Showing posts with label Standard and Poor's. Show all posts
Showing posts with label Standard and Poor's. Show all posts

Thursday, September 13, 2012

High gold prices mask difficult future for miners-S&P

Although gold prices have nearly tripled over the past four years, gold miners are not able to capitalize on their good fortune, says Standard & Poor's.

With the current capacity in the mining pipeline and the hefty position in gold ETFs, Standard & Poor's warns that gold miners' profits and free cash flow are at risk "from an abrupt downward correction in the gold price as occurred in the late 1990s following years of production increases and healthy prices."

In an analysis made public Tuesday, S&P suggested such a correction could "lead to the closure of high-cost mines and reduced investments to stem negative free cash flow, even though gold miners have adequate liquidity to withstand low gold prices over an 18-month period." Long-term credit facilities, loose financing covenants, multiple projects at different stages, and generally low leverage give miners this financial flexibility.

S&P analysts Elad Jelasko and Karl Nietvelt noted that, although the price of gold has almost tripled over the past four years, "gold miners' struggles have prevented them from capitalizing on good fortune."

For example, Newmont saw its gold production decline to 5.9 million ounces last year from 6.2 million ounces in 2007 as operating costs jumped 50% during the same period. "In other words, Newmont generated only $24 per ounce sold," said the analysts.

"Overall, we estimated that cost inflation has doubled the miners' total cash cost (cash operating costs plus all capital expenditures) over the past five years to $1,100 per ounce on average."

S&P rates a number og investment-grade gold mining companies globally, whose ratings have broadly remained unchanged. They include Barrick, Newmont, Goldcorp, Newcrest, AngloGold Ashanti, Gold Fields, Kinross and New Gold. The ratings agency maintains a stable outlook for the industry.

In their analysis, Standard & Poor's observed the amount of gold backing ETFs is almost equal to the annual production in gold. However, the situation could change if Europe's sovereign debt crisis is resolved, or if signs of recovery in the U.S. and the global economy prompt investors to move to riskier investments.


At first glance, the gold mining industry looks robust as world gold production reached 88 million ounces last year. However, S&P believes production will only increase by single digits and then start to decline in the next two or three years as mining tries to overcome the challenges of deteriorating quality of mined ore; taking longer to initiate new projects; and few new reserve discoveries.

"There is no consensus among gold miners about the likely direction for gold production," S&P advised.

"If our assumption of a single-digit rise in output over the years is conservative, and the industry majors and junior miners increase production by 5.7 million ounces and 1 million to 3 million ounces, respectively, we doubt the current price would remain sustainable."

In their analysis, S&P warns that "cost inflation is an ever-present threat" for gold miners. "The commodities boom has...created inflation across the mining industry, pushing costs up by 10%-15% a year." The main factors behind this inflation are crude oil and subsequent electricity prices; competition for skilled labor; general country inflation; and equipment costs.

When comparing the cash costs of low- and high-cost producers over the past five years, S&P found that the gap between them increased from about $100/oz in 2007 to almost $400/oz this year.

In a lower price environment, S&P believes mining companies will become "far more selective in their mining plans", thereby decreasing cash costs somewhat.

"Moreover, the healthy price of copper, which is found in some mines as a by-product, supports a lower cash cost structure, thereby improving competitiveness," said the analysts. "For example in 2011 Goldcorp reported a cash cost after by-products credit of $223 per ounce, compared with a cash cost of $535 per ounce before the by-products credit."

"In this respect, any improvements in the copper price should increase the cash cost structure. The main beneficiaries of such a move include Barrick, Newmont, Goldcorp and Kinross. The South African miners, by contrast, have insignificant by-products," the analysts advised.

Standard and Poor's views total cash cost as an indication of the floor level for the price of gold. "In our view, the investment needed to support existing production lies within a range of $150-$200 per ounce per year on top of the industry's median cash cost ($600-$650 per ounce)."

