support Uranium One's credit quality. We believe that the demonstration of stronger alignment could manifest by ARMZ fully capturing Uranium One's output into the group's operating profile, which would not only highlight the strategic importance of Uranium One to ARMZ but also underscore the consequently improved relative standing of ARMZ in the global nuclear industry. Moreover, Uranium One could have broader access to the financial capacity of its state-backed parents, particularly at a time when Uranium One's capital requirements could rise substantially to fund the development of the Mkuju River project in Tanzania. In our opinion, the company's stand-alone financial risk profile could deteriorate if Uranium One adopts a more aggressive financial policy leading to higher debt levels in its capital structure or undertakes corporate initiatives where the prospects for cash flow generation are unclear. Moreover, the company's financial flexibility could tighten given funding requirements that might include the redemption of its C$260 million convertible debenture--via a change-of-control provision--in addition to its existing growth capital spending plans (including Mantra Resources Ltd. and its Mkuju River project). We view Uranium One's business risk profile as weak, reflecting its high mine and geographic concentration as well as its relatively short aggregate proven and probable reserve mine life based on National Instrument 43-101, the Canadian mineral resource classification system. The company's mine concentration is underpinned by having nearly 45% of total production sourced from two mines: South Inkai and Karatau. While near-term production is limited by subsoil use agreements signed with Kazakhstan's Ministry of Industry and New Technologies, we believe that Uranium One's production will be enhanced by increased output from existing mines, as well as the continued production ramp-up at its development projects: Kharasan and Akbastau in Kazakhstan; Willow Creek in the U.S.; and Honeymoon in Australia. Liquidity We view Uranium One's liquidity as adequate, based on the following factors: -- We expect that sources of liquidity in the next 12-18 months will exceed uses by 1.2x or more. -- Sources of cash would be greater than uses even if EBITDA were to decline by 15%. -- The company had about US$442.3 million in cash on hand as of Sept. 30, 2012. We estimate that funds from operations generation will likely be able to cover nearly all of the company's share of capital expenditures through 2013. -- Debt maturities are light and are primarily related to asset-level debt facilities. This does not factor in the potential early redemption of its C$260 million unsecured convertible debentures that contain a change-of-control provision that is exercised within 30 days of the company's acquisition by ARMZ. -- Uranium One does not, nor do we expect it to, pay any common stock dividends over our liquidity forecast horizon. Not included within the liquidity calculation is the proposed A$1.0 billion acquisition of Mantra Resources Ltd. that is 86.1% owned by ARMZ. Uranium One has a call option to acquire Mantra Resources Ltd., which is set to expire on June 7, 2013. Outlook The developing outlook reflects our view that we could raise or lower the rating or SACP on Uranium One depending on the potential changes to the company's strategic direction and financial policies. That said, we expect that Uranium One's low-cost production profile and long-term sale contracts should help support the company's operating performance through this year with an adjusted debt-to-EBITDA leverage ratio near 3x, on a proportionately consolidated basis, with EBITDA generation of more than US$250 million. We could raise the rating if the proposed acquisition leads us to improve our view of potential support from the company's parent or via its status as a government-related entity under our criteria. Alternatively, we could lower the rating if we believe that the company's asset quality could deteriorate or debt levels were to increase significantly causing its adjusted debt-to-EBITDA leverage ratio to surpass 4.5x, a key threshold for downward ratings pressure. Related Criteria And Research -- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012 -- Methodology and Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 -- Rating Government-Related Entities: Methodology And Assumptions, Dec. 9, 2010 -- Key Credit Factors: Methodology And Assumptions On Risks In The Mining Industry, June 23, 2009 -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 -- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008 -- Corporate Criteria--Parent/Subsidiary Links; General Principles; Subsidiaries/Joint Ventures/Nonrecourse Projects; Finance Subsidiaries; Rating Link to Parent, Oct. 28, 2004 Ratings List Outlook Revised To Developing To From Uranium One Inc. Corporate credit rating BB-/Developing/-- BB-/Stable/--
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