MINING FINANCE / INVESTMENT

For U.S. metals and mining, gold is all that glitters - S&P

Although the financial ratios of U.S. metals and mining companies will continue to weaken, Standard & Poor's expect credit trends to slowly start to improve in the sector during the next several quarters.

RENO, NV - 

Gold continues to be a rare bright spot for U.S. metals and mining companies, while steel continues to be of concern to the credit analysts at Standard & Poor's.

Meanwhile, S&P's outlook for the U.S. metals and mining sector remains negative, "given the poor operating environment and deteriorating credit quality."

In an industry report card published Wednesday, Credit Analysts Marie Shmaruk, Michael Scerbo, Maurice Austin and Sherwin Bradford estimated that S&P has downgraded 20 domestic mining and metals companies since the beginning of this year.

Nevertheless, the analysts noted, "Although domestic demand for most metals remains very low and the entire supply chain continues to manage for cash by reducing inventory, orders and production levels, demand seems to have hit a floor in recent weeks. "

The analysts correctly ascertained that Chrysler would restart auto production as a revamped General Motors now tries to convince a court this week to allow it to emerge from bankruptcy. The result should help steel and aluminum producers, according to S&P.

"With a pick up in orders, some stabilization and improvements in the economy, and expected, albeit mild, benefits from the stimulus package, the demand for metals should start to recover and somewhat temper the decline in credit quality," the analysts predicted.

S&P noted prices for base metals have recently improved, partly due to Chinese buying and also from some amount of speculation. While both copper and aluminum prices are up, the analysts continue to be concerned about aluminum producers. "Although the industry has announced a significant amount of smelter curtailments, they have been insufficient thus far to offset the massive drop in demand and to eat into bloated inventory levels."

The analysts determined coal companies are also operating under tough conditions. "The sharp drop-off in metallurgical coal demand and prices resulting from low steel production levels are already pressuring the financial results of some producers. In addition, we are concerned that weak domestic electricity demand due to switching to lower cost natural gas by utilities, which have increased inventories, could cause a deferral of contracted amounts this year and as contracts reprice or are renewed, could cause prices into 2010 to be lower."