"However, gold miners are in a middle of ambitious capex programs at present, translating to actual capex of $400-$450 per ounce and pushing the total cash cost for the average gold miner to $1,000 to $1,100 per ounce," said the analysts. "As a result, under current conditions, a decline in the gold price below $1,200 per ounce would create a material pressure on FOCF [Free Operating Cash Flow] across the industry," as well as resulting in negative FOCF for some miners.

"Hence, a price drop of this magnitude would be unsustainable," the analysts asserted.

If gold prices decline substantially, S&P advised it would assess a mining company's credit profile for its financial flexibility including its ability and willingness to execute a change in mine plan to focus on gold seams; limit exploration costs; cut dividends; curtail capex programs in pre-feasibility/feasibility studies; and shut down expensive shafts.


Other risks constraining the gold mining industry include country risk, safety regulation, introduction of new tax regimes, and shareholders pressures on dividends, said S&P, adding these factors would limit the industry's growth prospects "and therefore support healthy prices over the next three to five years."

Under country risks, S&P factors in changes in mining licenses; a lack of infrastructure (water, electricity and logistics), and a country's ability to nationalize assets as has occurred recently in Argentina and Zimbabwe. "At this stage, the risk of nationalization in South Africa seems to us to have reduced."

Although mine safety has substantially improved over the years, S&P said ultra-deep underground mining "stretching the industry's engineering capabilities and exposes miners to extremely conditions, increasing fatalities."

"Safety regulations force mining companies to slow down the mining process, resulting in lower efficiency," said the analysts. "Production also suffers from regulatory investigations into fatalities. AngloGold, for example, lost production totaling 76,000 ounces in the first quarter of 2012 due to safety breaches."

As gold prices increase, there is a risk that governments will seek a higher portion of mining companies' income, observed S&P. Profit sharing can include higher royalties, a super tax (an additional tax on top of the regular corporate tax), and partial ownership in the assets.

"In this respect, we see royalties concealing a larger issue because expenses are calculated on revenues and not profit. By contrast, we see taxation levied as a percentage of free cash flow as being far less credit negative," the analysts advised.

However, they added, "We believe that negotiations over new tax regimes taking place in several countries (such as South Africa) push miners to defer capex and to adopt a ‘wait and see' strategy until they gain better visibility on the likely changes."

Gold miners are under increasing pressure by shareholders to up dividends. But, S&P observed "shifting cash flow from operations to the shareholders pushes back new mine development and constrains supply. In this respect, we take a positive view of Newmont's recent intention to link its dividends to the gold price."

Tuesday, July 31, 2012

S&P's lowers Barrick Gold’s credit rating to BBB+

Ratings agency Standard & Poor’s (S&P's) on Monday lowered gold producer Barrick Gold’s corporate credit rating to BBB-, from it previous A+ standing.

S&P's said the downgrade follows the company's announcement of a capital cost increase of close to $2.5-billion and a one-year delay to production start-up at its multibillion-dollar Pascua-Lama gold/silver project.

Barrick, the world's biggest gold miner, last week said lower productivity and persistent inflationary and other cost pressures had resulted in a 50% to 60% increase in capital costs at its $5-billion Pascua-Lama project, on the Chile/Argentina border. It blamed the cost increases mainly on a decision to manage construction of the mine using an in-house team, rather than an outside contractor.

“We believe that the latest revisions to Pascua-Lama likely precludes any meaningful balance-sheet deleveraging in the next 12 months, which would be necessary to return the company's financial metrics to comfortably within our expectations for the 'A-' rating, including a debt-to-Ebitda [earnings before interest, taxes, depreciation and amortisation] leverage ratio sustainably below 2x,” the ratings agency said.

S&P's added that the negative outlook on Barrick reflected the agency’s view that the execution risks surrounding Pascua-Lama could potentially stretch the company's credit measures and free operating cash-flow generation beyond the levels the agency had assumed within its base case scenario.

