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26/06/2014
15:23
AK&M Rating Agency rates TEIC CJSC 'A', outlook positive

CJSC AK&M Rating Agency assigned an 'A' national scale credit rating to TEIC CJSC, with a positive outlook.

The 'A' rating indicates that the Company is highly creditworthy. Risk of a failure to meet obligations in time is low, full or partial debt restructuring risk is minimal.

Tuva Energy Industrial Corporation CJSC (hereinafter called TEIC) was established to implement large-scale infrastructure projects in Krasnoyarsk Krai, the Tyva Republic, and Khabarovsk Krai. TEIC is currently implementing a comprehensive investment project including the development of the Elegestskoye coal deposit located in the Ulug-Khem coal basin in the Tyva Republic, including the construction of a mining and preparation plant; the Elegest-Kyzyl-Kuragino railway connected to the existing trunk railways; the launch of a deepwater marine terminal near Cape Burny at the Vanino port in Khabarovsk Krai (hereinafter referred to as the Project). The sub-projects referred to above are all strategically aimed at making Russia one of the leaders in the global market of coking coals by boosting exports of raw products to the Asian-Pacific region (APR) several times. Total investment in the Project is projected at ca. RUB 217 billion, 25% of the funds will be provided by the organizer and head contractor (equi ty financing from TEIC).

The Company's high credit rating results from a combination of several positive drivers, the most appreciable among them being: (i) the Project conformity with the priorities of Russia's social and economic development including the strategies and target programs related to the transport system, the railway transportation sector and the coal industry of Russia; (ii) the investment appeal of the Project arising from a high projected commercial, budgetary, social and economic performance; (iii) potential support from federal and regional authorities including state guarantees, tax incentives and financing from the National Wealth Fund; (iv) high professional competence and vast managerial experience of the Company's management team in large-scale projects including those related to the coal mining and transport infrastructure development sectors. The above-mentioned advantages create the necessary material, financial, economic and regulatory conditions for the feasibility of the investment Project.

The core element of the Project is the construction of the Elegest-Kyzyl-Kuragino railway 410 km long which requires the highest amount of capital investment (ca. RUB 156 billion). The road will connect the Elegestskoye coal deposit to the Trans-Siberian Railway bringing the finished products to the rail infrastructure in general use. The target throughput of the railway is 15 million tonnes of coal (equal to the processing volume at the Elegestskoye deposit) and 3 million tonnes of commercial freight per year. The joint Report of Russia's Ministry of Economic Development and Ministry of Finance emphasizes that this railway construction project meets the basic targets specified in the Russia's 2030 transport strategy.

The economic effect of the Project will depend on the Company's income from export deliveries of the coal concentrate. The high quality of the coal mined (a low ash percentage, easy coal washability, the highest concentrate yield in Russia), a fairly low mining cost due to unique geological parameters of the Elegestskoye deposit, and small per-unit processing expenses due to the high processing capacity of the mining and preparation plant will ensure a high competitive edge of TEIC products. Besides, using its own coal terminal at the Vanino port, the Company will avoid getting dependent on external stevedoring companies, eventually resulting in a lower cost of handling operations. According to the Company's internal calculations, with reasonably generalized initial conditions, the Project will stay commercially viable across the whole implementation period (2014-2068). The budget effect (the amount of discounted tax revenues) is projected at more than RUB 250 billion.

The Elegest-Kyzyl-Kuragino railway and coal port terminal construction project in Russia's Far East coupled with the development of the Tyva Republic's raw materials base is a showcase of using the public-private partnership pattern for the development of Russia's transport and coal mining infrastructure. The Government's assistance to the Project assumes the financing from the National Welfare Fund (ca. RUB 87 billion) on a repayable basis, Government guarantees for loans taken out from banks (ca. RUB 76 billion), tax incentives, and tax holidays. As part of the state support program, the Company secured a favorable opinion of Russia's Ministry of Economic Development and Ministry of Finance on the expediency of the Project financing effected, among other ways, by investing National Welfare Fund resources in TEIC securities, and concluded a memorandum of cooperation and interaction for the purpose of the Project with Vnesheconombank, Sberbank of Russia, and VTB. Besides, TEIC, the Ministry of Transport of Russia, the Tyva Republic and the Government of Krasnoyarsk Krai signed a four-party agreement for the construction of the Elegest-Kyzyl-Kuragino railway during the 10th Krasnoyarsk Economic Forum.

