Mining Sector Metrics under Pressure: DBRS Reports on Sector Ratings and Financial Metrics

DBRS has today published a compilation of its public mining-oriented ratings along with a summary of associated key financial metrics for the latest 12-month period as calculated by DBRS.

The financial metrics of most companies in the mining sector are on the downslope of a commodity cycle, continuing a trend from generally strong metrics in 2011, when commodity prices were high, often at or near record levels.

DBRS’s view is that there are two broad trends currently intersecting in the sector: The first is a long-term upswing in commodity demand that began in the early 2000s as developing countries, such as China, began a phase of rapid industrialization and urbanization. The second is a shorter-term trend causing the current downturn in commodity prices, which is related to the rapid expansion of supply for many commodities as a result of record prices and vibrant project economics post the 2008/2009 recession.

These trends are well illustrated by the growth in the iron ore sector over the last ten years. The iron ore units of the biggest diversified mining companies have grown enormously in size and importance to their companies in a long period of increasing steel production as lesser developed countries industrialize and urbanize. The growth in steel demand has been mirrored by a growth in iron ore output and in the seaborne trade in the commodity. These have been part of a long-term trend in growth in commodity demand, which continues.

The iron ore business has been very profitable to the major diversified mining companies that are the biggest producers of the steel ingredient. With access to large, undeveloped iron ore reserves and resources and with the size and capital resources to invest in large-scale mine development and infrastructure projects over extended periods, these companies invested heavily in the sector and rapidly expanded iron ore production, generating high levels of earnings. But, as is the nature of the commodity business, the good times don’t last forever, and the expansion of output has overwhelmed growing demand, resulting in a sharp downturn in iron prices from their record levels in 2011.

The rapid expansion of production has significant momentum, and the price weakness of today can be expected to be with us for perhaps several years, until constricted supply comes back into balance with more slowly growing demand.

The iron ore story illustrates the experience of many other commodities such as copper, thermal and steel-making coal, potash, nickel, etc. As such, individual companies in the DBRS mining universe have their own characteristics and abilities to weather the expected weakening of operating cash flows as commodity markets seek balance. Those with high debt levels and large cash outflows may be pushed to the limit where a negative rating action may be warranted.

Notes:
The primary methodology applicable to companies in the mining sector is Rating Companies in the Mining Industry (September 2014), which can be found on our website under Methodologies.

For the October 2014 report, DBRS methodologies or for more information on this industry, visit www.dbrs.com or contact us at info@dbrs.com.