Fitch Places Samarco on Rating Watch Negative Following Dam Breaches

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has placed the 'BBB' long-term foreign currency and local currency Issuer Default Ratings (IDRs) and 'AAA(bra)' National long-term ratings of Samarco Mineracao S.A. (Samarco) on Rating Watch Negative. The action follows the tailings dam ruptures at Samarco's Germano unit in the cities of Mariana and Ouro Preto in Minas Gerais, Brazil late last week and subsequent developments regarding the extent of the damage over the weekend. A full list of rating actions follows at the end of this release.

KEY RATING DRIVERS

Following the dam breaches, the impact on Samarco's iron ore pellet output in the medium term is currently unknown. Samarco's mine and production facilities were unaffected by the tailings dam ruptures and subsequent flooding, but the company is unable to produce at the Germano unit at this time. Investigations as to the cause of the dam breaches are currently underway, and the findings may have a significant impact. Should the cause be due to natural events, such as seismic activity, Fitch expects the company to be permitted to operate as normal following clean-up efforts. If, however, the cause of the breach was due to a technical error, the penalties could be more punitive.

KEY ASSUMPTIONS

Samarco is currently focussed on rescue and clean-up efforts and the financial impact on the company is unknown at this time. Samarco is Brazil's 10th largest exporter and has a large economic importance to the region. Accordingly, Fitch's current assumption is a gradual return to production albeit at lower levels than previous public guidance of around 30 million dry metric tons (dmt) per year.

Fitch has run two downside financial projection scenarios; one at 30% lower production levels and one at 50% lower production levels compared to guidance in 2016. These scenarios include Fitch's assumptions of total debt at BRL14 billion, dividends to BHPB and Vale of BRL500 million combined, average iron ore price of USD50/dmt, various financial penalties and clean-up costs totalling BRL2 billion and the inflow of BRL3 billion (USD800 million) from insurance. The figures used in Fitch's preliminary downside scenarios are not determined or inevitable, and are purely Fitch's assumptions for modelling purposes.

Under the 30% less production scenario net debt to EBITDA would be in the range of 3.5x-4.0x and in the 50% of production scenario, this ratio would be around 6.0x-6.5x. Samarco has no immediate liquidity issues in the short to medium term, with its next significant amortisation of over USD1 billion due in 2018. Samarco is a standalone legal entity and is responsible for the entirety of the cost resulting from the dam breaches. Fitch expects Vale and BHPB to support Samarco under this scenario by reducing or postponing dividends to support its liquidity and capital structure as it continues to work to resolve the crisis, alongside providing technical assistance.

RATING SENSITIVITIES

The Rating Watch Negative will be resolved once Fitch receives more information regarding the overall impact on Samarco's production volumes, and possible regulatory, legal and/or environmental penalties that could be levied as a result of the dam breaches, and subsequent clean-up costs.

Ratings could be downgraded, either by one notch or more, should developments result in a significant suspension of production or the company's operating licenses being permanently revoked, and/or severe environmental, legal and/or regulatory penalties.

Fitch could remove the Rating Watch and subsequently affirm the ratings if it determines that the overall impact on Samarco's credit profile is temporary and if no significant charges are levied against the company.

LIQUIDITY

Samarco has significant insurance coverage for property damage, business interruption and civil liabilities totalling over USD1.1 billion combined based on declared value at risk. Cash and marketable securities as of Jun. 30, 2015 were robust at BRL2.2 billion. Samarco has comfortable liquidity coverage with short-term debt of BRL1.6 billion. Fitch would expect Vale and BHPB to reduce dividends paid by Samarco should the company require further liquidity, as was seen during 2012.

FULL LIST OF RATING ACTIONS

Fitch has placed the following ratings on Rating Watch Negative:

Samarco Mineracao S.A. (Samarco)

--Local currency long-term IDR 'BBB';

--Foreign currency long-term IDR 'BBB';

--National long-term rating 'AAA(bra)';

--Senior unsecured debt rating 'BBB'.

Date of Relevant Rating Committee: Nov. 9, 2015.

Additional information is available on www.fitchratings.com.

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

Additional Disclosures

Solicitation Statushttps://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=993713

Endorsement Policyhttps://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

View source version on businesswire.com: http://www.businesswire.com/news/home/20151109006730/en/

Fitch Ratings
Primary Analyst:
Jay Djemal, +1-312-368-3134
Director
Fitch Ratings, Inc.
70 West Madison St
Chicago, IL, 60602
or
Secondary Analyst:
Debora Jalles, +1-312-606-2338
Director
or
Committee Chairperson:
Daniel R Kastholm, CFA, +1-312-368-2070
Managing Director
or
Media Relations:
Alyssa Castelli, +1-212-908-0540
New York
[email protected]

Source: Fitch Ratings

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