By order of The Russian Government's Order 1059-r as of June 16, 2014, the Elegest-Kyzyl-Kuragino railway and coal port terminal construction project coupled with the development of the Tyva Republic's raw materials base was added to the list of self-sufficient infrastructure projects implemented by legal entities in whose financial assets the National Welfare Fund invests resources on a repayable basis (the list was approved by the Government's Order 2044-r dated November 5, 2013). The loan disbursement and the placement of NWF resources are scheduled for the third quarter of 2014. AK&M Rating Agency estimates the probability of external financing for the Project in the projected amount as very high, providing a positive outlook on the Company's rating accordingly. Today, TEIC is financing the Project with own funds.

At the same time, we regard the significant dependence of the key Project indicators on the global market of coking coals and the volatility of end-product prices, the limited throughput of the Trans-Siberian and Baikal-Amur railways at some local bottlenecks, the possible outstripping growth of railway freight rates (seeing as transport expenses account for the bulk of in the coal concentrate shipping costs) as risk factors incidental to the Project implementation and preventing a higher credit rating.

While the global coking coal prices have seen a stabilization of the median level and lower volatility for the last two years, they are still sensitive to a variety of forces from steel-smelting process improvements to changes in the legislations and environmental conditions of the countries which are key players (both importers and suppliers) in the coke concentrate market. This makes the long-term forecasting of trends in the market of raw materials extremely problematic. Meanwhile, TEIC's financial model is quite sensitive to fluctuations of coking coal selling prices. It should be noted that the leading Russian coking coal producers (SUEK, Mechel, etc.) also want to ramp up exports, primarily focusing on the ATP countries. This will increase pressure on the general purpose trunk railways and may require consolidated logistic solutions geared to the Russian Railways' transport infrastructure projects, or additional investments in the construction of a relief line reaching from Kyzyl to Urumchi (Mongo lia) and proceeding to China.

The cost of railway transportation for export purposes from the Elegestskoye deposit to the terminal accounts for ca. 83% of the concentrate cost value (delivery basis: FOB Vanino). We believe that an increase in transport expenses driven by higher rates will cut into the Company's operating margin in both absolute and relative terms.

However, in AK&M Rating Agency's view, the above-mentioned risk factors will not jeopardize the full implementation of the Project, being only capable of impairing certain macroeconomic results (the investment payback period, the cost efficiency, etc.).

Besides, we think it appropriate to highlight that the Elegestskoye deposit contains a mere 6% of the total Ulug-Khem coal basin. The further development of the coal basin upon the Elegest depletion will boost the effectiveness of the Project infrastructure manifold.


TEIC CJSC registered in November 2012 (initially as a limited liability company) in Kyzyl city, the Tyva Republic.

The Company's authorized (share) capital is RUB 1,000,010,000

TEIC is beneficially owned by its CEO Ruslan Baisarov, a Russian businessman.

To restructure its business and separate the authority, the Company has established subsidiary companies: TEIC-Mining, TEIC-Trading House, TEIC-Transport, TEIC-Highways, DVVP.


This press release is based on the Statement of assignment of a credit rating to TEIC CJSC.

The credit rating, along with any information and conclusions provided in this press release, only conveys our opinion on the Company's creditworthiness and shall not be construed as a recommendation to purchase or sell securities, or to lend funds.

AK&M Rating Agency shall not be held liable for any interpretations, inferences and consequences related to the application of results of the rating estimation procedure by any third parties.

CJSC AK&M Rating Agency is a leading independent national rating agency engaged in rating activities since 1993. CJSC AK&M Rating Agency is accredited by the Ministry of Finance of the Russian Federation (order no. 452 as of September 17, 2010) and is on the Central Bank of Russia's Register of Accredited Rating Agencies.

CJSC AK&M Rating Agency - ul. Gubkina 3, Moscow, Russia - www.akmrating.ru

Press release by: A.V. Khibukhin - Phone no. (495) 916-70-30, fax no.: (499) 132-69-18.


"AK&M", 24.06.2014 18:50

 

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