The outlook on the credit rating of JSC "Rosgeologia" (hereinafter, Rosgeo, or the Company) has been changed fr om Stable to Negative due to the Company’s 2020 financial indicators (recorded in annual IFRS reporting) deviating from the projected indicators previously provided by the Company, as well as the Company’s more conservative expectations regarding its financial results for 2021–2022. According to the Company, these changes are associated primarily with the postponement of a number of works under contracts to later dates due to the impact of COVID-19 (increased costs for prevention and safety measures), geological complications, weather conditions and emergency events in 2021 (fires and floods in a number of regions wh ere work is taking place). The Agency notes the following changes: growth in total debt to RUB 13.6 bln (taking into account financial leasing) in 2020 (RUB 11.1 bln in 2019) and to RUB 15.5 bln in 2021, resulting in the weighted ratio of total debt (including financial lease obligations) to FFO before net interest payments increasing from 2.8x to 3.7x. In addition, actual revenues fell by 14.1% according to 2020 results, and the share of the production price in revenues is expected to grow from 73.4% to 80.3% in 2021.
Among other things, the rating is supported by the Company’s stable development in 2020 compared to 2019, namely, the improvement of a number of financial indicators: FFO before net interest payments and taxes grew from RUB 1.6 bln in 2019 to RUB 2.9 bln in 2020 and the FFO margin before net interest payments and taxes grew from 6% in 2019 to 12% in 2020 (according to IFRS for 2020).
Rosgeo is a state-owned company that was founded according to Order of the President of the Russian Federation No. 957 dated July 15, 2011 in order to carry out comprehensive geological study of subsoil and reproduction of the mineral resource base of the Russian Federation. The Company is engaged in geological prospecting and identification of the resource potential of promising territories of Russia, its continental shelf and the water areas of its internal seas, and the bottom of the World Ocean, Arctic and Antarctic, localization and assessment of the resource potential of the unallocated subsoil fund in developed and new areas, as well as government monitoring of the state of subsoil. The Company is wholly owned by the Russian Federation and is listed as one of the country’s strategic enterprises.
The credit rating of Rosgeo has been set at A(RU), which is two notches higher than the Company’s standalone creditworthiness assessment (SCA), which ACRA determined at bbb+. This is due to the state’s low level of support for the Company and the average degree of dependence on homogeneous risk factors (according to ACRA’s methodology).
Rosgeo’s SCA is based on its strong business profile, which stems from the Company’s role as an executor of government contracts for the reproduction of the country’s mineral resource base, the increasing share of its participation in commercial projects, a stable market position due to good business diversification, both in terms of performance of various types of geological exploration activities and due to its presence in various Russian regions and foreign markets, as well as adequate corporate governance. The Company’s financial profile is characterized by moderate profitability, average leverage, and a good liquidity position. The rating is constrained by the small size of business, industry risks, and negative free cash flow (FCF). In ACRA’s opinion, the credit risk in the geological exploration industry is above average because this industry is linked to the commodity cycle to a significant degree. This has a negative impact on the credit rating of the Company.
KEY ASSESSMENT FACTORS
The state’s low level of support for the Company and the average degree of dependence on homogeneous risk factors are due to the high share of revenue from government contracts, which is about 50% (the Company plans to reduce it), as well as low risks to the budget in the event of a default of the Company, and the low impact of disruption to the Company’s activities on the social situation in the country. At the same time, the level of support is influenced by significant strategic and operational control by the state: the government determines the Company’s development strategy, its investment plans and dividend policy. The Company’s strategic importance is based on the fact that Rosgeo is the only company in Russia that carries out a complete spectrum of geological exploration activities on the formation of a prospecting reserve under the state order for the replenishment of subsoil reserves. Rosgeo has been used to create a state geological exploration holding company, which includes around 40 geological enterprises and research institutes across the country. The Company’s geological prospecting activities cover hydrocarbons (oil and gas), solid minerals (coal, gold, diamonds, etc.), and other resources such as water.