Source: Creamer Media Reporter

Friday, July 13, 2012

S&P lowers 2012 nickel, aluminum price forecasts

As Standard & Poor's lowered its nickel and aluminum price assumptions to $7.50/lb and 90-cents per pound, respectively, price forecasts for other metals remain unchanged for this year.

Standard & Poor's Ratings Services has lowered its price assumptions for nickel and aluminum for the rest of this year, noting that "most metals prices are unlikely to fall much further under our base-case scenario for 2012."

"Our revised assumptions take into account the notable decline in spot prices for nickel and aluminum since our last update in January 2012, continued oversupply in the two markets, and the currently uncertain global economic outlook," wrote S&P Credit Analysts Andrey Nikolaev and Marie Shmaruk in an advisory note published Thursday.

Since S&P's January update, aluminum and nickel have fallen 11% and 16%--the steepest drops among the base metals. "The key reason for this underperformance, in our view, is the oversupply of the two metals," said the analysts. "As for other metals, nickel and aluminum prices are also under pressure from the strengthening U.S. dollar and market concerns about Chinese demand growth."

"We have left our 2012 price assumptions for the other metals and our 2013 and long-term price assumptions on all metals unchanged because we continue to factor in our assumption of a soft landing in China, where we forecast GDP growth of about 8% annually in 2012-2012," S&P advised. "We also assume virtually flat GDP in Europe and about 2% growth in the U.S. for 2012."

S&P also suggests that for most metals, "cost profiles of major producers will likely not allow further substantial price deterioration without a noticeable decrease in production, which we do not anticipate in our base case."

Meanwhile, S&P advised it is leaving its long-term price assumptions for industrial metals unchanged "as we currently do not anticipate substantial changes in the long-term supply-demand balance."

S&P's metals price assumptions for the rest of this year include 90-cent per pound aluminum; $3.25/lb for copper; $7.50/lb nickel; 80-cents per pound zinc; and $1,300/oz gold.

Base-case scenarios for metals supply-demand in 2012

S&P anticipates moderate growth in aluminum demand this year. Therefore, the agency lowered its price assumption from 95-cents per pound to 90-cents per pound for this year.

Moderate growth in copper demand and nickel demand is anticipated in S&P's base-case scenario. S&P lowered its price assumption for the rest of this year from $8 per pound nickel to $7.50/lb.

S&P also forecasts moderate growth in zinc demand. "The current substantial inventories create a considerable risk for the prices, however. At the same time potential closures of several major mines in 2013-2014 could substantially improve the supply/demand balance and support prices," said the analysts.

Contrary to industrial metals, gold remains elevated as investors still seek a safe haven, as well as a hedge against inflation risks, S&P advised.

Friday, June 15, 2012

Rough times ahead for zinc, nickel-S&P

While the world's mining sector faces tough times ahead, the absolute decline will not be as severe as it was during the global financial crisis, S&P forecasts.

In what likely will be a period of ups and downs, mining companies around the world share significant hurdles: slowing growth in the Chinese economy as well as economic uncertainty in Europe and the United States.

"Slowing growth in the Chinese economy will, in our view, almost certainly have an outsized effect on metals and mining companies around the world," Standard & Poor's warned in a recent report.

"And slowing economic growth in other markets will likely affect metals and mining companies too. It may be only a matter of the degree to which they suffer," S&P Primary Credit Analysts Michael Scerbo and Suzanne G. Smith advised.

The good news is Standard & Poor's Ratings Services only see a 10% chance that the Chinese economy could suffer a hard landing with growth slowing from the annual average of more than 9% in the past few years to 5%. However, even if the Chinese economic expansion slowed to only 8%--and because growth could even be slower in China's construction sectors, "the world's world steel producers could suffer most."

In North America, much of the current risk for mining stems from domestic conditions, says S&P. Construction steel markets are still weak, although industrial demand has picked up a bit, thanks to auto production and equipment manufacturing. "But even with demand slowly improving, the risk of oversupply and pricing volatility remains," the analysts advised.

