Moody's Perspectives on Global Base Metals

Transcription

1 Moody's Perspectives on Global Base Metals Outlook for rest of the year and implications for rated companies Gianmarco Migliavacca, VP - Senior Credit Officer MOODY S INVESTORS SERVICE - CORPORATE FINANCE GROUP Lugano Fund Forum 9 June, 2015

2 AGENDA Global Base Metals Industry Outlook for 2015 Metal price assumptions and focus on Iron Ore case Strategic Priority for mining companies in 2015: manage liquidity Q&A 2

3 2015 Global Base Metals Outlook: Negative Key Credit Issues» Industry fundamentals weakly positioned, continued global economic weakness and copper price plunge» No upside potential seen in copper prices in 2015, uncertainty about growth in China; no material demand improvement expected globally STABLE What could change outlook to stable PMI s in the US, Europe and China track between 50 and 55 for at least two consecutive months The IMF global GDP growth forecast is between 3% and 4% NEGATIVE PMI s in the US, Europe and China track below 50 for at least two consecutive months The IMF s global GDP growth forecast is less than 3% POSITIVE What could change outlook to positive PMI s in the US, Europe and China exceed 55 for at least three consecutive months The IMF global GDP growth forecast is at least 4% 3

4 Negative Outlook for Base Metals» Current economic uncertainties point to continued pressure on base metal prices» Slowing Chinese growth rates (PMI only around 50 in April 2015 (new GDP target for 2015 is 7%) - together with weak or contracting global trends elsewhere, particularly Europe and Brazil, will impact demand and prices in 2015» US continues to evidence growth but the PMI has been moderating since October 2014 April 2015 PMI at 51.5 ( flat to March and down from 52.9 in February)» Prices continue to be under pressure; we expect them to remain range bound around current levels Copper expected to be in surplus in 2015 on increasing new supply relative to demand expectations. Prices, while up from earlier lows, will remain pressured to the downside. Current prices approach the marginal cost of production Nickel prices, following a short lived bump up on the Indonesian natural resource export ban in early 2014, have trended steadily downward since mid 2014 averaging $6.33/lb. through April 2015 versus a 2014 average of $7.65/lb. Weakness in stainless steel production will continue to weigh on nickel price movement and stocks are high Aluminum slowing demand and high Chinese export levels keep LME prices low, regional premiums down significantly. Inventories have reduced but the return to a contango in the market provides support again to financing deals.» New mine development will be more expensive, take longer, and face increased environmental and political issues» Weak environment has led to many projects and exploration and development expenditures being deferred; this will change the medium term production profile 4

5 Relative Performance bottom line: most metals weakly positioned Outlook Key: NEGATIVE STABLE POSITIVE Potential for Further Downside Weakly Positioned Stable Improving Strong Performance» Iron Ore» Copper» Aluminium» Met Coal» Thermal Coal» Nickel» Silver» Gold» Zinc» Lead 5

6 Negative Outlook for Base Metals Bottom Line where do issuers stand?» Earnings and cash flow will contract further in 2015 from already weak 2014 levels Single commodity producers, particularly in copper and aluminum, more vulnerable than diversified issuers» Cost profiles continue to be pressured despite meaningful cost savings initiatives; lower oil prices and US Dollar strength, if sustained, will benefit the cost equation for the extractive industry but not enough to compensate for price compression Estimate approximately 25% of costs are energy related. At $52/barrel oil (WTI), savings could approximate up to 8% of costs US Dollar strength will benefit producers with operations in countries with depreciating currencies such as Brazil, Australia, Canada and Russia; producers with operations in the US could be placed at a cost disadvantage. As most metals are traded in US Dollars, the dollar strength could hurt metal demand» Increasing distance between investment grade and speculative grade rated companies Only 3 investment grade rated companies with negative outlook, against 11 speculative grade with negative outlook Investment grade companies generally have larger, lower-cost assets, stronger liquidity and lower refinancing risks and are therefore much more resilient in a downturn compared to typically smaller and less profitable speculative grade rated companies 6

