Mining Industry's Improved Creditworthiness

With falling debt levels and lower credit-default prices, the creditworthiness of selected mining companies has improved so far this year. New research by SNL Metals & Mining highlights a fall in the price of credit default swaps, or CDS, in the first six months of the year for the leading mining companies, which indicates improving creditworthiness and lower default risk.

Barrick Gold Corp., which has a BBB- grade assigned by S&P Global Ratings, showed the group's highest price change for five-year contracts on senior debt, with a 67% negative CDS price change on July 6. Barrick was closely accompanied by S&P Global Ratings' B+-rated Teck Resources Ltd., and BB-rated Anglo American Plc, whose five-year contracts on senior debt fell to 63% and 50% respectively by the end of the selected period.

Select mining companies yeat-to-date CDS performance

Mining companies have continued a trend that was established last year, where companies used a combination of non-core asset sales, cost-cutting initiatives and free cash flow generation to reduce net debt.

Analysis by SNL Metals & Mining of the 20 largest players in the mining sector with comparable data shows a significant reduction in debt over the past two years. As illustrated in the graph, net debt for this group fell from US$192 billion in mid-2014 to about US$180 billion by the end of 2015. Nevertheless, the group's net debt as a fraction of total equity has worsened from 0.35 to 0.58 over this period because of falling share prices.

Net Debt for 20 largest mining companies

London-listed Glencore Plc reduced reported net debt (in which total debt is reduced by cash and readily marketable inventories of US$15.4 billion) to US$25.9 billion in 2015, 15% lower than US$30.5 billion in 2014. The improvement in reported net debt was the result of US$1.6 billion in asset sales during 2015, with the company simultaneously hitting its targets for reducing operating expenditure, capital expenditure and working capital. The company plans to achieve net debt of US$17 billion to US$18 billion by the end of 2016, and to reduce it to about US$15 billion by the end of 2017.

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Precious metals major Barrick Gold also met its debt-reduction target of US$3 billion, which was 24% lower than its debt in 2014. The 2015 reduction was possible due to non-core asset sales, free cash flow from operations and partnerships. The company continued the trend so far this year, cutting debt by a further US$842 million, representing 42% of this year's goal of reducing debt by US$2 billion.

After facing multiple challenges during 2015 due to low iron ore prices and Samarco's tailings dam failure, Brazilian mining major Vale SA plans to divest some of its core assets. The company has suffered from reduced free cash flow and the impact of the falling local exchange rate, which had lifted its net debt to US$27.7 billion by the end of the March quarter of 2016, compared with US$24.8 billion in the year-ago period.

Vale expects to accelerate its debt-reduction plan by selling core assets worth a further US$10 billion through next year and divesting US$4 billion to US$5 billion in non-core assets this year.

Following the same trend, Freeport-McMoRan Inc. was rumored to be in negotiations with interested buyers to sell its 20% stake in its Americas assets to raise US$2 billion. In May, the company initiated the sale of its 56% stake in Tenke Fungurume and completed the sale of its 13% share of the Morenci join venture.

Anglo American Plc, meanwhile, is close to selling off its Moranbah North and Grosvenor metallurgical coal assets in Queensland, as part of its debt-reduction plan.

Q1 16 debt and liabilities ratios of largest mining companies

Mining companies are also buying back debt, most notably Rio Tinto. In June, the London-based mining giant announced a cash tender for US$3 billion of its 2018, 2020, 2021 and 2022 U.S. dollar-denominated bonds. This was just a month after it bought back US$1.5 billion in debt.

Rio Tinto's debt buybacks are a part of company's debt-reduction plan following a Moody's downgrade of its senior unsecured rating from A3 to Baa1.

Luxembourg-based steel company ArcelorMittal announced its third debt buyback this year. The company received a poor response to its previous two offers, but this time anticipates reducing debt by up to US$600 million by repurchasing its outstanding 5.125% notes due June 2020 for US$1,008.75 to US$1,051.25 per note, 5.25% notes due August 2020 for US$1,021.25 to US$1,063.75 per note and 5.5% notes due March 2021 for US$1,011.25 to US$1,053.75 per note.

Other companies redeeming outstanding notes include AngloGold Ashanti Ltd., with an offer to buy all its outstanding 8.5% notes due 2020, and AK Steel Holding Corp., which is looking to buy back all its outstanding 8.75% senior secured notes due 2018.

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