Standard & Poor’s expects gold prices to remain high in the next year because of economic challenges in Europe, increasing global inflation and potential economic fallout from the Japanese earthquake.
Author: Dorothy Kosich
RENO, NV –
In an industry economic and ratings outlook released Tuesday, Standard & Poor’s forecast that most U.S. and Canadian metals and mining companies will improve their operating performance in the first half of this year, “reflecting a rise in average prices and strengthened end-market demand.”
S&P Primary Credit Analyst Marie Shmaruk and Senior Economist Beth Ann Bovino also noted that prices of the yellow metal–in response to global political uncertainties and fears of inflation–have remained high, averaging nearly $1,400 per ounce, year to date. “We expect gold prices to remain high in the next year or so because of economic challenges in Europe, increasing global inflation, and a potential economic fallout resulting from the earthquake in Japan,” they forecast.
Meanwhile, the analysts observed that 60 U.S. and Canadian metals and mining sector companies have positive or stable rating outlooks.
“In our view, these companies would be able to withstand a period of weaker-than-expected market conditions, similar to what occurred at the end of 2010, without significant credit deterioration, and a resumption of slow steady growth could potentially result in higher ratings for some companies,” they said.
“For those with negative ratings outlooks or on CreditWatch with negative implications, we’re generally concerned about whether market conditions will be strong enough to support the ratings.”
Since S&P published its last industry outlook in January, one company, James River Coal, has been upgraded by the analysts while no mining and metals company has been downgraded.
Shmaruk and Bovino observed that the global demand for metallurgical coal is strong, while the steam coal business still has not recovered to pre-recession levels. “However, most metallurgical coal operations are enjoying high pricing and a strong export market.”
“Still, the regulatory costs of the EPA’s clean air and water rules and increased scrutiny of underground mining in the U.S. remain key risks,” they cautioned.
Meanwhile accelerating coal mining merger and acquisition activity has affected overall credit quality, and the analysts expect consolidation to continue because of cost pressures and the need for companies to diversify and expand their operations.
Favorable base metals prices continue
In their analysis, Shmaruk and Bovino noted, “Copper prices are robust, averaging more than $4.30 per pound thus far in 2011 compared with $3.40 for all of 2010.”
“With strong demand from China and slowly improving demand outside of China, along with relatively constrained supply, we expect prices to stay high enough to support producers’ current ratings.”
Meanwhile, the analysts also observed that aluminum prices are continuing to strengthen with prices above $1.15 per pound compared with an average of 99-cents per pound for all of 2010.
“However, still-high London Metal Exchange (LME) inventories could spur declining prices, especially if substantial supply comes to market,” they said. “We believe most of the LME inventories are backing financial transactions and are not readily available.”
The analysts suggested overall liquidity for most metals and mining companies remains adequate.
“Most metals and mining companies have sufficient liquidity to withstand the volatility inherent in these businesses. Over the next year or so, if the economy continues to improve as we expect it will, most companies are likely to use some of this liquidity to fund increases in working capital to accommodate higher business volumes, prices and costs.”
“Many companies are also expanding their capital programs, restarting projects deferred during the recession, and investing to improve their costs structures,” S&P noted. “We expect that most industry participants should generate sufficient cash flow to fund most of their capital spending and still have borrowing capability to accommodate working-capital growth.”