The outlook on BHP Billiton Ltd.’s credit rating was reduced to negative by debt assessor Standard & Poor’s as lower iron ore and oil prices threaten profits at the world’s largest mining company.
The ranking firm, which has cut its price assumptions for iron ore, opted to maintain the stable outlook on Rio Tinto Group, which had been placed on watch for a possible negative ratings action along with BHP and six other producers of the steelmaking material. BHP’s credit score was affirmed at A+, the fifth-highest level, while Rio Tinto is two steps lower at A-. S&P’s so-called CreditWatch on both companies has ended.
Risks have mounted for iron ore exporters as higher production has spurred a global supply glut. While the price has rebounded from the 10-year low touched last month, it remains at or close to unprofitable levels for some producers. The plunge in crude oil prices and BHP’s shareholder dividend policy added to S&P’s wariness about the Melbourne-based miner.
“Continued weakness in commodity prices, combined with BHP Billiton’s commitment to a progressive dividend payment, may weaken the company’s key financial metrics to below our expectations for the A+ rating without offsetting measures by the company,” S&P said in a statement Monday. “BHP Billiton is particularly exposed to iron ore prices and to some extent, oil prices.”
While S&P reckons the drop in iron ore prices will also hit Rio Tinto’s earnings and measures of creditworthiness, they are still in line with the company’s existing rating.
London-based Rio’s financial position, relatively low capital spending program and its competitive advantage in iron-ore production costs “should mitigate the pressure,” S&P said. The credit-ranking company said it sees further scope for BHP to cut operating and capital costs to conserve cash.
BHP spokeswoman Emil Perry reiterated previous statements that the company’s approach to capital management is unchanged, and it remains committed to a strong balance sheet and a solid A credit rating. Melbourne-based Rio Tinto spokesman Bruce Tobin declined to comment on S&P’s announcement.
The outlook shift on BHP follows S&P’s decisions to cut the ratings of other producers including Fortescue Metals Group Ltd., Vale SA and Anglo American Plc.
S&P’s assessments are based on iron ore averaging $45 a metric ton in 2015 and $50 in 2016, with an assumption that the Australian dollar will hold around 75 U.S. cents over the same timeframe. Iron ore at the Chinese port of Qingdao was at $56.18 a ton last week, having fallen as low as $47.08 in April, while the Aussie dollar bought 78.23 U.S. cents as of 3 p.m. on Monday in Sydney.