Johannesburg, 20 Dec 2013 — Global Credit Ratings has today downgraded the long term national scale and downgraded the short term national scale issuer ratings of Village Main Reef Limited to BB+(ZA) and B(ZA) respectively; with the outlook accorded as Negative.
Global Credit Ratings has accorded the above credit rating(s) on Village Main Reef Limited based on the following key criteria:
The purchase of gold, PGM and antimony assets has established Village Main Reef Limited (“Village”) as a mid-tier mining resources group over a relatively short period. Coupled with robust Rand prices realised for its gold output, this has underpinned robust top line growth over the 4-year review period, with revenue rising by 34% to R2.6bn in F13. Management’s longer term focus is to develop the business into a diversified resources investment company. Following the challenges faced with two of its gold mines (Buffelsfontein and Blyvoor) and their subsequent closure, however, the short term priority has shifted to replenishing cash reserves and shoring up the balance sheet.
Village has extensively overhauled its operations, culling non-viable mines and disposing of assets that are no longer deemed a strategic fit. Group structures have also been streamlined, with various cost cutting initiatives phased in and the management team reconstituted. The resultant impairments and losses from discontinued operations saw the group register a R916m net loss in F13, bringing cumulative losses over the review period to R2.1bn. Management is confident that enough has been done to mitigate further capital erosion, and no further write downs are anticipated.
Shareholders interest has nonetheless declined to new lows, having more than halved to R780m at FYE13. Albeit virtually ungeared, the smaller balance sheet implies curtailed financial flexibility. The deconsolidation of Blyvoor is expected to have an immediately positive impact in this regard. In addition, the group has shelved the planned R1bn DMTN programme and does not plan to gear up in the short term. Operating cash flows strengthened to a high of R608m (F12: R508m) despite the recent challenges. Cash will be further boosted by stable gold output and the disposal of ancillary assets over the year.
The reliance on Tau Lekoa mine (whose reserves will be depleted in 5 years) to sustain medium term cash flows elevates risk, especially given that the industry is particularly prone to disruptions from unprotected strikes, safety stoppages, equipment failure and seismic events. While this will be alleviated by the planned diversification, the group will need time to bed down its envisioned investment strategy. Operations are also susceptible to persistent price deflation, Rand volatility and the possible contagion effect of volatile labour relations within the industry. Given the sector’s prominence and strategic importance, companies also face significant regulatory scrutiny regarding licencing, ownership of mineral rights and safety.
Upward rating movement could result from enhanced scale, coupled with a proven track record of profitability and robust cash flows over the medium to long term. However, developments materially impairing Tau Lekoa’s viability, including (inter alia) protracted disruptions, price or currency volatility and more restrictive regulatory developments, would significantly constrain profitability. The resultant erratic cash flows would retard the group’s transition into a well-diversified investment company, compromising its credit profile and funding flexibility, and could warrant negative rating action.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (Nov/2012)|
|Long term: BBB(ZA); Short term: A3(ZA)|
|Last rating (Nov/2012)|
|Long term: BBB(ZA); Short term: A3(ZA)|
|+27 11 784 1771|
|Sector Head: Corporates|
|+27 11 784 1771|
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GCR affirms that a.) no part of the rating was influenced by any other business activities of the credit rating agency; b.) the rating was based solely on the merits of the rated entity, security or financial instrument being rated; c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument; and d.) the validity of the rating is for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.
Village Main Reef Limited participated in the rating process via face-to-face management meetings, teleconferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.
The credit rating/s has been disclosed to Village Main Reef Limited with no contestation of the rating.
The information received from Village Main Reef Limited and other reliable third parties to accord the credit rating included the 2013 audited annual financial statements (plus three years of comparative numbers), corporate governance and enterprise risk framework, an unaudited financial review for 1Q F14, industry comparative data and regulatory framework, as well as a breakdown of facilities available and related counterparties. In addition, information specific to the rated entity and/or industry was also received.
The ratings above were solicited by, or on behalf of, the rated client, and therefore, GCR has been compensated for the provision of the ratings.