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Moody's Perspectives on Global Base Metals
Outlook for rest of the year and implications for rated companies
Gianmarco Migliavacca, VP - Senior Credit Officer
MOODY’S INVESTORS SERVICE - CORPORATE FINANCE GROUP
Lugano Fund Forum – 9 June, 2015
AGENDA
Global Base Metals Industry Outlook for 2015
Metal price assumptions and focus on Iron Ore case
Strategic Priority for mining companies in 2015: manage liquidity
Q&A
Moody’s Base Metals Industry Outlook 2015
2
2015 Global Base Metals Outlook: Negative
Key Credit Issues
» Industry fundamentals weakly positioned, continued global economic weakness and
copper price plunge
» No upside potential seen in copper prices in 2015, uncertainty about growth in China; no
material demand improvement expected globally
STABLE
What could change outlook
to stable
PMI’s in the US, Europe and
China track between 50 and
55 for at least two
consecutive months
The IMF global GDP growth
forecast is between 3% and
4%
NEGATIVE
PMI’s in the US, Europe and China
track below 50 for at least two
consecutive months
The IMF’s global GDP growth
forecast is less than 3%
POSITIVE
What could change outlook
to positive
PMI’s in the US, Europe and
China exceed 55 for at least
three consecutive months
The IMF global GDP growth
forecast is at least 4%
Moody’s Base Metals Industry Outlook 2015
3
Negative Outlook for Base Metals
» Current economic uncertainties point to continued pressure on base metal prices
» Slowing Chinese growth rates (PMI only around 50 in April 2015 (new GDP target for 2015 is 7%) together with weak or contracting global trends elsewhere, particularly Europe and Brazil, will impact
demand and prices in 2015
» US continues to evidence growth but the PMI has been moderating since October 2014 – April
2015 PMI at 51.5 ( flat to March and down from 52.9 in February)
» Prices continue to be under pressure; we expect them to remain range bound around current levels
– Copper expected to be in surplus in 2015 on increasing new supply relative to demand expectations. Prices, while up
from earlier lows, will remain pressured to the downside. Current prices approach the marginal cost of production
– Nickel prices, following a short lived bump up on the Indonesian natural resource export ban in early 2014, have
trended steadily downward since mid 2014 averaging $6.33/lb. through April 2015 versus a 2014 average of
$7.65/lb. Weakness in stainless steel production will continue to weigh on nickel price movement and stocks are high
– Aluminum –slowing demand and high Chinese export levels keep LME prices low, regional premiums down
significantly. Inventories have reduced but the return to a contango in the market provides support again to
financing deals.
» New mine development will be more expensive, take longer, and face increased environmental
and political issues
» Weak environment has led to many projects and exploration and development expenditures
being deferred; this will change the medium term production profile
Moody’s Base Metals Industry Outlook 2015
4
Relative Performance bottom line: most metals weakly positioned
Outlook Key:
Potential for
Further
Downside
» Iron Ore
NEGATIVE
STABLE
POSITIVE
Weakly
Positioned
Stable
» Copper
» Zinc
» Aluminium
» Lead
Improving

Strong
Performance

» Met Coal
» Thermal Coal
» Nickel
» Silver
» Gold
Moody’s Base Metals Industry Outlook 2015
5
Negative Outlook for Base Metals
Bottom Line – where do issuers stand?
» Earnings and cash flow will contract further in 2015 from already weak 2014 levels
– Single commodity producers, particularly in copper and aluminum, more vulnerable than diversified issuers
» Cost profiles continue to be pressured despite meaningful cost savings initiatives; lower oil
prices and US Dollar strength, if sustained, will benefit the cost equation for the extractive industry but
not enough to compensate for price compression
– Estimate approximately 25% of costs are energy related. At $52/barrel oil (WTI), savings could approximate up to
8% of costs
– US Dollar strength will benefit producers with operations in countries with depreciating currencies such as Brazil,
Australia, Canada and Russia; producers with operations in the US could be placed at a cost disadvantage.
– As most metals are traded in US Dollars, the dollar strength could hurt metal demand
» Increasing distance between investment grade and speculative grade rated companies
– Only 3 investment grade rated companies with negative outlook, against 11 speculative grade with negative outlook
– Investment grade companies generally have larger, lower-cost assets, stronger liquidity and lower refinancing risks
and are therefore much more resilient in a downturn compared to typically smaller and less profitable speculative
grade rated companies
Moody’s Base Metals Industry Outlook 2015
6
Rated Base Metals Companies- Investment Grade
Rated Issuer
Domicile
Senior Unsecured
Commercial Paper
Outlook
BHP Billiton Plc
United Kingdom
A1
Prime-1
Stable
Corporacion Nacional del Cobre de Chile
Chile
A1
Negative
Rio Tinto Group
United Kingdom
A3
Stable
Minera Escondida Limitada
Chile
Baa1
Stable
Alcoa of Australia
Australia
Baa2
Stable
Anglo American plc
United Kingdom
Baa2
Industrias Penoles S.A.B. de C.V.
