By Robb M. Stewart
MELBOURNE--Prices for iron ore will need to bounce back further
to relieve the rating pressure facing some of the industry's
biggest producers, although companies willing to defer investment
in mining projects should be able to regain their financial
footing, Standard & Poor's Ratings Services has said.
In a report published Tuesday, the rating agency said it doesn't
believe iron ore prices will climb much further in the near term,
and despite an incremental recovery in the next two years, they are
likely to be less than US$100 a metric ton beyond 2015 as Australia
and Brazil ramp up output of the raw steelmaking ingredient.
Prices need to average above US$120/ton near-term to alleviate
potential negative rating pressure for some producers, assuming
costs and foreign exchange rates remain steady, S&P said. Even
for investment-grade mining companies, steps to mitigate the
pressure would determine the ratings impact if prices stay low, it
said.
"For heavily indebted miners, their liquidity levels and
discretion in reducing costs would be critical to their credit
quality," the agency said.
The warning comes after S&P last week lowered its rating on
Fortescue Metals Group Ltd.'s (FMG.AU) debt to B+ from BB-. The
Australian company has been squeezed by the sharp fall this year in
the spot market price of iron ore, forcing it to defer some
expansion plans and slash costs.
The ore price rapidly fell to below US$90/ton over the last two
months from last year's peak above US$180 as steel mills in major
consumer China slowed production and cut stocks of iron ore,
although the price has since rebounded to levels between US$100 and
US$110. Most analysts expect prices to recover in the coming months
as mills in China rebuild stocks.
S&P said single-commodity producers such as Fortescue and
Ukraine's Ferrexpo PLC (FXPO.LN) rely on iron ore sales for almost
all their revenue and earnings, while companies including Brazil's
Vale SA (VALE) and U.S.-based Cliffs Natural Resources Inc. (CLF)
are also heavily exposed.
Despite a greater diversification, Anglo-Australian Rio Tinto
PLC (RIO) last year depended on iron ore for about 70% of earnings
before interest, tax, depreciation and amortization as its aluminum
operations in particular struggled. Other producers such as BHP
Billiton Ltd. (BHP), Anglo American PLC (AAL.LN) and Vedanta
Resources PLC (VED.LN) have relatively moderate exposure to iron
ore, S&P said in its report.
Still, the agency said these global mining companies would need
sufficient liquidity levels to sustain their operations should iron
ore prices remain low, with those able to cut operating costs or
reduce capital expenses able to offset the pressure of lower
revenue.
On that front, it said BHP has the best asset diversity and
greatest financial flexibility to respond. BHP has committed to
investing about US$22 billion in its operations in the year through
June, but S&P said it believes some of that is discretionary.
The company during the global financial crisis in 2009 cut its
capital expenditure and costs to main its credit rating. It also
has non-core assets, including a diamonds business, that could be
sold to supplement cash flow, the agency said.
S&P said it believes Vale would be willing to adjust its
capital expenditure and dividends amid slower global economic
growth and subdued commodity prices, despite plans to invest
aggressively over the next three years. Rio Tinto, Anglo American,
Ferrexpo and Vedanta sit in the middle of the pack in terms of
financial flexibility, it said.
Fortescue, on the other hand, is at the peak of its planed
project to expand production in Western Australia, making it
particularly sensitive to iron ore prices.
"In our opinion, continuing strong iron ore prices, in
particular in the next 18-24 months, could help a successful
execution of its expansion because the company is partially reliant
on cash from operations to fund the expansion," S&P said.
S&P rates BHP at A+, Vale and Rio Tinto at A-, Anglo
American at BBB+, Cliffs at BBB-, Vedanta at BB and Ferrexpo at
B+.
Write to Robb M. Stewart at robb.stewart@wsj.com