Moody's puts Fortescue, South 32, Newcrest on review for credit rating downgrade

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Ratings agency Moody’s has put some of Australia’s biggest resources companies on review for a credit downgrade.

The companies affected are Newcrest, Alcoa, BHP Billiton spin-off South 32, and Andrew Forrest’s Fortescue Metals Group.

Moody’s says the current downturn in the commodities sector “will mark an unprecedented shift for the mining industry”, and explains that “deteriorating industry fundamentals require a recalibration of the global mining portfolio rated by Moody’s”.

China, the world’s biggest source of demand for raw materials through Australia’s recent mining boom, announced this week that its GDP grew at an annualised pace of 6.8% in the December quarter, the slowest since 2009.

“China’s outsized influence on the commodities market, coupled with the need for significant recalibration of supply to bring the industry back into balance indicates that this is not a normal cyclical downturn, but a fundamental shift that will place an unprecedented level of stress on mining companies,” said Matthew Moore, a Moody’s Vice President and senior credit officer.

Downgrades by ratings agencies would increase the debt servicing costs of the miners as their businesses come under increasing pressure from falling commodity prices.

From the Moody’s statement:

This broad ratings review will consider each mining company’s asset base, cost structure, likely cash burn and liquidity, as well as management’s strategy for coping with a prolonged downturn and the ability to execute on same. The review will assess each company’s cash flow and credit metrics closer to our latest stressed price assumptions and the relative rating positioning.

Moody’s believes that this downturn will mark an unprecedented shift for the mining industry. Whereas previous downturns have been cyclical, the effect of slowing growth in China indicates a fundamental change that will heighten credit risk for mining companies. This review reflects the belief that deteriorating industry fundamentals require a recalibration of the global mining portfolio rated by Moody’s. Although all issuers in these sectors have been adversely affected by declining prices, severity varies substantially by issuer. Accordingly, the range of possible outcomes upon conclusion of the review for given issuers varies from possible confirmation of ratings to multi-notch downgrades. Moody’s expects to conclude a majority of the reviews by the end of the first quarter. While this review focuses on companies rated in the range from A1 to B3, Moody’s is also reevaluating higher and lower rated companies in the context of industry conditions. The higher rated companies, on average, are somewhat more resilient to low commodity prices and many of the lower rated companies have recently been downgraded.

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