A worsening of already dismal mine operations conditions and an extended slowdown could weaken credit metrics and cash flows throughout the U.S. metals and mining industry, Standard & Poor's analysts have warned.
In a recent industry report card, S&P analysts noted that out of the 43 public rated U.S. metals and mining companies, "13 have negative outlooks or are CreditWatch with negative implications, and only four have positive outlooks or on CreditWatch with positive implications."
"With the onset of the credit crisis and the further weakening of the economy, demand has dropped sharply, and visibility into prospects for 2009 is low, and in some cases non-existent," the analysts said. "In the face of deteriorating conditions and tight credit, the entire supply chain is managing for cash and reducing inventory, orders, and, ultimately, production levels."
Nevertheless, S&P noted that the majority of larger U.S. metals and mining companies have benefited from several years of good earnings and cash flows. "This has allowed them to enhance their business profiles through acquisitions, expansions, and improved cost positions and to create sufficient liquidity to provide a cushion going into the current downturn."
"However, further price declines and low commodity prices for a prolonged period could lead to lower ratings across the sector," the analysts warned. Only coal and gold remain relatively strong.
The analysts identified several key factors that they believe will affect credit quality for U.S. metals and mining companies in the coming months, including: stabilization and improvements in the economic environment; economic improvements from proposed global government stimulus packages could benefit worldwide metals demand; the cost position of many mining and metals companies should improve with the across-the-board decline in input prices; maintaining the restraint shown in response to market declines will be a key factor in reducing inventories and supporting prices; the viability of the Big Three U.S. automakers; and liquidity position/cash flow generation.