Trent Ernst, Editor
Moody’s has spoken, and it doesn’t look good.
In their January 26 Sector Comment, they say they have recalibrated their ratings based on a “fundamental shift” in the mining sector.
As a result, they have placed 55 mining companies rated between A1 and B3 under review for downgrade.
“While severity varies among issuers, all are impacted and many companies could be downgraded, some multiple notches. Our broad review, which will be largely completed during the first quarter, will consider each mining company’s asset base, cost structure, likely cash burn and liquidity, as well as strategies for coping with a prolonged downturn. We will assess each company’s cash flow and credit metrics closer to our latest stressed price assumptions and the relative rating positioning.”
The reason for the downgrading of many of the world’s biggest mining companies? An “unprecedented” downturn in the mining economy, far beyond what is normal. “Metals prices continue on a downward trend as slowing economic growth in China and weakening global demand take a toll,” says the report. “This reflects ongoing contraction and is a figure that is unlikely to see any sharp improvement as China moves toward a service economy.”
The report says there is little light on the horizon for mining across the board. “We expect the physical supply/demand imbalance to widen further, leaving industry conditions extremely weak and making a return to normality unlikely for several years. We expect the US dollar to continue to strengthen as interest rates rise, which will maintain pressure on base metal prices.”
While some mines do benefit from weak local currencies (the Australian dollar is currently at US$0.706744, while the Canadian dollar is at US$0.711783) and low oil prices, says the report, this is only delaying the inevitable supply adjustments needed to bring the industry back into balance.
This means mining companies either need to sharply curtail their output, or wait until high cost/low volume mines are closed.
“This imbalance can trace its roots to the overly optimistic expectations for growth in China, which consumes some 40-50 percent of the key metals like aluminum, copper and nickel, coupled with a favorable financing that led to massive investments by miners in building capacity—particularly in high tech “super mines” that are difficult to scale back,” says the report.
“In addition, Chinese steel production, the catalyst for the seaborne iron ore and met coal markets, slowed in 2014 and 2015. This, in combination with new supply in these markets has maintained downward pressure on iron ore and met coal prices, with prices decelerating more in 2015.”
In September, the price per tonne of metallurgical coal dropped below US$100/tonne and continues this downward trend.
The downturn is affecting more than coal. Copper dropped 26 percent of its value in 2015, and is already down nearly 10 percent again. Nickel is currently at $8,395 a tonne, down from $13,6000 a tonne average over the last decade.
Even zinc, which was the one bright star in the metals market, has dropped from $2,380 last year to $1,476 this year.
Steel—which goes hand in hand with met coal—has hit below US$40/tonne, down from US$191/tonne five years ago.
Anglo American, still the fifth largest publicly held mining company recently gutted itself in an attempt to stay solvent, reducing the number of mines it operates from 55 to twenty-something. No word yet on how this might affect their Trend property.