While Fitch Solutions Macro Research has long held the view that major miners are better positioned to weather unexpected storms, grow further and tackle new challenges, the ratings agency has questioned whether this would be the case with the Covid-19 pandemic – which brings with it operational disruptions and declining metal prices.
The findings build on the 2019 financial year already having proven challenging for most miners as profit levels declined, not only owing to share buybacks, impairments and legal charges, but also as metal prices, except for iron-ore and nickel, fared slightly worse than the year before.
In 2020, however, Fitch expects this situation to “intensify significantly” and, other than for gold, it anticipates most metal prices faring worse than in 2019 as a result of poor investor sentiment owing to Covid-19, and the global recession affecting physical demand for metals.
Nevertheless, even if mining companies face losses this year, Fitch Solutions Macro Research says it continues to hold the belief that they will still be able to weather the year, owing to having vastly streamlined their operations, cut debt and expenditures, and increased production efficiencies.
“We expect miners to accelerate the integration of technology, especially automation, in their operations as a lesson learnt from the Covid-19 pandemic,” the company notes.
As gains in cost reduction and production efficiency had become harder to achieve through traditional means, large miners have been incorporating advanced technology in operations.
Challenges for the future that have started to develop include increasing pressure for increased transparency in operations and environmental sustainability, and a greater emphasis than present on the mining and smelting of metals related to renewable energy.
Of the world's major miners, Fitch Solutions Macro Research expects Rio Tinto to perform the best this year.
“We expect continued outperformance from Rio due to strong management and good governance, as displayed by the company's consistent capital discipline and strong balance sheets, as well as its reputation to think ahead of its peers.”
It adds that Norilsk Nickel is also likely to achieve a solid financial and operational performance over the coming months as a result of operational streamlining and higher metal prices.
Between 2016 and 2018 the company focused on the modernisation of downstream facilities and reconfiguration of nickel production in a bid to improve efficiency and boost profitability.
On the other hand, the financial results of other global and diversified mining players, such as Glencore, Freeport-McMoRan and Vale, would be less positive, Fitch Solutions Macro Research states.
It expects Freeport to continue experiencing a dent in earnings this year as the Grasberg mine continues to transition to underground mining, and as the impact of Covid-19 affects copper prices and forces the company to halt production in countries that have issued lockdowns.
The case for Glencore is similar, with the firm having announced multiple closures in March related to government mandates to slow the spread of the coronavirus. Despite the impact of the Brumadinho dam collapse on Vale's financials taking effect in 2019, Fitch Solutions Macro Research expects Vale will be able to sustain its project capital expenditure programme over the next several years.
“There are continued risks to the miner's production in the coming months as Brazilian courts continue their scrutiny of the company's operations,” its says, suggesting that mining companies will continue their restraint over capital and supply over the coming years.
While healthier balance sheets have encouraged a slight increase in capital expenditure budgets of miners since 2017, the increase has been modest. Miners are forecast to also remain disciplined in terms of production, in order not to repeat the mistakes of the commodity boom years of 2004 through to 2013.
While prices of most commodities will improve over the years, compared to the lows Fitch expects in 2020, the agency expects miners to hold the reins on supply.