Moody's Investors Service says that the joint decision of Baosteel Group Corporation (Baosteel) and Aurizon Holdings Limited (Baa1 stable) to delay the development of the West Pilbara Iron Ore project has no immediate impact on Baosteel's A3 issuer rating or Baosteel Resources International Company Ltd.'s (BRIC) Baa1 issuer rating and their stable rating outlook.
On 11 May 2015, Aurizon announced that it had agreed with Baosteel to delay plans for the development of its project in Western Australia by at least 18 months. But, the technical and commercial feasibility study will continue.
"The postponement is a prudent move, given that the steel industry in China -- which would be the project's main off-taker -- is still weak," says Franco Leung, a Moody's Vice President and Senior Analyst.
The West Pilbara Iron Ore project is a greenfield project with large capital investment. The investment has become less attractive, as iron ore prices fell to USD60 per tonne versus over USD100 per tonne in mid-2014 when Baosteel and Aurizon made the acquisition.
The delay will also reduce the cash outflow for capital expenditures which will in turn conserve cash at the project company and reduce incurred debt.
Most of the AUD7.4 billion investment earmarked for the project relates to the development of supporting infrastructure. This investment will be funded substantially by project finance at the project level.
"Moody's expects that asset impairment from the West Pilbara Iron Ore project will unlikely be substantial to affect Baosteel's ratings," says Jiming Zou, an Assistant Vice President and Local Analyst for Baosteel.
At this stage, there is no indication of asset impairment on this project from the company.
Baosteel has strong financial reserves and a solid capital structure which can absorb any impairments to its upstream mining assets which are important to Baosteel for achieving a high level of self-sufficiency in iron ore over the long term.
Baosteel had an about RMB37 billion cash balance and over RMB70 billion in available-for-sale financial investments at end-2014. Its equity base was strong at about RMB290 billion.
Moody's expects Baosteel's financial leverage -- as measured by adjusted net debt/EBITDA -- to stay at about 3x over the next 12-18 months. Such a ratio still supports its A3 issuer rating and baa2 baseline credit assessment.
Moody's will continue to monitor the progress of the development of the West Pilbara Iron Ore project and any of Aquila's other future projects to assess any rating implications.
The principal methodology used in these ratings was Global Steel Industry published in October 2012. Other methodologies used include the Government-Related Issuers methodology published in October 2014. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.
Baosteel Group Corporation is the world's fourth-largest steel producer by production volume. Its products are mainly flat steel items -- such as hot rolled coils and cold rolled coils -- for the automotive, home appliances, shipbuilding, oil and gas, and manufacturing industries.
The West Pilbara Iron Ore project is 50% owned by Aquila Resources, a Australia-based resources company which is in turn 85% owned by Baosteel and 15% owned by Aurizon. Other joint owners of the project include Korean steel giant POSCO (Baa2 stable) and commodities investor AMCI Group (unrated).
The West Pilbara Iron Ore project has total reserves of about 2,200 million tonnes and is expected to produce around 30 million tonnes of iron-ore annually.
Source: .moodys.com