Moody’s puts 55 miners on review for downgrade

Moody’s Investors Service has put the credit ratings of 55 mining companies under review due to poor market conditions, noting this downturn marks a “unprecedented shift” for the mining industry.

The agency points out that slowing growth in China has weakened demand for commodities, sending prices to multi-year lows and increasing the credit risk for mining companies.

“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,” Carol Cowan, a Moody’s senior vice-president, says in a release.

The strong U.S. dollar has also contributed to the deteriorating demand and softer prices, as most metals are traded in U.S. dollars, the agency adds.

The current review focuses on miners within the A1 to B3 rating range, where “A” is defined as “upper medium grade,” but below the higher-quality Aaa and Aa ratings, and “B” is considered “speculative,” and below the Baa and Ba ratings. There are three levels within each rating category from Aa through Caa, with “1” being the highest.

Speaking on background, a Moody’s analyst explains that when a company’s credit rating moves below investment grade or Baa3, the borrowing costs could increase.

“With things such as credit facilities, typically what could happen is the bank or the lenders will look to have financial covenants or more stringent type of restrictions on the lending, as [companies] move down the scale on credit quality,” the analyst says.

The market judges anything below Baa3 as non-investment grade, or “junk.” There are several miners with a Baa3 rating under review, including Vale (NYSE: VALE), Barrick Gold (TSX: ABX; NYSE: ABX), Yamana Gold (TSX: YRI; NYSE: AUY), Newcrest Mining (ASX: NCM; US-OTC: NCMGF), AngloGold Ashanti (NYSE: AU) and China National Gold.

However, most of the 55 companies on review already have a non-investment grade or junk rating, including Teck Resources (TSX: TCK.B; NYSE: TCK), Rio Tinto (NYSE: RIO; LSE: RIO), Alcoa (NYSE: AA), Hecla Mining, Alamos Gold (TSX:AGI; NYSE: AGI), Iamgold (TSX: IMG; NYSE: IAG), Kinross Gold (TSX: K; NYSE: KGC) and Lundin Mining (TSX: LUN; US-OTC: LUNMF).

The current evaluation will consider each mining company’s asset base, cost structure, liquidity and management plan, and will assess each company’s cash flow and credit metrics closer to Moody’s latest stressed price assumptions.

The agency expects to downgrade most companies’ ratings at least one notch, cautioning that many of the miners could see multi-notch declines.

Along with the 55 miners, Moody’s has placed 120 oil and gas companies on review for downgrade, due to declining prices.

“It’s going to take some time to get through them all,” the analyst says. The agency aims to wrap up its review by the end of March. Meanwhile, it will monitor the credit metrics of all the companies in its oil, gas, mining and metals portfolios.