7 Rated Base Metals Companies- Investment Grade Rated Issuer Domicile Senior Unsecured Commercial Paper Outlook BHP Billiton Plc United Kingdom A1 Prime-1 Stable Corporacion Nacional del Cobre de Chile Chile A1 Negative Rio Tinto Group United Kingdom A3 Stable Minera Escondida Limitada Chile Baa1 Stable Alcoa of Australia Australia Baa2 Stable Anglo American plc United Kingdom Baa2 Prime-2 Negative Industrias Penoles S.A.B. de C.V. Mexico Baa2 Stable Norsk Hydro ASA Norway Baa2 Stable Vale S.A. Brazil Baa2 Negative Minera Mexico Mexico Baa2 Stable Southern Copper Corporation United States Baa2 Stable Glencore International AG Switzerland Baa2 Stable Teck Resources Limited Canada Baa3 Stable Freeport-McMoRan Inc. United States Baa3 Stable Votorantim Participações S.A. Brazil Baa3 Stable Ratings as of May 26,

8 Rated Base Metals Companies- Speculative Grade Rated Issuer Domicile Corporate Family Rating Speculative Grade Liquidity Outlook OJSC MMC Norilsk Nickel Russia Ba1 Negative Volcan Compania Minera Peru Ba1 Stable Alcoa Inc. United States Ba1 SGL-1 Positive Vedanta Resources Plc United Kingdom Ba1 Negative Fortescue Metals Group Australia Ba2 Negative JSC Holding Company Metalloinvest Russia Ba2 Stable Kaiser Aluminum Corporation United States Ba3 SGL-1 Positive Cliffs Natural Resources United States B1 SGL-2 Stable First Quantum Minerals Canada B1 Negative Constellium N.V. Netherlands B1 Negative Novelis Inc. United States B1 SGL-2 Negative Aleris International Inc. United States B1 Negative KGHM International Ltd. (Quadra) Canada B1 SGL-3 Stable Noranda Aluminum United States B3 SGL-3 Stable Hudbay Minerals, Inc. Canada B3 SGL-3 Positive Century Aluminum United States B3 Negative Taseko Mines Limited Canada B3 SGL-3 Stable Consolidated Minerals Limited Jersey B3 Negative Horsehead Holding Corp. United States B3 SGL-3 Stable Thompson Creek Metals Company Inc. Canada B3 SGL-3 Stable Wise Metals Group LLC United States Caa1 Negative Molycorp, Inc. United States Caa2 SGL-4 Stable Ferrexpo Plc Switzerland Caa3 Negative Ratings as of May 26,

9 US $/lb Scale for AL, Zn and, CU Base Metals Prices January 2008 to April 2015 $5.0 Aluminum (LME) Copper (LME) Zinc (LME) Nickel (LME) $24.0 $4.5 $21.0 $4.0 $3.5 $18.0 $3.0 $2.5 $2.0 $1.5 $1.0 $0.5 $15.0 $12.0 $9.0 $6.0 $3.0 US $/lb Scale for NI $0.0 $0.0 Source: London Metal Exchange 9

10 Tonnes US$ per Lb. Tonnes US$ per Lb. Tonnes US$ per Lb. Tonnes US$ per Lb. A closer look at price/inventory levels: downside for copper and nickel LME Zinc Inventory vs. Price/lb. January 2008 to April '200'000 1'000' ' ' ' '000 0 $0.00 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Source: London Metal Exchange LME Nickel Inventory vs. Price/lb. January 2008 to April ' ' ' ' ' ' ' ' '000 50'000 Source: London metal exchange LME Zinc Inventory (tonnes) LME Nickel Inventory (tonnes) LME Zinc Price/lb. $2.25 $2.00 $1.75 $1.50 $1.25 $1.00 $0.75 $0.50 $0.25 LME Nickel Price/lb. $16.00 $14.00 $12.00 $10.00 $8.00 $6.00 $4.00 $ $0.00 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 LME Copper Inventory vs. Price/lb. January 2008 to April ' ' ' ' ' ' '000 0 $0.00 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Source: London Metal Exchange LME Aluminum Inventory vs. Price/lb. January 2008 to April '000'000 5'000'000 4'000'000 3'000'000 2'000'000 1'000'000 Source: London Metal Exchange LME Copper Inventory (tonnes) LME Aluminum Inventory (tonnes) Both copper and nickel face supply/demand surplus risk in 2015 LME Copper Price/lb. $5.00 LME Aluminum Price/lb. $4.50 $4.00 $3.50 $3.00 $2.50 $2.00 $1.50 $1.00 $0.50 $1.60 $1.40 $1.20 $1.00 $0.80 $0.60 $0.40 $ $0.00 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 10

