Ratings agency Fitch has downgraded its credit rating outlook for mining giants BHP Billiton and Rio Tinto in the wake of sliding iron ore prices prices.
Fitch reaffirmed BHP and Rio’s respective A+ and A- ratings but placed both companies on negative watch.
It said the changed outlook was based on the impact of lower commodity prices, especially iron ore.
“The rating actions follow an industry review, which included an analysis of forecast operational and financial profiles for each company over the next three to four years and incorporated Fitch’s new price assumptions on major commodities,” the ratings agency said in a statement.
Fitch’s BHP outlook
BHPB’s operational profile which has superior product diversification compared to the broad industry with exposure to the high margin oil business, places it at the higher end of the ‘A’ rating category. However funds from operations (FFO) adjusted gross leverage is expected to remain above our 1.5x downgrade trigger in 2015-2016 and beyond despite the expected price recovery for iron ore and oil. This is a key reason for our change in Outlook to Negative.
In May 2015 BHPB completed the demerging of South32, a new mining company that will be involved in coal, aluminium, manganese, silver and nickel production. Fitch assesses the near-term effect of South32’s spin-off on BHPB’s credit profile as marginally negative owing to weaker projected free cash flow (FCF) generation and a modest increase in FFO adjusted gross leverage after the demerger. However, BHPB will benefit from a streamlined business structure and better average position on the commodity cost curve, which will help the company navigate the depressed commodity prices environment.
Fitch expects the company to retain a strong profit margin during the forecast period with the EBITDA margin above 40%. Moderate capital spending versus previous years should add to the company’s ability to remain free cash positive through the cycle.
Fitch’s Rio Tinto outlook
The affirmation of RT reflects Fitch’s view that the company’s financial profile remains commensurate with the lower end of the ‘A’ rating category. The revision of the Outlook to Negative reflects our expectation that the company’s leverage will remain above 2.5x during 2015-2016, the years of weakest iron ore prices under Fitch’s assumptions. Fitch expects the company to remain FCF negative during most of the forecast period despite the relatively limited projected capital spending programme.
Although RT benefits from a leading iron ore cost position, the high percentage of revenue and EBITDA generated by that single commodity exposes the company to significant risks.
– with AAP