The average degree of dependence on homogeneous risk factors is determined by the level of government contracts in the Company’s revenue, the relatively low level of subsidies received and dividends paid, the absence of dependence of the state and the Company on one sector of the economy, and exposure to similar credit risks.
Strong business profile and good product and geographical diversification. Rosgeo’s activities are focused on early-stage geological exploration. The Company has extensive experience in carrying out geological exploration both on land and on shelves, including transition zones. In addition, Rosgeo possesses unique technology and is the only company in Russia that carries out parametric drilling. The contract base shows that the Company has work until 2023, and currently amounts to RUB 70.9 bln (taking into account contacts with a high possibility of being signed). In the past, the contract base has demonstrated a slight degree of volatility due to fluctuations in minerals markets, which has been partially offset by the diverse range of minerals that the Company can search for. The Company operates throughout Russia and in a number of foreign countries (India, Uzbekistan, Mongolia, Equatorial Guinea, Benin, etc.). Three of the largest clients accounted for 44% of the Company’s revenues in 2020. The Company’s fixed assets are characterized by a high degree of physical wear and tear, which influences growth in the need for capital investments.
Average leverage and adequate coverage. According to ACRA’s assessments, which are based on the Company’s projections, in 2021 the ratio of total debt (taking into account financial lease obligations) to FFO before net interest payments will fall to 3.3x in 2021 (from 5.3x in 2020) and amount to RUB 15.5 bln (RUB 13.6 bln in 2020). In 2022–2023, the average annual value of this indicator is expected to decline to 2.2x.
When determining leverage, ACRA took into account debt under financial lease contracts in the structure of total debt, which is due to the transition of the Company from the asset ownership model to the use of leasing instruments.
As of September 13, 2021, the Company’s debt included bank loans, targeted loans, and lease obligations. Loans comprised the lion’s share of the debt portfolio. Interest rates are fixed and floating (tied to the key rate of the Central Bank of Russia); the Company’s debt, which is mainly bank debt, is denominated entirely in Russian rubles and balanced in terms of creditors. The Agency notes that the Company is carrying out plans to transition from short-term borrowing to long-term borrowing. The Company issued its first bond, worth RUB 6 bln, on September 30, 2021.
According to ACRA’s assessments, which are based on the Company’s forecast, in 2021 the FFO before net interest payments to interest payments ratio should grow to 3.5x (2.5x in 2020). The Agency expects this indicator to continue growing in the future.
Small size of business and moderate profitability. According to ACRA’s assessments, which are based on the Company’s forecast, in 2021, the Company’s FFO before net interest payments and taxes should increase to RUB 4.8 bln (RUB 2.9 bln in 2021). This indicator should continue to grow in 2022–2023. Its growth stems from the growth of income from signed contracts and optimization of operating expenses, as well as due to the development of new areas (partnership programs, gold mining, consulting, etc.). The Company’s FFO margin before net interest payments and taxes in 2020 grew to 12% (from 6% in 2019); its annual average value is expected to increase to 18% in 2021–2023. This growth will be driven by falling operational costs amid an increase in the contract base and the development of new areas of business.
Good liquidity amid negative FCF. Taking into account the balance of funds in the Company’s accounts (RUB 4.5 bln as of September 15, 2021) and open credit lines (RUB 6.6 bln as of September 13, 2021), ACRA expects the Company’s short-term liquidity indicator to exceed 1.5x in 2021. The qualitative liquidity assessment is not at the maximum level because the Company does not have any public debt, including eurobonds.
In 2018–2020, the Company’s FCF was negative (RUB -3.3 bln in 2020). The annual average ratio of capital expenses to revenue for the aforementioned period was 7%. According to ACRA’s forecasts, which are based on the Company’s projections, in 2021–2023, the Company’s FCF will turn positive.
