S&P summary: Winsway Coking Coal Holdings Ltd.
May 02, 2012
Mong, olian coking coal producers have a cost advantage in China, in our view. Winsway has expanded its logistic centers and processing plants over the past year to improve handling capacity. We expect that competition for end customers and for railway capacity will intensify as more players start importing coal from Mongolia. However, we believe that potential competition from state-owned enterprises would decrease if Aluminum Corp. of China Ltd. (foreign currency BBB/Negative/–; cnA-) completes its planned acquisition of Winsway.
Winsway’s financial risk profile is “aggressive”, in our view. We believe the company can maintain good financial strength for the rating level, although its debt leverage has increased after the GCC acquisition. We expect Winsway’s Mongolian coking coal import business to continue to perform satisfactorily in the next 12 months. We forecast the company’s ratio of total debt to EBITDA at 3x-3.5x, and the ratio of funds from operations to total debt at or slightly more than 20% in the next 12 months. However, the coal mining business and an uncertain global economy could weaken Winsway’s cash flow.
Winsway’s liquidity is “adequate”, as defined in our criteria. We expect the company’s sources of liquidity to cover its uses by more than 1.2x in 2012. Our liquidity assessment is based on the following factors and assumptions:
– Winsway’s sources of liquidity include cash, pledged deposits, funds from operations, US$350 million loan to finance the GCC acquisition, and US$50 million facility for GCC’s working capital.
– As of Dec. 31, 2011, Winsway has cash and cash equivalents of about Hong Kong dollar (HK$) 3,137.8 million, pledged deposits of HK$1,590.5 million, and short-term debt of about HK$660.9 million.
– Winsway’s uses of liquidity include cash consideration for the acquisition, planned capital expenditure, working capital needs, debt repayments, and dividend distribution.
– We expect net sources to remain positive even if EBITDA declines by 15%.
About HK$8.2 billion of Winsway’s uncommitted bank facilities are undrawn as of Dec. 31, 2011. The company’s bank loans do not have financial covenants.
The stable outlook reflects our view that Winsway’s Mongolian coking coal import business will remain satisfactory despite the company’s exposure to the coal mining business. We therefore expect Winsway to maintain its financial risk profile.
We could lower the rating if: (1) Winsway continues to expand aggressively through debt, particularly in the upstream business; or (2) GCC’s cost structure deteriorates significantly, which could happen if GCC can’t ramp up its production effectively and its sales and margins are much lower than our projections.
We could raise the rating on Winsway if: (1) GCC ramps up its coal production and significantly lowers its average production cost; (2) Winsway establishes a record of disciplined investment; and (3) Winsway maintains its financial risk profile on a consolidated basis. An adjusted ratio of funds from operations to total debt of more than 20% and a ratio of adjusted total debt to EBITDA of less than 4x can indicate such stability.
Related Criteria And Research
– Winsway Coking Coal Holdings Ltd.’s Potential Ownership Change Has No Immediate Rating Implications, April 25, 2012
– Winsway Coking Coal Holdings Ltd. Downgraded To ‘B+’ On Heightened Business Risk; Outlook Stable, Feb. 28, 2011
– Standard & Poor’s Standardizes Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
– Key Credit Factors: Methodology And Assumptions On Risks In the Mining Industry, June 23, 2009
– 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
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