Friday, 6 February 2009

Fitch Says Latin Miners Face 50 Percent Ebitda Drop This Year. Investors Ignore Warning, Favour Mining Stocks in Today's Trading Session

Pig Iron: its market in Brazil was paralysed before
year-end after buyers disappeared and price formation collapsed

Fitch Ratings issued on Feb. 4 a report on the Latin American metals and mining industry called ''Bruised but Not Beaten.´´ The report says that regional metals and mining companies are braced for a decline of over 50 percent in their Ebitda along 2009 as prices decline and demand for raw materials, especially in China, tumbles. Yet, after amassing cash in their balance sheets during the 2003-2008 bull market characterised by high demand and high prices, the companies seem to be well positioned to face the current downturn. Yet, Fitch warns: ''The next twelve months will prove difficult for these companies.´´ Jay Djemal, the lead author of the report, said that leverage and interest covenants may be breached by some metal and mining companies in the region as ''a result of the tightening cash flows due to the subdued demand and low metal prices. But very strong cash positions mean it is unlikely that any of the big players will default on their debt obligations.´´ The argument is a bit convoluted ... but it is a warning anyways.

Markets ignored this report -- as opposed to Fitch's very timely report on Brazilian homebuilders, which sent the Bovespa down for a couple of days, two weeks ago. Cia. Vale do Rio Doce, the world’s biggest iron-ore miner, gained today in São Paulo for a fourth day following an improvement in Goldman Sachs Group Inc.'s ratings on the company as demand for iron-ore begins to recover.

Let's say this -- the outlook for this industry is quite complicated, especially in Brazil and Perú. In November I attended a MMX conference with analysts. The company's CEO (Martins, maybe? I forgot his name, apologies ...) at the time told us that the pig iron market had collapsed! There was no pricing -- can you imagine that? He also said that exports were close to zero in both October and November and that, even as local orders were not bad, they were cooling at quite a fast rate. Companies from Vale to Cia. Siderúrgica Nacional and MMX to Rio Tinto announced delays in their capital expenditure projects and trimmed their production levels in response to the slowing demand and to cope with tightening cash flow generation. As an anecdote, the town of Corumba in southeast Brazil, an iron-ore production pole, has seen more than 10,000 citizens lose their jobs as MMX, Vale, Rio Tinto (or is it Anglo American?? -- I think either of those two have a significant operation there) reduce their workforce and negotiated with unions to place employees on paid leave. Mills and mines have been shut down. And, just finalise, the companies are facing the toughest credit markets in at least four decades. The outlook is not good -- and that is why investors should welcome this Fitch report.

Fitch added that the median cash/short-term debt coverage ratio for the group of the Fitch-rated Latin American metals and mining companies for the 12 months ended on Sept. 30, 2008 was 1.6 times, down from the 2.5-times peak seen in 2006. Median short-term debt for the same period accounted for just 21 percent of total debt, with the majority of large amortizations not being due until after 24 months. Fitch included CAP, CSN, Gerdau, Vale, Samarco, Usiminas, Siderar, Sidetur, Ternium Mexico, Codelco, Southern Copper Corporation, Minera Escondida, Molymet, Alcoa Aluminio and Clarendon Alumina in its report.

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