If iron ore prices “stagnate” at US$90 per ton through 2015, some miners’ key credit metrics might worsen significantly, based on scenario analysis on 10 major iron ore producers, Standard & Poor’s Ratings Services observed this week.
“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,” warned S&P Credit Analysts May Zhong, Diego H. Ocampo, Andrey Nikolaev, Amanda Buckland, Elad Jelasko, and Xavier Jean.
“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,” said the analysts. “In addition, diversified mining companies are well placed, as they can rely on commodities with more resilient prices, such as oil.”
“Another important factor is the movement of mining companies’ local currencies, which could affect their costs and revenues,” S&P observed.
“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 US$90 per ton through to the end of 2015,” said the credit ratings agency. “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., U.S.-based Cliffs Natural Resources Inc., and South America’s CAP S.A.,” the analysts cautioned.
“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,” said S&P.
“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,” S&P advised.
“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,” the analysts advised. “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,” said S&P. “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.”
“On the other hand, Anglo American’s financial flexibility is currently limited due to high capital-expenditure plans for 2014 and 2014,” the analysts observed. “The company is unlikely to postpone these projects, given the need to finish these key projects, notably the Minas Rio iron ore project in Brazil. We also take into account Anglo America’s significant dividend leakage to minority shareholders on top of its common dividends.”
“In our view, producers with a break-even cost of higher than US$80 per ton are vulnerable to iron price volatility. Rio Tinto and BHP Billiton are positioned at the lowest end of the cost curve due to their competitive C1 and low freight costs to China. In fact, Australian producers generally enjoy a competitive freight advantage due to their proximity to China, compared to producers in Africa, North America and South America.”
S&P noted that Cliffs Resources and Atlas Iron “have relatively high breakeven costs, because of their relatively high C1 costs or interest burdens”.