Corporate Risk Profiles Still Cause for Concern for US Mining and Metals Companies

Although metals and mining credit quality is stable and higher metals prices continue, Standard and Poor's said Wednesday that it is concerned about several factors that present risks.

In their industry report card, S&P Primary Credit Analysts Michael Scerbo and Marie Shmaruk said they expect base metals prices to remain above historical levels for the next several quarters "as worldwide demand continues to be strong and supplies continue to be constrained."...

Scerbo and Shmaruk said that mining and metal credit ratings have been improving this year, "benefiting from the combination of strong operating cash flow and issuer-specific measures to reduce debt."

However, they also noted, that the rate of improvement has flowed "as individual companies' business risk profiles, which reflect the highly competitive volatile markets and other risks of operating in the sector, constrain ratings. Moreover, the strength of the metal cycle has generated sufficient liquidity for metal producers, which in turn has prompted more aggressively leveraged M&A activity and relatively high debt."...

S&P forecasts that M&A activity among large global mining companies is likely to continue. During the past seven years, companies have used acquisitions to enhance business risk profiles by expanding market positions, broadening geographic and product diversity, improve pricing power in fragmented markets, and lower cost profiles, according to the analyst.

However, S&P advised that near-term acquisition activity for U.S. metal and mining companies "will slow for all but the larger and better capitalized-players. This reduced activity would come as a result of a combination of fewer available attractive candidates and less favorable credit market conditions."