FITCH Rates China Hanking "BB-": Outlook Stable

Jun 19, 2012 11:20 JST

HONG KONG, Jun 19, 2012 - (ACN Newswire) - FITCH RATINGS has assigned China Hanking Holdings Limited ("Hanking") a Long-Term Foreign Currency Issuer Default Rating (IDR) of "BB-", with Stable Outlook, and a senior unsecured rating of "BB-".

The ratings are supported by Hanking's competitive cost advantage over other Chinese iron ore producers. Long-Term Structural shortage of iron ore supply in China supports its Stable Outlook.

Hanking's most competitive advantage is low cash operating cost, which was CNY252/ton in 2011 (CNY244/ton in 2010) and was driven by favourable mine geology including a shallow ledge and low stripping ratio as well as low deleterious elements in iron ore. This compares favourable with the Chinese domestic average cash production cost CNY500 /ton in 2010. Hanking also enjoys short transportation distance to clients with low logistic costs, which is a major reason of cost advantage as well.

Fitch noted that China, which produced 46% of global crude steel in 2011, generated only 408 mt of iron ore domestically and imported 686 mt from overseas, mostly from Australia and Brazil. Liaoning, where Hanking is located, sourced 38% of its iron ore from outside of the province in 2010. Fitch does not expect iron ore self-sufficiency in Liaoning Province to reach 100% and therefore sees Hanking continuing to enjoy cost advantage over iron ore supplies from outside the province, which will support its sustainable and stable development.

Hanking's ratings are also supported by its low financial leverage with a net cash position at end-2011. Fitch expects Hanking's total adjusted net debt/operating EBITDAR leverage to be below 1.0x for the next 18-24 months even though free cash flow will be negative during this period due to capex being incurred for capacity expansion.

Hanking's current ratings are constrained by its current small scale relative to its peers and single commodity concentration in the cyclical iron ore market. According to its proven and probable iron ore reserves at end-May 2012 and its 2012 planned production rate, the reserve life is equivalent to 28.7.

According to people familiar with the matter, Hanking's financial status is now quite strong and robust with ample cash flow. Hence, it will not consider the debt financing at this moment.

Sectors: Metals & Mining