Mexico
Baa2
Stable
Norsk Hydro ASA
Norway
Baa2
Stable
Vale S.A.
Brazil
Baa2
Negative
Minera Mexico
Mexico
Baa2
Stable
Southern Copper Corporation
United States
Baa2
Stable
Glencore International AG
Switzerland
Baa2
Stable
Teck Resources Limited
Canada
Baa3
Stable
Freeport-McMoRan Inc.
United States
Baa3
Stable
Votorantim Participações S.A.
Brazil
Baa3
Stable
Prime-2
Negative
Ratings as of May 26, 2015
Moody’s Base Metals Industry Outlook 2015
7
Rated Base Metals Companies- Speculative Grade
Corporate Family Rating
Speculative Grade
Liquidity
Rated Issuer
Domicile
Outlook
OJSC MMC Norilsk Nickel
Russia
Ba1
Volcan Compania Minera
Peru
Ba1
Alcoa Inc.
United States
Ba1
Vedanta Resources Plc
United Kingdom
Ba1
Negative
Fortescue Metals Group
Australia
Ba2
Negative
JSC Holding Company Metalloinvest
Russia
Ba2
Stable
Kaiser Aluminum Corporation
United States
Ba3
SGL-1
Cliffs Natural Resources
United States
B1
SGL-2
First Quantum Minerals
Canada
B1
Constellium N.V.
Novelis Inc.
Netherlands
United States
B1
B1
Aleris International Inc.
United States
B1
KGHM International Ltd. (Quadra)
Canada
B1
SGL-3
Stable
Noranda Aluminum
United States
B3
SGL-3
Stable
Hudbay Minerals, Inc.
Canada
B3
SGL-3
Century Aluminum
United States
B3
Taseko Mines Limited
Canada
B3
Consolidated Minerals Limited
Jersey
B3
Horsehead Holding Corp.
United States
B3
SGL-3
Thompson Creek Metals Company Inc.
Canada
B3
SGL-3
Wise Metals Group LLC
United States
Caa1
Molycorp, Inc.
United States
Caa2
Ferrexpo Plc
Switzerland
Caa3
Negative
Stable
SGL-1
Positive
Positive
Stable
Negative
SGL-2
Negative
Negative
Negative
Positive
Negative
SGL-3
Stable
Negative
Stable
Stable
Negative
SGL-4
Stable
Negative
Ratings as of May 26, 2015
Moody’s Base Metals Industry Outlook 2015
8
Base Metals Prices
January 2008 to April 2015
Aluminum (LME)
$5.0
$4.5
Copper (LME)
Zinc (LME)
Nickel (LME)
$24.0
$21.0
$4.0
$3.0
$2.5
$2.0
$15.0
$12.0
$9.0
$1.5
US $/lb Scale for NI
US $/lb Scale for AL, Zn and, CU
$18.0
$3.5
$6.0
$1.0
$0.5
$0.0
$3.0
$0.0
Source: London Metal Exchange
Moody’s Base Metals Industry Outlook 2015
9
A closer look at price/inventory levels: downside for copper and nickel
LME Zinc Inventory vs. Price/lb.
LME Copper Inventory vs. Price/lb.
January 2008 to April 2015
January 2008 to April 2015
LME Copper Inventory (tonnes)
$2.25
1'200'000
$2.00
$4.50
600'000
$4.00
800'000
$1.25
600'000
$1.00
400'000
$0.75
Tonnes
$1.50
US$ per Lb.
$1.75
1'000'000
Tonnes
LME Copper Price/lb.
$5.00
700'000
500'000
$3.50
400'000
$3.00
$2.50
300'000
$2.00
200'000
$1.50
$0.50
200'000
0
Jan-08
0
Jan-08
$0.00
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
$1.00
100'000
$0.25
Jan-15
$0.50
$0.00
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Source: London Metal Exchange
Source: London Metal Exchange
LME Nickel Inventory vs. Price/lb.
LME Aluminum Inventory vs. Price/lb.
January 2008 to April 2015
January 2008 to April 2015
LME Nickel Inventory (tonnes)
LME Nickel Price/lb.
500'000
$16.00
450'000
$14.00
400'000
Jan-15
LME Aluminum Price/lb.
$1.60
$1.40
5'000'000
$1.20
$10.00
250'000
$8.00
200'000
$6.00
150'000
4'000'000
Tonnes
300'000
US$ per Lb.
Tonnes
LME Aluminum
Inventory (tonnes)
Jan-14
$12.00
350'000
$1.00
3'000'000
$0.80
$0.60
2'000'000
$0.40
$4.00
100'000
1'000'000
$0.20
$2.00
50'000
0
Jan-08
6'000'000
$0.00
Jan-09
Source: London metal exchange
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
US$ per Lb.
LME Zinc Price/lb.