Meanwhile, U.S. coal producers have already felt the impacts of an unusually warm winter and the fact power generators have been switching from coal to natural gas because of lower gas prices, S&P noted. The bad market for steam coal, which power plants use to generate electricity, has caused prices to plummet.

At the same time, global prices for met coal, which producers used to make steel, have declined and earnings from met coal will not offset the significant decline in steam coal demand and pricing,

Nonetheless, S&P forecasts not all steel-related industries will suffer at the same rate.

Brazil will benefit because it hosts some of the world's most prolific reserves and quality iron ore. Although China has tried to exploit its own iron ore reserves, domestic production meets just 30% of its needs.

Even with Chinese steel production at record highs, large Chinese steel companies are losing money for the first time in 10 years "and overcapacity and slowing demand may continue to weigh on steel prices, perhaps pushing them further down," the analysts observed.

"Standard & Poor's believes that while a sharp slowdown in Chinese economic growth could reverberate through the iron ore market, we don't expect prices to weaken significantly. Even if Chinese steel production grew at a much slower pace, iron ore producers would have to increase capacity significantly to meet demand."

However, in the Asia-Pacific region, S&P says the slowdown in China and weakening commodities prices could hurt metals and mining companies, which face rising costs, softening prices, and oversupply problems.

"Times could be very tough, in our view, for producers of commodities such as zinc and nickel, which are used in heavy industry," according to Scerbo and Smith. "We think prices on these could suffer the most in a medium- or hard-landing scenario in China.

"And we have a negative outlook on the metals sector, reflecting our view that steel and aluminum producers will continue to struggle with softening demand growth and abundant supply. Aluminum prices, in particular, show no immediate signs of having reached bottom-or doing so any time soon."

"Still , while we are forecasting a deceleration in demand in the Asia-Pacific metals and mining sectors due primarily to the slowdown in property development and infrastructure investment in China, we believe the absolute decline may not be as severe as it was during the global financial crisis," the analysts advised.

Thursday, May 10, 2012

S&P: Inmet Mining Corp. Assigned 'B+' CCR, Stable Outlook; US$1 Billion Notes Rated 'B+' (Recovery Rating: '3')

  • We are assigning our 'B+' long-term corporate credit rating and stable outlook to Toronto-based base metalsproducer Inmet Mining Corp.
  • We are also assigning our 'B+' issue-level rating and '3' recovery rating to Inmet's US$1 billion senior unsecured notes. Proceeds from the unsecured notes issuance will be used to fund development of the company's Cobre Panama copper-gold-silver project.
  • Inmet operates three mines in Finland, Spain, and Turkey and holds a majority interest in the Cobre Panama project.
  • The stable outlook reflects our view that contemporary base metals prices should support the company's credit measures, which are strong for the rating, with funds from operations generation reinforcing Inmet's liquidity position in a period of extraordinarily large growth capital expenditures.
  • Standard & Poor's Ratings Services assigned its 'B+' long-term corporate credit rating and stable outlook to Toronto-based base metals miner Inmet Mining Corp.

At the same time, Standard & Poor's assigned its 'B+' issue-level rating and '3' recovery rating to Inmet's proposed US$1 billion senior unsecured notes. A '3' recovery rating indicates our expectation of meaningful (50%-70%) recovery in a default scenario. (For the complete corporate credit rating rationale on Inmet, see the research report to be published on RatingsDirect on the Global Credit Portal immediately following this media release.)

We understand that proceeds from the unsecured notes issuance will be used to fund the development of the company's Cobre Panama copper-gold-silver project
in Panama.

"The ratings on Inmet reflect our view of the project execution risks associated with its 80%-owned Cobre Panama copper project, the company's reliance on volatile metals prices to support its capital funding obligations, and short reserve lives," said Standard & Poor's credit analyst Donald Marleau. "These risks are counterbalanced by the company's attractive second-quartile cash cost position, geographically diversified operations, and strong operating margins," Mr. Marleau added. Inmet operates three mines in Finland, Spain, and Turkey and holds a majority interest in the advanced development stage Cobre Panama copper-gold-silver project.

