MINING FINANCE / INVESTMENT

Fitch says gold price will hold up reasonably well over 12-18 months

Some hidden benefits may be found in the current financial crisis for mining companies as labor, energy, power and consumable costs decline, Fitch Ratings advises.

RENO, NV - 

Fitch Ratings Thursday said liquidity for the mining and metals sector is generally healthy as "most companies have taken advantage of strong prices to improve their assets and capital structure."

In their analysis on the liquidity of North American mining and metals, Fitch analysts Monica Bonar and Sean Sexton forecast that "gold producers should continue to benefit from a very strong pricing environment"  as gold prices "hold up reasonably well over the next 12-18 months."

Fitch also advised that "steel, aluminum and copper prices are expected to trough in 2009."  

The current cash and credit crunch may actually have some benefits for mining companies despite the scarcity of financing and cost cuts. Fitch noted that "labor, energy, power and consumables costs for mining and metals producers should decline in a recessionary environment. Unit costs should benefit from taking marginal production off line."

The analysts also advised that "costs should benefit from the decline in energy prices as well as production efficiencies."

Acting in response to strong cash flows and indications of strong global demand, Fitch said "many companies have been spending on exploration, development, expansion or cost reduction projects. Indications are that discretionary spending will be curtailed for producers in weaker markets such as copper, aluminum, nickel and zinc."

"While some earnings are expected to decline in 2009 from robust 2008 levels, runoff of working capital and active management of capital budgets should partially offset the impact to free cash flow," Bonar and Sexton advised. "Financial covenant levels should not constrain borrowing under the revolving credit facilities over the next 12-18 months."

The analysts also noted that "merger and acquisition (M&A) activity will be constrained absent the credit markets and the extreme volatility of the stock market." Meanwhile, Fitch forecasts that curtailments by mining companies in exploration and development to conserve cash "will result in short supply beginning in 2011 for copper, nickel and zinc." 

Steam coal producers have benefited from global short supply, high freight rates and a weak U.S. dollar, which have lifted exports, curtailed imports and lifted prices in all coal basins, according to Fitch.

Bonar and Sexton suggested, "While the steel market is expected to show slower growth in 2009 to 2008, metallurgical coal should be in tight supply and prices show a modest increase." While steel remains a cyclical industry, "consolidation has resulted in strong market discipline."

While steel consumption has decline as a result of weakness in automotive and appliance manufacturing, the analysts noted that "U.S. production has held up relatively well and the first half of 2008 was exceptionally strong. More recently, production is being curtailed in the face of falling prices and the outlook for oversupply. Earnings should fall in 2009."