The US-based credit rating agency Standard and Poor’s has placed BHP Billiton (ASX:BHP), Rio Tinto (ASX:RIO) and Fortescue Metals (ASX:FMG) on a negative credit watch. Five other miners were also placed on the list. The potential credit downgrade has been seen as a reaction to continually falling iron ore prices. Recently, Treasurer Joe Hockey projected that iron ore prices would fall to the $US35 per tonne range. The credit agency has predicted that iron ore prices will be lower than previously projected, coming in around $US45 per tonne in 2015, $US50 in 2016 and $US55 for 2017. As falling commodity prices squeeze profit margins for Australian miners, BHP and Rio have decide against pulling back production. Instead, the companies have decided to cut capital spending to deal with lower profits.
Currently, BHP has an A+ credit rating, Rio has an A- rating and Fortescue has a credit rating of BB+ from S&P. S&P has now signalled that these credit ratings will need to be revised. It cited BHP and Rio’s decision to refrain from reducing production proportionally to falling demand. "In our view, the severe supply and demand imbalance in the iron ore market could continue for the next two years," the agency said. "Lower iron ore prices may not only weaken producers' operating cash flows and financial leverage but may also affect the long-term resilience of some companies' business risk profiles, given the higher-than-anticipated earnings volatility due to iron-ore-price swings."
BHP, Rio and Fortescue shares have all been challenged in the last 12 months. BHP has fallen 22.38 per cent in the last 12 months and 1.26 per cent so far this year. RIO has fallen 13.09 per cent in the last 12 months and 5.21 per cent so far this year. Fortescue has been hit the hardest. FMG has fallen 66.38 per cent in the last 12 months and 35.22 per cent so far this year.
Author: Imran Valibhoy
Apr 14, 2015
Since Joining the firm in 2006, Imran has worked on a range of M&A and Capital Market transactions in the natural resources, mining as well as projects in the renewable energy sector. Prior to joining Wise-owl, Imran worked at Euroz Securities in Perth, aiding in the advisory and valuation of companies in the mining and industrial sectors in Australia. Imran has a Masters in Banking & Finance from City University's Class Business School in London and a Bacheloor degree in Commerce from UWA.