Petaquilla Minerals Ltd. -- Moody's assigns Caa1 CFR to Petaquilla
Toronto, October 03, 2012 -- Moody's Investors Service assigned first-time ratings to Petaquilla Minerals Ltd. ("Petaquilla") consisting of a Caa1 corporate family rating ("CFR"), Caa1 probability of default rating, Caa1 senior secured rating to its proposed $210 million notes, and a speculative grade liquidity rating of SGL-3, indicating adequate liquidity. Petaquilla plans to use the net proceeds from the notes offering to primarily fund the development and expansion of its mine and mineral exploration properties and repay existing indebtedness. The ratings outlook is stable.
Petaquilla's Caa1 CFR is constrained by its small scale, lack of mineral diversity, reliance on a single gold mine in Panama that has a limited operating history and short reserve life, and the substantial execution risks associated with its expansion plans in Spain. The rating also reflects Petaquilla's high pro forma adjusted leverage (Debt/ EBITDA of about 6.7x) and Moody's expectation that elevated capital expenditures will cause free cash flow to remain negative through the 12 to 18 month ratings horizon. The rating acknowledges the company's good cost position and high EBIT margins, available pro-forma cash balances to fund its development plans and Petaquilla's recent positive earnings trajectory which is likely to continue through next 12 to 18 months.
Pro forma for the transaction, Petaquilla will have adequate liquidity (represented by the SGL-3 rating), underscored by cash balances of about $100 million, no meaningful near-term debt maturities, and lack of financial maintenance covenants. Countering these factors are the absence of a committed revolving credit facility and Moody's belief that Petaquilla's capital spending plans will consume a substantial portion of the company's cash balances through calendar 2014.
The stable outlook reflects Moody's expectation that gold prices will remain relatively favorable over the next 12 to 18 months and that earnings growth driven by increased production will enable the company to reduce its leverage towards 5x in this time frame.
Upward rating movement is unlikely until Petaquilla successfully completes its expansion plans and demonstrates that it can generate positive free cash flow to repay debt. Following this consideration, the ratings could be upgraded if the company sustains its adjusted Debt/EBITDA below 5x. The ratings could be downgraded if gold prices decline sharply, if costs escalate such that the company sustains adjusted Debt/EBITDA above 7x or if the company's liquidity was to become inadequate.
The principal methodology used in rating Petaquilla Minerals was the Global Mining Industry Methodology published in May 2009. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.
Headquartered in Vancouver, British Columbia, Petaquilla Mineral Ltd. is a gold production and exploration company with one operating mine in Panama and several exploration properties in Panama, Spain and Portugal. Revenue for the fiscal year ended May 31, 2012 was $93 million with about 70 thousand gold equivalent ounces produced.
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