Moody’s foresees elevated commodity prices persisting throughout this year
Moody’s Investors Service says the persistence of weaker mining production and volume constraints will exacerbate tight markets and further elevate prices of many metals after a number of large-rated global diversified mining companies posted first-quarter production results showing weaker production and rising costs.
However, a boom in 2021 has provided a cushion to many mining companies that will help soften current upheavals in the market. Higher prices that are likely to persist throughout this year will also limit the adverse effects of cost inflation on miners’ credit quality.
Moody’s reports that Covid-19-related labour constraints and cost inflation are the main drivers behind lower production and cost increases across the mining industry, while higher rates of Covid-19 infections among workers has created labour challenges in key mining countries, including Australia, Peru and South Africa.
Added to this is weather-related disruptions, including heavy rainfall, impacting on diversified miners operating in Brazil, South Africa and Australia.
Further, Russia’s invasion of Ukraine in February has triggered turmoil in commodity markets, with Moody’s raising its near-term price assumptions for several metals and mining commodities to reflect constrained commodity supply.
CASE-BY-CASE
Moody’s points out that while Anglo American’s credit metrics will remain solid with high commodity prices supporting margins and cash flow, profitability and cash flow for the miner this year will still be hurt by the revisions to its guidance and other factors.
Anglo reported a 10% year-on-year decrease in first-quarter production and lowered its full-year platinum group metals, iron-ore and metallurgical coal production guidance for the year. It also raised its overall cost guidance by 9%.
Anglo also temporarily suspended part of its metallurgical coal production because of a fatal incident at Moranbah, in Australia, in late March, with reopening subject to regulatory approval.
Weather or water availability issues may also continue to affect some of its other operations.
As another example, Moody’s points out that Glencore reduced its copper and cobalt full-year volume guidance by 3% and cut its zinc guidance by 9%, largely driven by first-quarter developments.
However, Glencore increased its guidance for nickel and ferrochrome by 3%.
While the production constraints for Glencore were largely driven by Covid-19-related labour constraints, geotechnical challenges and slower ramp-ups, Moody’s says the strong performance of coal, together with outperforming marketing operations, will continue to support growing profits for the diversified miner this year.
Meanwhile, BHP’s total group production (excluding petroleum operations) decreased by 3% on a copper equivalent basis for the nine months ended March 31, mainly because of lower copper volumes.
Pandemic-induced labour issues contributed to BHP’s March quarterly copper production registering 6% below the same period last year, in addition to reflecting lower grades and disruptions from public road blockades near Escondida, in Chile, its largest copper mine.
Moody’s says these issues contributed to BHP also lowering its copper production guidance for the fiscal year ending June 30.
Nonetheless, despite similar labour challenges and ongoing cost pressures across its iron-ore and metallurgical coal operations, Moody’s says BHP maintained its production and unit cost guidance for these operations.
This will support continued strong cash flow generation, as iron-ore is BHP’s largest earnings contributor and metallurgical coal has been benefiting from record prices.
Further, Vale maintained its iron-ore production guidance for this year at between 320-million and 335-million tonnes, despite the challenges faced in the first quarter when heavy rainfall temporarily halted production at the Southern and South-eastern systems and led to stoppages of railway transportation in the Northern system.
Some delays in obtaining licenses and maintenance works also contributed to the overall decline of 6% in iron-ore production volumes in the first quarter against the same period in 2021.
Nevertheless, improved production capacity in Minas Gerais and in the Northern system will support the production guidance this year, says Moody’s.
Although Vale’s cash costs for iron-ore increased by $2.20/t, to $18.70/t in the first quarter, the miner estimates its cash costs for iron-ore (excluding third-party purchases) will remain between $18.50/t and $19/t this year.
Despite these challenges, Vale’s cash flow will continue to benefit from elevated iron-ore prices and sales with a higher share of premium products.
Furthermore, Rio Tinto’s Pilbara iron-ore segment – accounting for 59% of revenue and 72% of the earnings before interest, taxes, depreciation and amortisation in 2021 – reported a 6% year-on-year decline in production and an 8% decline in shipments in the first quarter, mainly owing to labour shortages and supply chain issues.
As such, Moody’s highlights that Rio Tinto reiterated its 2022 iron-ore unit cost guidance of between $19.50/t and $21/t and shipments guidance of between 320-million and 335-million tonnes.
This remains subject to numerous operational risks, including the commissioning and the ramp up of the Gudai-Darri greenfield mine and brownfield mine replacement projects, uncertainty around the impact of cultural heritage management on mine plans and Covid-19-related constraints.