Last Tuesday, Peru-based Minsur S.A. (Ba3 positive) announced an agreement to sell a 40% stake in its wholly-owned subsidiary Cumbres Andinas S.A.C. to Inversiones Alxar S.A. (Alxar), a subsidiary of Chile's Empresas Copec S.A., Moody's affirmed.
Cumbres Andina owns Marcobre S.A.C., which manages the Mina Justa copper project in Peru.
The agreement is credit positive for Minsur because it reduces Minsur's
investment requirements in the US$1.6 billion Mina Justa copper project.
Minsur, a majority-owned subsidiary of Peruvian conglomerate Inversiones Breca S.A., will remain the Mina Justa project operator through the 60% stake it will continue to hold.
"The US$200 million transaction is subject to certain working capital adjustments and capital expenditures for
project development through the closing date. The parties expect to conclude the transaction shortly after required regulatory approvals and customary conditions, which may take a few months," it noted.
Minsur expects to begin construction in the second half of this year, and forecasts the project will be operational by the end of 2020. With a total resource base of 432 million tonnes (0.75% average copper grade), Minsur expects the mine to operate for up to 18 years, including pre-stripping work.
Mina Justa is a transformational expansion that will strengthen Minsur's business model through greater diversification into copper and significant cash generation starting in 2021. Once fully operational, Mina Justa expects that annual production will reach as much as 150,000 tonnes in the mine's first four years of operation, and will produce about 100,000 tonnes per year of copper concentrates and cathodes during the mine's life.
The project will require about a US$1.6 billion
investment, 50% of which will be debt-funded, with the remaining 50% equity-funded by Minsur and
Alxar. Even after selling the 40% stake, Minsur will incur a sharp increase in leverage and sustained negative free cash flow at least through 2020.
And, because of Minsur's majority ownership of Marcobre, the full amount of debt raised for Mina Justa will be consolidated on Minsur's balance sheet.
Once the project is fully operational, Moody's expects that the effect on Minsur's balance sheet will subside. Minsur expects that the majority of the funding for Mina Justa will be disbursed during the 2018-20 construction phase. The project will be funded with about US$800 million in non-recourse project finance and Minsur will guarantee 60% of the total during the construction phase.
On a pro forma basis, peak adjusted leverage, as measured by gross debt to EBITDA, will be 5.9x at the end of 2020, versus 2.5x at the end of 2017.
However, EBITDA generation starting in 2021 could be more than three times higher than the US$257 million reported for 2017, which will help reduce leverage toward 2.0x.