A sustained slump in iron ore prices through next year would pressure ratings for producers including Atlas Iron Ltd. and Cliffs Natural Resources Inc. and may trigger downgrades, Standard & Poor’s said.
The steelmaking ingredient has slumped 29 percent this year as the largest producers in Australia and Brazil expand output amid waning demand in China, the biggest consumer.
If iron ore fell to $90 a ton until the end of next year, Anglo American Plc may face additional strain on its debt rating that is already pressured by expansion programs including its $8.8 billion Minas-Rio project, S&P credit analyst May Zhong wrote in a note dated yesterday.
“The key credit metrics of some mining companies might worsen significantly,” should prices remain depressed, Zhong wrote, citing Atlas, Cliffs and CAP SA as those with debt ratings most at risk. Atlas has a B+ rating with a stable outlook from S&P, while Cliffs is rated BBB- with a negative outlook and CAP SA has a BBB- rating with a stable outlook.
Moody’s Investors Service yesterday cut its outlook on Atlas’ ratings to stable from positive because of continued weakness in the ore price. The company “may no longer sustain a financial profile that is consistent with its B2 positive rating,” Moody’s said.
Australia last month cut its price estimates for iron ore on surging output. The raw material will average about $105 this year and may average about $97 a ton in 2015, the Canberra-based Bureau of Resources and Energy Economics said.
Iron ore with 62 percent content delivered to Tianjin port in China, rose 0.5 percent to $94.70 a dry ton yesterday, according to The Steel Index Ltd.
Weaker earnings may put pressure on Perth-based Atlas, while Cliffs faces a high cost structure and CAP SA could see its debt to earnings before interest, taxes, depreciation and amortization ratio rise under S&P’s pricing scenario, according to Zhong. Producers with break-even costs above $70 per ton will also be vulnerable, she said.
Fortescue Metals Group Ltd., Australia’s third-biggest iron ore producer, and mining services companies including Ausdrill Ltd. and Emeco Holdings Ltd. are also exposed to falling prices, Moody’s analysts led by Jason Lu wrote in a note dated today.
“Lower iron ore prices, steep discounts owing to the quality of iron ore produced and the persistently strong Australian dollar are curtailing iron ore producers’ profit margins,” Lu wrote.
Rio Tinto Group, BHP Billiton Ltd. and Brazil’s Vale SA, which last year together controlled about 60 percent of the $170 billion global iron ore trade, can accommodate declining earnings and also have financial flexibility to respond to weaker prices, S&P’s Zhong wrote.