Tashkent, Uzbekistan (UzDaily.com) -- Fitch Ratings has affirmed JSC Almalyk Mining and Metallurgical Complex’s (AGMK) Long-Term Issuer Default Rating (IDR) at ‘BB-’ with a Stable Outlook.

AGMK’s rating is equalised with that of its sole parent, Uzbekistan (BB-/Stable). This is due to the strong ties between the company and the state under Fitch’s Government-Related Entities (GRE) Rating Criteria. The agency assesses AGMK’s Standalone Credit Profile (SCP) at ‘b+’, reflecting its small but increasing scale of operations, commodity diversification into copper, gold, zinc and silver, a favourable cost position of its main asset, long reserve life and moderate leverage.

AGMK’s current reliance on a single mine will decrease once the greenfield copper-gold Yoshlik project is commissioned. The execution and financial risks linked to the first stage of development (mining and concentrator) are reducing as it nears completion towards the end of 2024. The second stage of the project (smelter) is only expected to be finalised in 2026, so liquidity remains stretched due to expected negative free cash flow reflecting high capex and not yet finalised funding for the second stage. The rating also reflects concentration of operations in one country with a weak operating environment.

Fitch views ‘Decision Making and Oversight’ factor as ‘Strong’ as the company is 98% owned by the state, although it may consider selling a minority stake in the future. The state has tight control over the company, overseeing operating activity, the budget and investment programme. The agency assesses precedents of support as ‘Strong’ as the government provided a US$1.0 billion equity injection for the Yoshlik project over 2017-2022 and a further US$0.3 billion is expected in 2024.

AGMK will convert an about US$700 million loan provided by the Fund for Reconstruction and Development of Uzbekistan (FRDU) into equity in 2024. The state will not provide guarantees for new debt for Yoshlik, but The agency expects strong state support if there are any cost overruns or commodity price downturns. As of 2023, 24% of debt was guaranteed. Following the drawdown of other loans for Yoshlik, The agency expects this to decrease towards 16% in 2025.

The agency assesses AGMK’s preservation of government policy role as ‘Strong’ as it is responsible for all copper produced in the country with around 60% of current volumes consumed internally. AGMK is also the second-largest taxpayer, the second-largest exporter and one of the major employers in Uzbekistan. We view ‘contagion risk’ as ‘Strong’ as AGMK is gradually increasing its share of external funding for the Yoshlik project as it expects the smelter to be financed by a foreign syndicate. We believe AGMK’s default could affect the ability of Uzbekistan and other GREs to borrow on international markets.

Yoshlik is a transformative copper, gold and silver project for AGMK and the country’s mining industry, which should double the company’s production scale and asset diversification. Its first phase has a US$4.8 billion budget, and comprises a new mine and a processing plant that will substantially increase the company’s copper output to 264,000 tonnes (t) by 2026 (up 78% from 2023) and gold output to over 800,000 ounces (oz) by 2026 (up 50%).

The second phase, which includes construction of a new copper smelting plant for approximately around US$1 billion, should increase AGMK’s smelting capacities. Until the smelter is completed, the company will be selling copper concentrate. Construction works have started and the tender process for equipment purchase is in progress. The agency expects the project to be funded by an international syndicate and loans from equipment suppliers.

Execution Risk: AGMK has limited experience in delivering projects of this scale and is exposed to cost overruns and delays. Due to geopolitical issues and the pandemic, the project commissioning has been delayed by around one year. The agency expects that copper (concentrate) production at Yoshlik will start towards the end of 2024 and that smelter will be commissioned by end-2026. Given the current advanced stage of the project with around 60% of capex spent as of February 2024, risks for the first stage have reduced.

Under Fitch’s price assumptions and the company’s ambitious capex programme, Fitch estimates AGMK’s EBITDA gross leverage to increase to around 2.4x in 2023-2026 from 2x in 2022. The company does not have any public leverage targets, but we view its projected leverage as moderate. We assume that the loan from FRDU will be converted to equity in 2024, given the advanced stage of the conversion process. If there is a delay, it will not impact the rating.

AGMK’s main asset Kalmakir has low cash costs due to its low cost base, by-product credits and 70% of its costs being local currency-denominated. CRU places AGMK’s Kolmakir mine in the lower second quartile of the global copper cost curve for all-in sustaining costs. The combined proven and probable reserve life for Kalmakir and Yoshlik mines, based on projected production, is high at over 60 years.

Similar to other state-controlled companies in Uzbekistan AGMK is improving its corporate governance. It started publishing IFRS financials (although interim results are not available) and re-estimated its reserves according to the JORC international standard. The company includes one independent director, while the board is dominated by state representatives. The proposed IPO has been pushed back.

AGMK’s peers include copper producers First Quantum Minerals Ltd. (FQM; B/Rating Watch Negative), Freeport-McMoRan Inc. (BBB/Stable), Hudbay Minerals Inc. (BB-/Stable) and precious metals producers such as Endeavour Mining plc (BB/Stable).

AGMK’s output (149,000t of copper and 0.5 million oz of gold) is higher than Hudbay’s (132,000t of copper and 0.2 million oz of gold), but significantly smaller than that of FQM and Freeport, which are among the top 10 global copper producers. FQM produced 707,678t in 2023 and Freeport produced 1.2 million t.

AGMK’s Kalmakir mine is positioned in the second quartile on CRU global copper all-in sustaining cost curve, compared with the first quartile for Hudbay and the third quartile for FQM. Freeport’s assets, on average, are slightly behind AGMK’s within the second quartile.

AGMK’s operational diversification is weaker than its peers, with more than 80% of production coming from a single mine. The company is also exposed to single-country operational risk, while peers have operations in multiple countries. Freeport in particular benefits from a wider diversification across geographies, with a more stable operating environment and more sizable assets with long reserve life.

AGMK and Endeavour have the highest profitability levels among the peers, with EBITDA margins ranging between 40% and 50% through the cycle. AGMK has higher EBITDA leverage than its peers due to its large ongoing investment project.