Moody's opines that the current severe downturn in the mining industry represents a fundamental shift in the operating environment and that, as a consequence, a wholesale recalibration of ratings is required. As a result, on January 21 (2016), Moody's placed 55 companies in the base metal, precious metal, iron ore and coal industries rated between A1 and B3 under review for downgrade. While severity varies among issuers, all are impacted and many companies could be downgraded, some multiple notches. Moddy's broad review, which will be largely completed during the first quarter, will consider each mining company's asset base, cost structure, likely cash burn and liquidity, as well as strategies for coping with a prolonged downturn.
Moody's assessed each company's cash flow and credit metrics closer to our latest stressed price assumptions and the relative rating positioning. This is not a normal cyclical downturn, but rather, one Moody's perceived to be unprecedented.
Stress on companies in the metals and mining industry could surpass what Moody's saw during the 2008/2009 period. Prices peaked in 2012 for most base metals, with a subsequent gradual price decline in 2013 and 2014 that allowed companies to adjust mining plans and exploration expenses. However, price declines accelerated sharply in mid- and late-2015 and that has continued in the first few weeks of 2016.
Metals prices continue on a downward trend as slowing economic growth in China and weakening global demand take a toll. Some metal prices have fallen below levels reached during the 2008/2009 financial crisis and are now moving closer to the stress case scenario included in Moody's revised price assumption from just last month.
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