Announcements

Village Main Reef Limited

GCR has accorded Village Main Reef Limited (“Village”) initial national scale ratings of BBB(ZA) (triple B) and A3(ZA) (single A three) for the long and short term respectively. The outlook on both ratings is stable. The ratings are indicative of adequate credit quality and protection factors, although there is considerable variability in risk during periods of economic stress.

Strategic acquisitions of gold and antimony assets have underlined strong revenue growth since F11, enabling the group to transition into a mid-tier precious metals player. Village envisions itself as a type of private equity player, investing in projects offering high returns. Notwithstanding the sound returns on capital projected, the group’s investment strategy elevates its risk profile and in GCR’s view, constrains the long term rating.

Albeit cash generative, a number of the group’s assets evidence ageing infrastructure and diminishing ore reserves, pointing to rising development and extraction costs in the longer term. In addition, the group is largely reliant on one asset for cash flows, a factor that heightens risk, particularly in view of disruptions associated with mining. Village has, however, indicated that it does not maintain a long term view towards these mines, and instead will utilise the cash underpin they provide to pursue further investments.

Notwithstanding a short track record, operations attained profitability in F12, underpinned by the strong margins registered by Tau Lekoa. Enhanced output across a number of mining assets is expected to result in a double digit operating margin and stable cash flows over the medium term. While Village has thus far had very limited recourse to debt, funding itself through share issuances, it plans to launch a R1bn DMTN programme, from which an initial issue of R500m will be utilised to fund investments. The group is nonetheless projected to remain net ungeared, maintaining robust debt serviceability metrics over the tenure of the initial note issue. The disposal of some of Village’s assets will also buttress cash flows. Should the group achieve the enhanced scale, consistent profitability and robust cash flows envisaged, this could exert upward pressure on the rating in the medium term.

GCR is, however, cognisant of the challenges inherent in the mining industry, with protracted closures or price/currency fluctuations likely to result in failure to meet profitability targets. In this regard, constrained earnings and erratic cash flows, translating to earnings based gearing metrics in excess of management’s internal ceiling of 150% could trigger a rating review.

For more information contact:

Global Credit Ratings – Eyal Shevel/Patricia Zvarayi
Tel: (+27 11) 784-1771

E-mail:
shevel@globalratings.net
patricia@globalratings.net

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