Adequate corporate governance. The Company’s strategy is clear and consistent, includes specific targets and detailed roadmaps, and has measurable performance indicators. The 2014–2020 strategy was aimed at developing the Rosgeo holding, a stage which is currently being completed, and as a result the Company had to develop a strategy for 2020–2025. This strategy is based on measurable financial and non-financial targets. The risk management structure of the Company includes a risk map that describes risks and how to mitigate them, budget rules, financial and credit policies, provisions on the risk management system, and a declaration on accepting a preferred risk target system. The Company has a single treasury. The Company’s management structure complies with corporate governance standards, and there are regulatory documents, including provisions on the audit committee, board of directors, executive board, and a code of corporate governance. The board of directors includes: A. A. Kozlov (Minister of Natural Resources and Environment of the Russian Federation), S. N. Gorkov (CEO and Chairman of the Management Board of Rosgeo), Y. I. Petrov (Deputy Head of Rosnedra), A. N. Klepach (Chief Economist of State Corporation VEB.RF), A. Y. Pavlov (Deputy Head of the Federal Property Management Agency), P. Y. Sorokin (Deputy Minister of Energy of the Russian Federation), and M. O. Volkov (Assistant to the Deputy Prime Minister of the Russian Federation). However, it is noteworthy that the structure of corporate governance and risk management is in line with Russian practice. Rosgeo includes a large number of legal entities, which is due to production needs and the specific nature of geological exploration work. The Company compiles consolidated audited IFRS financial statements and releases them to the public.
Continued implementation of the Company’s strategy until 2025;
Contractual obligations carried out in full and on time;
Annual growth of production prices not exceeding the growth of revenue;
Dividend payments in 2021–2023 not exceeding payments in 2020;
Annual investments made according to the plan;
The Company’s projections for 2021 are no worse than actual results for 2021 under IFRS.
potential outlook or rating change factors
The Negative outlook assumes that the rating may be downgraded within the 12 to 18-month horizon.
A positive rating action may be prompted by:
Weighted FFO before net interest payments and taxes exceeding RUB 5 bln amid simultaneous growth of weighted FFO margin before net interest payments and taxes above 15%;
Weighted FCF margin exceeding 2% amid simultaneous growth of weighted FFO before net interest payments and taxes above RUB 5 bln;
Significant growth of the Company’s systemic importance for the Russian economy.
A negative rating action may be prompted by:
Significant negative deviation of the Company’s financial results as of the end of 2021 (according to IFRS) from the forecast indicators in the Company’s forecast for 2021;
Absence of a documented decision on the provision of funds to the Company by the state (in the form of additional capitalization or otherwise) in the amount of at least RUB 15 bln;
Weighted FFO before net interest payments and taxes falling below RUB 0.5 bln;
Weighted FFO margin before net interest payments and taxes falling below 12%;
Growth of weighted total debt (including lease contract obligations) to FFO before net interest payments to above 5x;
Substantial decline in the value of the contract base;
Substantial deterioration in access to external sources of liquidity;
Substantial decline of the Company’s systemic importance for the Russian economy.
Support: state — SCA + 2 notches.
The credit rating of JSC "Rosgeologia" has been assigned under the national scale for the Russian Federation based on the Methodology for Credit Ratings Assignment to Non-Financial Corporations Under the National Scale for the Russian Federation, the Methodology for Analyzing Rated Entities Associated with a State or a Group, and the Key Concepts Used by the Analytical Credit Rating Agency within the Scope of Its Rating Activities.
The credit rating of JSC "Rosgeologia" was published by ACRA for the first time on November 9, 2020. The credit rating and its outlook is expected to be revised within one year following the publication date of this press release.
The credit rating was assigned based on data provided by JSC "Rosgeologia", information from publicly available sources, and ACRA’s own databases. The credit rating is solicited, and JSC "Rosgeologia" participated in its assignment.
In assigning the credit rating, ACRA used only information, the quality and reliability of which was, in ACRA’s opinion, appropriate and sufficient to apply the methodologies.
ACRA provided no additional services to JSC "Rosgeologia". No conflicts of interest were discovered in the course of credit rating assignment.