March. 20 --
(The following was released by the rating agency) Overview
-- Mirabela recently announced a three-month delay in the completion of its processing facility upgrade at its Santa Rita mine in Brazil. It also plans to spend up to US$32 million during 2012 on mobile equipment rebuild.
-- Mirabela also indicated a cash cost target of US$6 per pound of nickel produced by the end of 2012. The target is probably six months behind our previous expectation and still significantly higher than the company's original long-term target of below US$5 per pound.
-- The Australia-based nickel miner's liquidity could come under pressure by the end of 2012 or in early 2013 due to these factors and the current depressed nickel prices. -- We are lowering our long-term corporate credit and issue rating on Mirabela to 'CCC+' from 'B-'.
-- The negative outlook reflects our view that Mirabela's ability to restore an adequate liquidity position is dependent on nickel prices returning to levels above US$8.50 per pound on a sustained basis.
On March 30, 2012, Standard & Poor's Ratings Services lowered its long-term corporate credit and issue ratings on Australia-based nickel miner Mirabela Nickel Ltd. to 'CCC+' from 'B-'. The outlook on the corporate credit rating is negative. At the same time, we affirmed the '4' recovery rating on the company's senior unsecured debt.
The downgrade reflects our view that Mirabela's liquidity is likely to be inadequate to weather a prolonged period of negative operating cash flow while the company completes its nickel-processing upgrades and equipment modifications. Mirabela's ability to reduce cash costs to US$6 per pound of nickel produced and a recovery in nickel prices to US$8.5-US$8.7 per pound will be crucial for the company to meet its near-term financial obligations. Nickel prices are currently at about US$8 per pound.
We forecast Mirabela's liquidity sources to be US$50 million-US$60 million by mid-year 2012. Our view is based on the assumption that the mobile equipment rebuild will start in the second half of the year. The company's cash balances include the US$61 million it had as of Dec. 31, 2011, and a new US$50 million working capital facility.
Mirabela's cost-saving measures introduced during the first quarter of 2012 are likely to result in savings of up to 40 cents per pound. The company's cash cost could drop by an additional 60 cents per pound from US$7.42 in the fourth quarter of 2011 due to the completion of a desliming plant and associated improvements in nickel recovery. Nevertheless, this level of reduction is unlikely until the second half of the year. In our base-case scenario, we therefore assume that average cash costs over 2012 will be in the US$6.60-US$6.80 per pound range.
The rating on Mirabela reflects our view of the company's highly concentrated operations, with a focus on a single site and a single product. Mirabela will be exposed to volatile nickel prices and a high per-unit cash costs of production. We do not expect the cash costs to reach sustainable levels until 2013 at least.
We affirmed the recovery rating of Mirabela's senior debt to reflect our expectation of average (30%-50%) recovery in the event of default. Our hypothetical default scenario assumes that the company will be unable to either extend or refinance its working capital facility when the first principal payment is due in early 2013. This would lead to a default during the first half of 2013, when the company would be unable to meet its interest payment under the bonds.
We assess Mirabela's liquidity as "less than adequate", as defined in our criteria. Relevant aspects of our assessment of the company's liquidity are as follows:
-- We expect the sources of liquidity to remain marginally higher than its uses during 2012 after taking into account the availability of the US$50 million working capital facility.
-- We assume that the company will undertake its planned mobile equipment rebuild during 2012 at a total cost of about US$32 million. We believe some of the expenditure could be postponed to 2013.
-- The company will face a repayment of US$25 million under this working capital facility in early 2013.
-- Any sustained drop in nickel price below US$8 per pound could result in a significant weakening of liquidity by the end of 2012.
Mirabela's bond indenture does not contain any covenants linked to financial ratios and or those that prevent the company from paying dividends to shareholders in certain circumstances.
The negative outlook reflects our opinion that Mirabela's current per-unit cash cost of production is unsustainable in the long run. The outlook also reflects our base-case expectation that nickel prices will be at $8 per pound for 2012, below the levels crucial for the company to meet its financial obligations in the near term. We also expect the company to continue with its significant capital expenditure.
We could downgrade Mirabela if the company is unable to perform at levels consistent with our base case or if nickel prices continue to fall. Such a scenario would weaken the company's liquidity position and heighten the risk of a payment default in early 2013 or sooner. We could also lower the rating if we find any evidence of the company's lack of long-term commitment to its operations.
We could revise the outlook to stable if the company performs substantially better than our base case and builds a liquidity cushion that would allow it to withstand depressed nickel prices.