11 Key Metals Prices assumptions: reduced for copper, nickel and iron ore» Average base metal prices in 2014 (aluminum, copper, nickel and zinc) have evidenced volatility» Prices will remain within similar range in 2015, except for copper, nickel and iron ore, for which we reduced sensitivity levels Base Downside Base Downside Copper $6,062/tonne $4,960/tonne $6,614/tonne $5,511/tonne $2.75 $2.25 $3.00/lb $2.50/lb Aluminum $1,874/tonne $1,764/tonne $1,874/tonne $1,764/tonne $0.85/lb $0.80/lb $0.85/lb $0.80/lb Nickel $13,779/tonne $12,676/tonne $13,779/tonne $12,676/tonne $6.25/lb $5.75/lb $6.25/lb $5.75/lb Zinc ($/tonne) $1,984/tonne $1,874/tonne $1,764/ton $1,543/ton $0.90/lb $0.85/lb $0.90/lb $0.85/lb Iron Ore Fines $50/ton $40 ton 62% Fe $45/ton $40 ton 62% Fe Note: Price sensitivities represent baseline approximations not forecasts that we use to help us evaluate risk within the base metals industry. We periodically revise our base metal price sensitivities based upon movement in metal prices and material developments in the industry 11

12 US $ per Ton The Iron Ore case: price sensitivity reduced on global oversupply $ $ $ $ $ $ $80.00 $60.00 $40.00 $20.00 $0.00 Further price erosion is assumed for Iron Ore prices in

13 Iron Ore is facing a protracted oversupply, with +300MT supply coming Ramp-up in production in and flat global steel demand to exert protracted negative pressure on iron ore prices, and result in further earnings compression 13

14 Strategic priority for mining companies in 2015: manage liquidity» Liquidity is weakening also in 2015 for most rated companies due to negative free cash flows being projected also for this year, after a negative 2014 Investment grade companies display larger cash balances and better maturity profiles, with easier access to markets Speculative grade companies tend to be much more vulnerable, having generally reduced access to capital markets» To preserve liquidity most companies are cutting costs and capex and divesting assets Little room left to cut costs much further, after several costs cutting initiatives already undertaken in ; Little chance to divest assets on a timely basis, given many sellers and few opportunistic buyers in current market; Little room left to reduce sustaining capex, as it is basic investment needed for running existing operations; Key option open to most companies to manage liquidity is to cut expansionary capex further. Expansionary capex reduction is key option left to most companies to preserve cash 14

15 Second consecutive year of double digit capex decline in e 2016e $100.0 $90.0 $80.0 $70.0 sustaining capex expansionary capex $60.0 $50.0 $56.1 $43.1 $34.4 $40.0 $30.0 $20.0 $10.0 $0.0 $32.7 $33.3 $ e 2016e Most of capex reduction is coming from expansionary projects 15

16 Q & A 16

17 Moody s Base Metals Analysts New York Carol Cowan carol.cowan@moodys.com London Gianmarco Migliavacca gianmarco.migliavacca@moodys.com Toronto Darren Kirk darren.kirk@moodys.com Sydney Matthew Moore matthew.moore@moodys.com Moscow Denis Perevezentsev denis.perevezentsev@moodys.com Singapore Alan Greene allen.greene@moodys.com Sao Paulo Barbara Mattos barbara.mattos@moodys.com Mexico City Gabriel Vigueres gabriel.vigueres@moodys.com New York Anna Zubets-Anderson anna.zubets-anderson@moodys.com 17

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