The stable outlook reflects our view that contemporary base metals prices should support Inmet's credit measures, which are strong for the rating, with funds from operations (FFO) generation reinforcing its liquidity in a period of extraordinarily large growth capital expenditures. We expect that a copper price of US$3.50 per pound would result in an average leverage ratio of 3x and an average FFO to debt of 25% in the next few years. We could lower the rating if large capital spending increases alter the cost profile of Cobre Panama while at the same time its producing mines encounter unexpected operational disruptions, higher costs, or weaker metals prices. In such a scenario, Inmet's financial flexibility would begin to tighten as leverage approaches 4.5x in conjunction with thinner FFO levels, causing major delays to Cobre Panama's existing construction timeline. A positive rating action is unlikely during the initial stages of Cobre Panama's construction program

Friday, May 4, 2012

Halcyon days fading for Asia-Pacific mining companies-S&P

Standard and Poor's warns if China's slowdown proves to be severe, it could take the wind out of commodities prices sails. Even with a soft landing, steel and aluminum producers will still weaken.

A key threat to the stable outlook of the mining sectors is a rise in inputs costs," Standard & Poor's credit analysts warned in a recent industry report card on Asia-Pacific metals and mining companies.

"A tighter labor supply and likely higher energy prices will pressure the profitability of many commodity producers. Metal producers will also be wrestling with more expensive raw materials," the analysts advised."

"For Asia-Pacific steel and aluminum companies, we forecast a negative outlook. Margins in this subsector will struggle with softening demand due to a global slowdown and abundant supply."

"On the other hand, we expect the credit prospects of producers of copper, high grade minerals sands, seaborne iron ore, and coking coal to remain steady," the analysts predicted. "Although prices of these commodities have come down, producers still enjoy reasonable margins. In addition we believe prices of these commodities have bottomed out because growing, albeit slower, demand and supply-side constraints will underpin prices at current levels."

S&P analysts say they believe prices of coking coal, copper and seaborne iron ore likely bottomed in the first quarter of this year. Meanwhile, further industrial actions, delays in production ramp-up and the impact of weather events could disrupt supply.

Nevertheless, S&P believes thermal coal prices could further soften, especially if exports from the U.S. to Asia due to a sluggish domestic market consolidate its momentum.

Meanwhile, S&P warns, "Further bouts of weakness could also materialize for nickel because of the metal's demand sensitivity to industrial usage and substitution risks."

Australia, in particular, is facing risks in the persistence of increased input costs. "The country's tight labor and contractor market, as well as the strong Australian dollar have pushed up the cash production costs of local miners," the analysts observed.

"Indonesian and Mongolian miners are also feeling the heat from steep fuel costs," they added.

In their report, the credit analysts said mining regulatory or taxation changes have no immediate rating impact. However, they added, "We believe the mining sector is braced for increasingly negative regulatory developments throughout Asia Pacific over the 18-24 months. Still, we do not expect the adverse regulatory rulings to immediately affect our ratings on mining companies in the region."

"Increasing regulation in the mining sector is not specific to Asia Pacific," the analysts observed. "Peru and Chile in South America have temporarily or permanently increased royalties or income taxes in 2011 and South Africa is considering the application of a super-profit tax. Environmental regulation is also becoming increasingly costly in the U.S."

Despite the aforementioned risks, S&P foresees capital spending remaining firm within the next two years for commodities with a more favorable supply-demand balance, including iron ore coking coal and gold.

Meanwhile, S&P analysts observed, "Large producers and state-owned enterprises will continue to have strong access to capital markets in 2012, in our view. This is despite increasing commodity price volatility and an uncertain global environment."

"We believe smaller miners with undeveloped assets, significant capital spending requirements or a marginal cost position will face a tougher time raising financing," they suggested.

Currently, 17 or 63% of the Asia-Pacific metals and mining companies rated by S&P have stable outlooks, nine (33%) have negative outlooks, and one company (4%) with a positive outlook.