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Investing.com -- Moody’s Ratings has upgraded the Corporate Family Rating (CFR) and the 8.75% Senior Secured notes of Volcan Compania Minera S.A.A. y Subsidiarias (Volcan) to B3 from Caa1. The rating for Volcan’s 4.375% Senior Unsecured notes was also raised to Caa1 from Caa2. The outlook for the company has been changed from positive to stable.
The rating upgrade is a result of a reduction in refinancing risk due to improved cash flow generation, which is better than expected. Over the last twelve months ending March 2025, Volcan generated a free cash flow (FCF) of $97 million, increasing the cash balance to $154 million from $62 million in December 2023. The increase in cash during 2024 was due to stable production and cost, a hedging strategy, and strong silver prices.
The FCF generation is expected to remain neutral on average in the 2025-2026 period, considering $108 million in growth capital expenditure (capex) related to the expansion of the Romina project and around $200 million per year in sustained capex during the same period. The Romina project, expected to start by June 2026, will benefit the consolidated cost structure as its production cost is estimated at $45 per metric ton (MT), lower than Volcan’s consolidated cost in Q1 2025 of $51.7 per MT.
The Romina project, a polymetallic project in the Alpamarca unit, is expected to produce an average of 40,000 MT of zinc, 20,000 MT of lead, and 1 million ounces of silver per year. The company reported a 56% increase in its reserves in December 2024 due to the inclusion of the Romina project in the reserve inventory.
Volcan’s 2026 debt maturities include $68 million due in February related to its senior unsecured notes, $20 million related to its syndicated loan, and $8 million related to prepaids. The B3 CFR of Volcan takes into account its relatively high cost structure and debt levels, which increase volatility through commodity cycles. It also reflects a track record of tolerance to refinancing risk, geographic concentration in Peru, and Volcan’s modest scale compared to its global peers.
As of March 2025, the company’s capital structure includes a $342 million term loan and $300 million secured notes, which benefit from a collateral package including a trust over receivables, shares of subsidiaries, and mortgages over most of the company’s assets.
The stable outlook reflects the belief that the company will maintain its cash flow generation through a stable cost structure, hedges, and strong silver prices. It also takes into account the expectation that Volcan will be able to start the Romina project on budget and on time.
The upgrade also takes into account governance considerations, including improved credit metrics and liquidity, which are now reflected in the company’s Financial Strategy and Risk Management assessment. This was changed to 4 from 5, and the overall exposure to governance risks to 4 (G-4) and Volcan’s Credit Impact Score to 4 (CIS-4), from 5.
Factors that could lead to an upgrade or downgrade of the ratings include consistent adequate liquidity, maintenance of Moody’s adjusted leverage below 4x and retained cash flow to debt above 15% at different price points. A downgrade could occur if there is lower than expected cash flow generation due to soft commodity prices, decline in production, higher costs, or delays in the startup of Romina that result in additional investments. Downgrade pressure could also emerge if debt to EBITDA is maintained above 5.0x.
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