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Volcan Compania Minera (Volcan) was downgraded to B- from B by Fitch. This comes on the back of increased liquidity pressure amid recent governance concerns that could hurt its refinancing ability. Volcan’s majority shareholder, Glencore, and minority shareholders like as Peruvian Pension Funds, Picasso and Letts families have seen a “misalignment in priorities”. This was evident after its general shareholder agreement to spinoff the Chancay port unit, that later saw major board and management changes. With low cash resources (only $50mn as at end-June) and negative free cash flows, its ability to meet 2024 dues is under scrutiny. Asset sales would be an important source of funds but it remains uncertain at this point. Besides, its free cash flow generation is also uncertain now given the low zinc prices, high costs and capex required to sustain volumes. While its leverage is expected to stay “moderate”, with gross and net leverage EBITDA ratios averaging 3.8x and 3.3x, its interest coverage is expected to weaken to 2x by 2026 from ~4.7x. Further, Fitch notes that Glencore’s intention to sell its 55% voting and 22% economic stakes in Volcan does not affect its rating. However, Fitch has not considered further financing, or operational support from Glencore that could lead to refinancing risk.
Volcan’s 4.375% dollar bond due 2026 were amongst the most volatile notes in September following governance worries. They are currently trading stable at 57.2 cents on the dollar.