Fresnillo plc #BBB# Ratings Outlook Remains Stable

Stocks and Financial Services Press Releases Wednesday August 31, 2016 09:00
MEXICO CITY--31 Aug--S&P Global Ratings

MEXICO CITY (S&P Global Ratings) Aug. 30, 2016--S&P Global Ratings said today that it affirmed its 'BBB' long-term corporate credit rating on Fresnillo PLC, which it views as a "core" subsidiary of Penoles. We also affirmed our 'BBB' long-term issue rating on Fresnillo's $800 million senior unsecured notes. The outlook remains stable.

Our ratings on Fresnillo are aligned with those on its parent company Industrias Penoles S.A.B. de C.V. (BBB/Stable/--) because the latter holds 75% of Fresnillo's equity, they two companies have significant related party transactions, and we view their business lines as fully integrated.

Also, Fresnillo sells 100% of its mining output to Penoles' refining and smelting facility (Met-Mex) and contributes about 40% and 60% of Penoles' consolidated revenues and EBITDA, respectively.
Although Fresnillo has an independent management and board, we believe that its strategy follows Penoles' and that the parent's equity stake enables Penoles to control decisions at the subsidiary level.

The rating also reflect Fresnillo's position as the largest silver producer in the world and Mexico's second-largest gold producer, coupled with its low mining cost structure (Fresnillo all-in sustaining costs with $8.3 per ounce and Saucito with $5.3 per ounce as of the first half of 2016, some of the lowest in the industry) and strong operating margins.

Our analysis also takes into account the company's concentrated operations in Mexico, its limited but improving mine diversification, and the mining industry's inherent exposure to commodity price volatility.

The financial profile of Fresnillo is viewed in line with its parent Peñoles, and it maintains strong liquidity as well as low financial leverage and cash flow protection ratios, according with the rating level.

We recently revised upward our price assumption for metals prices to reflect the current market conditions and outlook for each commodity (see article titled "S&P Global Ratings Revises Its Price Assumptions For Iron Ore, Gold, Zinc, And Aluminum," Aug. 26, 2016).

We have raised our price assumptions for iron ore, gold, zinc, and aluminum, and kept those for copper and nickel at levels we published on Jan. 22, 2016. We now assume gold prices at $1,300 for the second half of 2016 and $1,250 per ounce for 2017.

We also assume zinc prices at $2,200 per ton for the rest of 2016 and for 2017, in line with our revision of metals prices. For further information on Peñoles, please see "Industrias Penoles Debt Rating Raised To 'BBB' From 'BBB-' On Solid Financial Performance, Credit Ratings Affirmed," Aug. 30, 2016.

The stable outlook on Fresnillo parallels that on Penoles, which reflects our expectation that it will maintain debt to EBITDA below 1.0x and FFO to debt above 60% for the next 12 to 18 months.
We also believe that it will maintain strong liquidity and a low cost structure while it continues to expand and improve operations.
Based on our assessment that our ratings on Fresnillo are aligned with those on Peñoles, any positive rating action on Peñoles would trigger the same rating action on Fresnillo.
Based on our assessment that our ratings on Fresnillo are aligned with those on Peñoles, any negative rating action on Peñoles would trigger the same rating action on Fresnillo.
In addition, we could also lower the rating if we were to reassess Fresnillo's status within the group.

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