Mining, oil companies on downgrade watch
Commodities meltdown has Moody’s Investors Service eyeing credit downgrade
Moody’s Investors Service says it’s eyeing most of the major players in Canada’s mining sector and oilpatch for a credit downgrade amid a prolonged and “unprecedented” global commodities meltdown.
Barrick Gold Corp., Goldcorp Inc. and Teck Resources are among the dozen miners and 19 oil producers in Canada that are being reviewed by the ratings agency as companies struggle with a steep decline in oil and metals prices driven by oversupply and slowing growth in China.
Moody’s notice Friday for 120 energy companies and 55 miners around the world is its single largest warning of potential corporate downgrades since the 2008 financial crisis.
A ratings downgrade would make borrowing more expensive for oil and metal producers that are already cash-strapped and swimming in debt due to plummeting commodity prices, forcing them to slash jobs and costs and shut down mines.
“Multi-notch downgrades are particularly likely among issuers whose activities are centred in North America, where natural gas prices have declined dramatically along with oil prices,” said the rating agency.
Among the biggest names on the list is Calgary-based Precision Drilling, which owns and operates fleets of rigs used by oil and gas companies in Canada, the United States and other countries.
Other companies under review include Paramount Resources Ltd., Talisman Energy Inc. and other oil and gas producers, as well as companies that provide drilling, transportation and environmental services to the industry.
Moody’s also reduced estimates for both West Texas Intermediate and Brent crude to $33 (U.S.) a barrel for 2016, cutting the two benchmark forecasts by $7 and $10, respectively, citing increased OPEC supplies and moderate consumption growth.
“Even under a scenario with a modest recovery from current prices, producing companies will experience much lower cash flows,” Moody’s said in a statement commenting on international giants Shell, Total and Statoil.
“Today’s review for downgrade considers that much weaker industry fundamentals have potential to warrant rating changes.”
Oil companies have been battered by a more than 75-per-cent collapse in crude prices over the past 18 months amid a global supply glut and as China’s economy slows.
Shell, Europe’s biggest oil producer, said this week that it expects fourthquarter profit to drop at least 42 per cent.
In metals, “China’s outsized influence on the commodities market, coupled with the need for significant recalibration of supply to bring the industry back into balance indicates that this is not a normal cyclical downturn, but a fundamental shift that will place an unprecedented level of stress on mining companies,” said Carol Cowan, a Moody’s senior vice-president.
Raw materials have sunk to multiyear lows amid rising concern that slowing growth in China will hurt demand for energy and metals.
Billionaire investor George Soros said last week that China’s economy is headed for a hard landing in a slump that will worsen global deflationary pressures.
The prospects of further rating cuts adds pressure to a resources sector that led global bankruptcies in 2015.
“This could have a larger impact on investment-grade companies rather than high-yield ones,” said Raymond Chia, head of credit research for Asia ex-Japan in Singapore at Schroder Investment Management Ltd., noting that junk-graded energy bonds are already trading at depressed levels after seeing downgrades over the last six months.
“The key here is that we will have to see how many more forecast revisions there would be,” he said.
Moody’s says it needs to “recalibrate the ratings in the mining portfolio to align with the fundamental shift in the credit conditions of the global mining sector.”
The Canadian miners under review include Alamos Gold Inc., Eldorado Gold Corp., Goldcorp Inc., HudBay Minerals Inc., Iamgold Corp., Kinross Gold Corp., Lundin Mining Corp., New Gold Inc. and Yamana Gold Inc.
Moody’s expects to complete most of its ratings by the end of the first quarter.
The move comes on the heels of Barrick giving notice Thursday of a $3 billion (U.S.) writedown.
The Toronto mining giant said it will be writing down the value of its stalled Pascua-Lama mining project on the border of Chile and Argentina and its Pueblo Viejo gold operation in Dominican Republic by a total of between $1 billion and $1.2 billion.
And it will reduce the value of goodwill — an intangible asset related to some of its past acquisitions — by about $1.8 billion.
The company also lowered its gold price assumption to $1,000 (U.S.) an ounce for 2016 and to $1,200 longterm.
In 2015, Barrick had used $1,250 an ounce as its short-term gold price assumption in impairment tests and $1,300 for the long-term. With files from Star wire services