JOHANNESBURG (miningweekly.com) – Reflecting an effort by the ratings agency to recalibrate mining portfolio ratings to align with the fundamental shift in the credit conditions of the global mining sector, Moody's has placed 55 mining companies on review for downgrade.
This included 12 mining companies from the Europe, Middle East and Africa region, 11 US companies, 12 Canadian companies, nine Latin American companies and four Australian companies.
The list included Anglo American, BHP Billiton, South32, Rio Tinto, Vale, Alcoa, Barrick Gold, Newmont Mining, Gold Fields, Petra Diamonds, AngloGold Ashanti, Metalloinvest, Nord Gold, Alrosa and Uranium One.
As part of an ongoing assessment of mining companies, Moody's sharply reduced its price sensitivity assumptions in December, after which credit conditions in the mining industry weakened further, with prices continuing to decline.
The company said the likelihood had increased that prices for base metals, precious metals, iron-ore and metallurgical coal would approach levels closer to Moody's 'stressed sensitivity' scenario.
In addition, the strong dollar was a further factor contributing to weakening demand and driving prices lower, as most metals are traded in dollars.
“Slowing growth in China, which consumes and produces at least half of base metals, and is a material player in the precious metals, iron-ore and metallurgical coal markets, is weakening demand for these commodities and driving prices to multiyear lows.
“China's outsized influence on the commodities market, coupled with the need for significant recalibration of supply to bring the industry back into balance, indicates that this is not a normal cyclical downturn, but a fundamental shift that will place an unprecedented level of stress on mining companies,” commented Moody’s MD David Staples.
While the review focused on companies rated in the range from A1 to B3, Moody's was also reevaluating higher- and lower-rated companies in the context of industry conditions.
The higher-rated companies were, on average, somewhat more resilient to low commodity prices and many of the lower-rated companies had recently been downgraded.
This broad ratings review would incorporate ratings that had previously been placed on review in the sector, such as Anglo American, which currently had a Baa3 rating.
Moody’s said the broad ratings review would look at companies across the mining portfolio covering gold, diamond and uranium producers, the outlook for which was pressurised by depressed prices for key commodities, as well as a slowdown in China's economic growth.
The review would consider each mining company's asset base, cost structure, cash flows and liquidity, as well as management's strategy for coping with a prolonged downturn and the ability to execute on it.
The review would assess each company's cash flow and credit metrics closer to the latest stressed price assumptions and the relative rating positioning.
“Moody's believes that this downturn will mark an unprecedented shift for the mining industry. Whereas previous downturns have been cyclical, the effect of slowing growth in China indicates a fundamental change that will heighten credit risk for mining companies.
“This review reflects the belief that deteriorating industry fundamentals require a recalibration of the global mining portfolio rated by Moody's,” it stated.
Although all issuers in these sectors had been adversely affected by declining prices, severity varied substantially by issuer.
Accordingly, the range of possible outcomes upon conclusion of the review for given issuers varied from possible confirmation of ratings to multinotch downgrades.
Moody's expected to conclude a majority of the reviews by the end of the first quarter.