According to Fitch Ratings, continuing declines in iron ore prices will test the resilience of iron ore miners’ capital structures and credit profiles in 2015. Currently prices are around USD 70 per tonne for 62% Fe content cash and freight basis to China.
Mr Jay Djemal, Director at Fitch, said that “Fitch expects the majority of iron ore miners in Latin America to remain profitable through the pricing trough due to their low production costs resulting from higher average ore grades, low transport costs to the port, increasing sales volumes and weakening local currencies. Rating downgrades could occur if iron ore prices remain low for a sustained period absent management action to remedy deteriorating credit metrics.”
Fitch’s ratings for Latin American iron ore miners remain consistent with the sector’s ‘through the cycle’ credit profiles and factor in peaks and troughs of the demand cycle. Latin American corporates have historically held large levels of cash for liquidity purposes and Fitch expects to see no changes in this practice during difficult operating periods. Under extremely challenging conditions through a prolonged period, Fitch expects management to take measures to preserve capital structures and ratings at their current levels and in some cases for additional shareholder support to be forthcoming. Downgrades could also result from companies emerging from the trough with significantly deteriorated credit profiles, absent supportive actions mentioned.
Vale S A’s credit ratings are expected to remain stable during the pricing trough as it ramps up iron ore production from around 330 million tonne in 2014 to over 450 million tonne by 2018. During 2014, the company had a cash cost of USD 23.6 per tonne to the port and an additional freight cost of USD 20 tonne to China, a total cost of USD 43.6 tonne. Following the completion of its higher grade expansion projects in its Northern System, Vale’s total production cash cost including freight should improve to USD 39.6 tonne by 2018.
Fitch expects higher cost iron producers to be ultimately displaced, allowing for a recovery in prices. Running a financial forecast scenario of three years with average iron ore prices constant at USD 70 tonne, Fitch projects Vale’s EBITDA would be around USD 10 billion in 2015, USD 13.5 billion in 2016 and USD 15.6 billion in 2017. This corresponds to a peak in net adjusted debt to EBITDA of around 3.0x in 2015, reducing to 2.0x in 2016 and 1.5x in 2017 including REFIS debt, and 2.3x, 1.5x and 1.1x, respectively, excluding REFIS. Vale’s EBITDA per tonne at this price level would be USD 28 tonne in 2015, USD 36 tonne in 2016 and USD 38 per tonne in 2017.
These projections maintain a stable cash cushion of around USD 5 billion and do not include the cash impact of any possible asset sales or other value creating measures that Vale recently mentioned as a possibility for 2015 and beyond. Capex requirements will also decrease materially post-2015, alleviating cash flow pressure significantly. Vale has committed credit facilities of USD 9.1 billion as of September 30th 2014 and a very comfortable debt amortization profile of around USD2 billion a year on average until 2018, providing strong liquidity.
Samarco S A also exhibits robust profitability with EBITDA margins at above 30% under a USD 70 per tonne iron ore price scenario. Samarco, like CAP S A, is a producer of iron ore pellets that command a premium of between USD 30 to USD 40 per tonne above the spot price. This pellet premium includes an adjustment for higher iron ore content and for the higher efficiency it brings to the steel making process.
CAP is also able to charge a premium for its magnetite iron content due to the exothermic reaction of its magnetite iron ore pellets during the steel making process, adding extra efficiency and lowering energy costs. CAP produces iron ore lumps, pellet feed and fines, alongside its steel production and steel processing businesses, in addition to pellets, diluting the pellet premium on a consolidated basis for this company.
Both Samarco and CAP exhibit competitive cost structures due to their use of long pipelines that carry their iron ore slurry from mines to plants located close to ports for export. Samarco’s consolidated cash cost is around USD 49 per tonne Freight on Board and CAP’s is around USD 56 per tonne FOB in 2013, with both costs decreasing in-line with their respective iron ore volume expansions. Samarco’s cash cost is expected to decrease to around USD 45 tonne and CAP’s to around USD 50 tonne by 2015.
Samarco’s leverage ratios would be high for its rating category at around 3.5x net debt/EBITDA on average should iron ore prices remain at USD 70 tonne for 3 years as a result of recent debt incurred to complete its third pipeline, 4th pelletizing plant project. Fitch’s downside projection takes into account lower capex and dividends paid to its parent companies, Vale and BHP Billiton Limited. Fitch would expect additional shareholder support under such a scenario to preserve Samarco’s capital structure and credit profile.
CAP under a USD 70 per tonne iron ore price scenario would exhibit net debt/EBITDA between 2.5x to 3.0x during 2015 to 2017. This is dependent on the company achieving an average premium of around USD 10 tonne above this iron ore spot price, blended for its various products and maintaining cash on balance sheet of around USD 400 million as a cushion with stable debt levels of around USD 1.2 billion.
CAP’s ratings could be pressured without additional actions to shore-up its capital structure and if it is unable to sell a product mix to achieve this premium level above the iron ore spot price. Other expectations under this scenario include the ramp-up in iron ore sales volumes from 15 million tonne per year in 2014 to 16 million tonne per year in 2015 and 17 million tonne in 2016. CAP has a debt covenant relating to its USD 200 million senior notes of 3.1x net debt/EBITDA that the company does not breach under this scenario.
Brazilian steel players, Gerdau S A and Usinas Siderurgicas de Minas Gerais S A have postponed plans to expand iron ore production at their respective mining assets. They are currently producing levels of iron ore to remain self-sufficient. The ratings of Companhia Siderurgica Nacional could be downgraded under a long-term USD 70 tonne iron ore price scenario as the company’s iron ore operations would be unprofitable at that price absent further cost reductions. CSN’s production costs are elevated due to the investment to expand Casa de Pedra, CSN’s largest iron ore asset.
Fitch would expect the company to postpone further expansion at a time of low iron ore pricing. Leverage ratios are also currently high for CSN, a sustained period of low iron ore prices not being offset by improved performance from its steel, cement and logistics businesses could result in negative rating action.
Source – Strategic Research Institute
Zhejiang Yaang Pipe Industry Co., Limited