More miners to go bankrupt in 2016

Analysts and investment groups are touting an acceleration of mine closures this year.

Moody’s and BlackRock fund manager Evy Hambro – manager of some of the world’s largest mining funds – have predicted a year of bankruptcies and closures ahead for the resources industry.

In Moody’s recent Corporate Default and Recovery Rates, 1920-2015 report it forecasts speculative-grade corporate defaults will increase this year to the highest levels since the Global Financial Crisis.

While globally there are a high level of defaults, unlike the GFC the majority of these are resources industry specific, with mining and metals companies seeing the highest default rate last year at 6.5 per cent, while oil and gas operators were closed behind at 6.3 per cent.

To date major miners such as Arch Coal and Alpha Resources in the US have already declared Chapter 11 bankruptcy, following the predictions of WoodMackenzie analysts who remain extremely bearish on the future of miners.  

Many miners have already seen credit downgrades as the market’s belief in their ability to pay down debt and generate effective returns diminished in the face of lower commodity prices and soft demand from China.

Moody’s predicts the sectors to further weaken as the continued downturn wipes billions from revenues, and has already indicated it is looking at downgrades for 175 mining and energy companies globally.

 “Although credit quality declined throughout 2015, the magnitude of ratings downgrades widened significantly in the fourth quarter,” Moody’s vice president and senior credit officer Sharon Ou said.

"These factors, combined with the sharp increase in defaults and rising investor caution, indicate that the credit cycle is turning."

It expects mining and energy default rates this year to spike to as high as 8 or 9 per cent, with the baseline forecast sitting at 7 per cent, more than double the historical average, with speculative companies slated to be hit the worst.

These figure edge close to the 9.4 per cent default rate mining and metals experienced in 2009.

"Persistently low commodity prices, slowing economic expansion and widening high-yield spreads will send default rates higher in 2016," Ou said.

BlackRock’s Hambro forecasts were in line with Moody’s report.

“Commodity markets remain over-supplied and prices for certain commodities will need to remain at current levels, or move lower, to see loss making production leave the market. In light of this, dividends will remain under pressure," Hambro said, according to the SMH.

"As we enter 2016, the industry will be forced to respond and we would expect to see an acceleration in production cuts which should be supportive for commodity prices," he said.

"The oversupply in bulk commodities (namely, iron ore, thermal coal and metallurgical coal) is set to persist. However, the balance between supply and demand is tighter and likely to tighten more quickly for a number of the base metals (copper and zinc in particular)."

BHP has already made strides forward in this regard, announcing a shift in its views on iron production, with BHP CEO Andrew Mackenzie yesterday stating that a renewed focus on cash flows means it will no longer rely on higher volumes.

"High quality medium-to-longer term projects will only be pursued at a time when they add greater value than all other options, and do not exacerbate the current supply-demand imbalances,” Mackenzie said.

But this is unlikely to stem the tide in the short to medium term as Chinese stockpiles remain high.

{^image|(width)440|(height)213|(sizetourl)True|(behavior)hover|(style)float;|(originalwidth)960|(align)right|(url)~/getmedia/c6b7bd62-5995-4a9a-bba0-5236851c501c/Producer-stock-prices-reflect-troubled-times-for-coal-2.aspx?width=440&height=213|(originalheight)466|(vspace)10|(hspace)10|(mouseoverwidth)960|(ext).jpg|(mouseoverheight)466^}WoodMackenzie analyst Andy Roberts stated, “Who can blame producers for rushing to close the books on a really bad year and shifting their gazes to tomorrow?”

“Across the industry, 2016 promises more pain than gain.

“It’s what producers won’t do that matters most. They won’t sufficiently rationalise production to balance supply and demand. They won’t, because most of them can’t, repair debt-laden balance sheets and that will leave many vulnerable and their bond-holders squeamish. They won’t find it easy to re-capitalise their mines because financers are backing away from coal.”

These forecasts are in line with many miners’ predictions for their year ahead.

View from the pits

Anglo American head Mark Cutifani and current Vedanta Resources CEO – and former Rio Tinto chief – Tom Albanese are both pointing to more turmoil for the mining industry in the coming months.

“This is exactly where we were in the late 1990s,” Albanese, told Bloomberg Television.

“The survivors were the ones that enjoyed the benefit when China kicked in starting in 2003. Those who can manage their balance sheets the best in this period of time, manage their assets the best, stay opportunistic. We could be OK.

“We’re all quite hesitant to say to say the bottom is here and has turned.”

Cutifani gave a similar outlook, talking of ‘grim’ markets and more job losses ahead for the industry at a mining industry event earlier this week.

“Things may still get worse before they get better,” Cutifani said.

“We can’t rely on a reversal of this price slump any time soon. For many of us in the industry, 2016 is already shaping up to be the most challenging yet.”

He went on to state that no miner has been untouched by the downturn.

This current situation is compounded by the latest data from the London Stock Exchange, which found LME listed companies cash held fell by 1.1 billion pounds over the last 12 months.

Light at the end of the tunnel

However despite this negative pressure on the mining industry, it is still supporting Australia’s economy.

A BIS Shrapnel study released earlier this week stated that sustained growth in mining production and export levels has managed to buoy Australia’s economy, protecting it from a potential recession.

According to BIS Shrapnel chief economist Dr. Frank Gelber, the main reason Australia has yet to spiral into a depressed economy has been strong and sustained growth in resource production and export volumes (around eight per cent per annum in each of its past three years), aided recently by surging education and tourism exports, but this situation can’t continue indefinitely.

He pointed to Australia’s position as a low-cost, bulk commodity producer which has lifted output levels and rode out the worst of the downturn, albeit not without repercussions.

BIS Shrapnel’s report goes on to state that the low cost producers in the Pilbara are playing a major role in keeping the nation afloat.

 “Australia is a low-cost, high quality resources exporter, and other countries simply cannot compete with that,” Gelber said.

“While prices have fallen dramatically, export volumes are growing strongly as projects come on stream.”

This is likely to be later supported by the LNG production coming online however it will not be entirely offset, as we are currently entering only the second year of a predicted four to five year decline “that will constitute an enormous negative shock to GDP growth,” BIS Shrapnel stated.

“We are only at the beginning of the decline in mining investment, but we are still looking at strong growth in production and exports,” Gelber said.

“The net effect is that the negative impact from falling investment is being offset by continued growth in production. Having been a strong driver of growth during the boom, mining is now not contributing at all. That’s why growth is, and will remain, weak.

“There is little risk of recession, but we’re stalled, waiting for the non-mining economy to pick up.”

To keep up to date with Australian Mining, subscribe to our free email newsletters delivered straight to your inbox. Click here.