US$ per Lb.
LME Zinc Inventory (tonnes)
0
Jan-08
$0.00
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
Source: London Metal Exchange
Both copper and nickel face supply/demand surplus risk in 2015
Moody’s Base Metals Industry Outlook 2015
10
Key Metals Prices assumptions: reduced for copper, nickel and iron ore
» Average base metal prices in 2014 (aluminum, copper, nickel and zinc) have
evidenced volatility
» Prices will remain within similar range in 2015, except for copper, nickel and
iron ore, for which we reduced sensitivity levels
2015
Base
$6,062/tonne
$2.75
Downside
$4,960/tonne
$2.25
Base
$6,614/tonne
$3.00/lb
2016
Downside
$5,511/tonne
$2.50/lb
Aluminum
$1,874/tonne
$0.85/lb
$1,764/tonne
$0.80/lb
$1,874/tonne
$0.85/lb
$1,764/tonne
$0.80/lb
Nickel
$13,779/tonne
$6.25/lb
Zinc ($/tonne)
$1,984/tonne
$0.90/lb
$1,874/tonne
$0.85/lb
$1,764/ton
$0.90/lb
$1,543/ton
$0.85/lb
Iron Ore Fines
$50/ton
$40 ton 62% Fe
$45/ton
$40 ton 62% Fe
Copper
$12,676/tonne $13,779/tonne
$5.75/lb
$6.25/lb
$12,676/tonne
$5.75/lb
Note: Price sensitivities represent baseline approximations—not forecasts—that we use to help us
evaluate risk within the base metals industry. We periodically revise our base metal price
sensitivities based upon movement in metal prices and material developments in the industry
Moody’s Base Metals Industry Outlook 2015
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The Iron Ore case: price sensitivity reduced on global oversupply
$200.00
$180.00
$160.00
US $ per Ton
$140.00
$120.00
$100.00
$80.00
$60.00
$40.00
$20.00
$0.00
Further price erosion is assumed for Iron Ore prices in 2016
Moody’s Base Metals Industry Outlook 2015
12
Iron Ore is facing a protracted oversupply, with +300MT supply coming
Ramp-up in production in 2015-18 and flat global steel demand to exert protracted
negative pressure on iron ore prices, and result in further earnings compression
Moody’s Base Metals Industry Outlook 2015
13
Strategic priority for mining companies in 2015: manage liquidity
» Liquidity is weakening also in 2015 for most rated companies due to negative free cash flows
being projected also for this year, after a negative 2014
– Investment grade companies display larger cash balances and better maturity profiles, with easier access to markets
– Speculative grade companies tend to be much more vulnerable, having generally reduced access to capital markets
» To preserve liquidity most companies are cutting costs and capex and divesting assets
– Little room left to cut costs much further, after several costs cutting initiatives already undertaken in 2013-2014;
– Little chance to divest assets on a timely basis, given many sellers and few opportunistic buyers in current market;
– Little room left to reduce sustaining capex, as it is basic investment needed for running existing operations;
– Key option open to most companies to manage liquidity is to cut expansionary capex further.
Expansionary capex reduction is key option left to most companies to preserve cash
Moody’s Base Metals Industry Outlook 2015
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Second consecutive year of double digit capex decline in 2015
120.0
110.0
100.0
90.0
80.0
70.0
60.0
50.0
40.0
30.0
20.0
10.0
0.0
2008
2009
sustaining capex
2010
2011
2012
2013
2014
2015e
2016e
expansionary capex
$100.0
$90.0
$80.0
$70.0
$60.0
$56.1
$43.1
$50.0
$34.4
$40.0
$30.0
$20.0
$32.7
$33.3
$33.3
2014
2015e
2016e
$10.0
$0.0
Most of capex reduction is coming from expansionary projects
Moody’s Base Metals Industry Outlook 2015
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Q&A
Moody’s Base Metals Industry Outlook 2015
16
Moody’s Base Metals Analysts
New York
Carol Cowan
+1.212.553.4999
carol.cowan@moodys.com
London
Gianmarco Migliavacca
+44.207.772.5397
gianmarco.migliavacca@moodys.com
Toronto
Darren Kirk
+416.214.3845
darren.kirk@moodys.com
Sydney
Matthew Moore
+612.9270.8108
matthew.moore@moodys.com
Moscow
Denis Perevezentsev
+7.495.228.6064
denis.perevezentsev@moodys.com
Singapore
Alan Greene
+65.6398.8318
allen.greene@moodys.com
Sao Paulo
Barbara Mattos
+5511.3043.7357
barbara.mattos@moodys.com
Mexico City
Gabriel Vigueres
+1.212.553.4999
gabriel.vigueres@moodys.com
New York
Anna Zubets-Anderson
+1.212.553.4617
anna.zubets-anderson@moodys.com
Moody’s Base Metals Industry Outlook 2015
17
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Moody’s Base Metals Industry Outlook 2015
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