Can mining companies survive USD 90 per tonne iron ore prices?
Standard & Poor’s Ratings Services observed that if iron ore prices stagnate at USD 90 per tonne through 2015, some miners key credit metrics might worsen significantly, based on scenario analysis on 10 major iron ore producers.
S&P Credit Analysts Mr May Zhong, Mr Diego H. Ocampo, Mr Andrey Nikolaev, Ms Amanda Buckland, Mr Elad Jelasko, and Mr Xavier Jean said that “In particular, miners with large iron ore exposure, but are unable to cut costs and are saddled with debt, will face a severe deterioration in earnings and credit metrics.”
They said that “Whether this deterioration triggers a downgrade depends critically on a mining company’s financial flexibility. If a miner can defer its capital expenditure and conserve cash, its credit quality should be able to withstand sliding iron ore prices. In addition, diversified mining companies are well placed, as they can rely on commodities with more resilient prices, such as oil.”
The credit ratings agency said that another important factor is the movement of mining companies’ local currencies, which could affect their costs and revenues. We observed that major players Australia’s BHP Billiton Ltd. and Rio Tinto, PLC, and Brazil’s Vale S.A, can accommodate declining earnings should iron ore prices stay at USD 90 per ton through to the end of 2015.
Other iron ore mines, Australia’s Fortescue Metals Group Ltd. and Brazil’s Samarco Mineracoa, S.A., too, should have sufficient buffer in their credit metrics to absorb the lower iron ore prices, notwithstanding the moderate impact on their earnings.
On the other hand, downward rating pressures could arise for Australia’s Atlas Iron Ltd., US based Cliffs Natural Resources Inc and South America’s CAP SA.”
Cliffs’ high cost structure and leverage profile following its acquisition of Consolidated Thompson Iron Mines in 2011 reduced its ability to absorb earnings deterioration at its current ratings.
On the other hand, Anglo American PLC is well diversified by commodity type; the impact of the US$90 per ton price will be low relative to pure iron ore miners. However, as its metrics are already under pressure because of its plans for large capital expenditure in 2014 and 2015, we believe that lower iron ore prices could further contribute to rating downside.
Among the global miners, we consider BHP Billiton, Rio Tinto, and Vale as being the most financially flexible to respond to weakening iron ore prices. They can defer their capital expenditure or sell their noncore assets. Nonetheless, we see that BHP Billiton and Rio Tinto have limited flexibility to adjust dividends amid weaker commodity prices due to their commitment to a progressive dividend policy.
Meanwhile, Vale’s leverage is increasing due to the additional debt associated with a tax settlement with the Brazilian government. Nonetheless, we believe that Vale will manage its investments in line with market conditions. Should iron ore prices fall to less than US$100 per ton for a prolonged period, the company has some financial flexibility to revise and postpone some projects.
Source – Mineweb