Fitch Ratings Tuesday affirmed the following ratings for CAP S.A. (CAP):
-- Foreign and local currency Issuer Default Ratings (IDR) at 'BBB-';
-- Yankee bonds due 2036 'BBB-';
-- National scale rating 'A+(Cl)';
-- Local bonds No. 434 (Series E and F) 'A+(Cl)';
-- Local bonds No. 435 (Series D) 'A+(Cl)';
-- Local debt issuance programme No 591 and 592 'A+(Cl)';
-- Local equity ratings in First Class level 2.
The ratings affirmation reflects CAP's strong liquidity and financial flexibility and incorporates recent operating disruptions, specifically, the uncertainty over the restart of operations of its steel subsidiary Compania Siderurgica Huachipato S.A. (CSH), which was severely affected by the recent earthquake in Chile. The slowly recovering economic environment in Chile is factored into the ratings.
The investment-grade credit ratings of CAP are also supported by the company's dominant presence in the Chilean steel industry, its vertical integration into iron ore and its long-term relationships with its steel and iron ore clients. Balanced against these credit strengths is the volatile nature of the steel and steel processing industry in terms of prices and volumes. A larger than expected economic magnitude of the repair costs that could impact the credit profile of CAP.
CSH, the leading steel producer in Chile, which supplies 60 percent of the domestic market, was severely damaged by the earthquake. The company estimates that it will take until June 2010 before the steel operations return to normal capacity. It is important to note that the steel rolling lines were not largely affected, and CAP will continue to partially operate during this time using existing semi-finished inventories and imports. CAP also has insurance policies in place that are expected to cover a substantial part of the repair work and operating costs for damages arising from the earthquake.
CAP expects to offset some of the lower cash flow from the steel business while repair work takes place by generating higher revenues from its iron ore mines and steel processing business, which were not damaged. The company's share of revenues from its mining operations are set to increase following sizeable investments over the past few years to expand its iron ore production, along with the expected iron ore price increase following the 2010 benchmark negotiations.
The recent deal by Vale of Brazil and Anglo-Australian BHP Billiton with Japanese and Chinese mills agreeing to move into quarterly contracts linked to the nascent iron ore market, is expected to lift the cost of iron ore to Asian steelmakers up between 80 and 100 per cent from the US$ 60 level at which the 2009-10 annual contracts were settled. Steel prices are also expected to rise by up to a third.