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Industry Top Trends 2019

Metals and Mining

November 12, 2018

Key Takeaways

–Ratings Outlook: The outlook for upstream producers largely improved in 2018, with a modestly positive rating bias. We expect the focus on financial prudence--particularly among the largest globally diversified miners--to continue in 2019 amid what we assume will be a continuing generally supportive price environment. For global downstream producers, we expect stable conditions, with upgrades now likely to reflect financial policies and resilience to future downturns as much as strong metrics.

–Forecasts: Our base assumptions result in credit measures improving modestly in 2019 for upstream and downstream producers. Lower net debt is primary cause for the improvement, given our relatively flat price and output expectations for next year. However, we haven't factored in any potential negative impact from the U.S.-China trade war on global demand and prices, which could lead to deviations from our base-case projections.

–Assumptions: Generally stable prices for most metals and mining commodities over the next two years; reflecting our assumption of balanced global supply/demand conditions. We also expect the debt reduction cycle to continue, which should build issuers’ resilience to potential downturns, assuming judicious use of discretionary cash flow for investments and shareholder-friendly initiatives, at least in 2019.

–Risks: China remains the primary force behind the fundamentals of the metals and mining industry. Slowing demand from China or an unexpected ramp-up of steel and aluminum output remain key risks that could disrupt relatively balanced conditions for most metals and mining commodity markets. However, ongoing supply-side reforms could also lead to stronger-than-expected market fundamentals for certain commodities. Additionally, foreign currency becomes a greater risk, given the historical negative correlation between the U.S. dollar and metals prices, and as U.S. coal producers’ shift to export markets to offset domestic thermal decline. Overall, we expect prices to remain volatile, with fluctuations likely related to developments in China and potentially due to other government policies and geopolitical risks.

–Industry Trends: We expect the prevailing mood of balance sheet conservatism to continue into 2019 for most upstream and downstream producers. However, we believe shareholder remuneration will start to increase--in some cases because of financial policy frameworks--and could emerge as a possible risk to financial profiles. That said, prudent financial policy implementation should support ratings, provided that cash generation funds shareholder returns to ensure that balance sheets have cushion for future downturns.

S&P Global Ratings

Authors

Vania Dimova

New York

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Jarrett Bilous

Toronto

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William Ferara

New York

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Sergei Gorin

Moscow

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Danny Huang

Hong Kong [phone]

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Elad Jelasko

London

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Donald Marleau

Toronto

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Diego Ocampo

Buenos Aires [phone]

[e-mail]

Simon Redmond

London

[phone] [e-mail]

Chiza Vitta

Dallas

[phone] [e-mail]

May Zhong

Melbourne 613-9631-2164 [e-mail]

1

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Industry Top Trends 2019: Metals and Mining

Ratings trends and outlook

Global Metals and Mining

Chart 1															Chart 2
Ratings distribution															Ratings distribution by region
				Metals & Mining																			North America														W.Europe
50															50								Asia-Pacific														Latin America
40															40
30															30
20															20
10															10
0															0
		AAA AA+ AA AA- A+ A A- BBB+ BBB BBBBB+ BB BB-								B+ B B- CCC+ CCC CCCCC C SD D									AAA AA+ AA AA- A+ A A- BBB+ BBB BBBBB+ BB BB- B+ B B- CCC+ CCC CCCCC C SD D
Chart 3															Chart 4
Ratings outlooks															Ratings outlooks by region
		Positive								Negative							Negative								WatchNeg						Stable					WatchPos					Positive
15%										9%
		WatchPos											WatchNeg		100%
										2%
1%															80%
															60%
															40%
							Stable								20%
															0%
73%
																							APAC				LatAm N.America														W.Eur
Chart 5															Chart 6
Ratings outlook net bias															Ratings net outlook bias by region

Net Outlook		Metals & Mining				Net Outlook		N.America		W.Europe
Bias (%)						Bias (%)		Asia-Pacific		Latin America
10						40
0						20
-10						0
-20						-20
-30						-40
-40						-60
-50						-80
13	14	15	16	17	18	13	14	15	16	17	18

Source: S&P Global Ratings. Ratings data measured quarterly with last shown quarter ending September 30, 2018

The outlook for ratings on metals and mining issuers is predominantly stable, and the rating bias has modestly improved relative to last year. As of third quarter 2018, close to three-quarters of mining and metals issuers had stable rating outlooks. The number of positive outlooks remains unchanged year-over-year (15%), but the share of negative outlooks has declined to about 9%. Ratings net bias improved modestly across all regions. In our view, this trend highlights the positive cash flow momentum for most mining and metals issuers over the past year. We also believe positive cash flow has contributed to an increase in new issuer ratings largely concentrated in the ‘B’ rating category.

S&P Global Ratings

November 12, 2018 2

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Industry Top Trends 2019: Metals and Mining

Industry forecasts

Global Metals and Mining

Chart 7									Chart 8
Revenue growth (local currency)									Capex growth
				Metals & Mining Upstream										Metals & Mining Upstream
				Metals & Mining Downstream										Metals & Mining Downstream
30%				Global			Forecast		50%					Global			Forecast
20%									40%
									30%
10%									20%
0%									10%
									0%
-10%									-10%
-20%									-20%
									-30%
-30%
									-40%
2015				2016	2017	2018	2019	2020	2015				2016		2017	2018	2019	2020

We expect relatively flat revenues across the upstream and downstream sectors in 2019 and 2020, albeit at favorable levels following the sharp increase in 2017. Our estimates mainly reflect relatively stable average metals and mining commodity price assumptions that for the most part reflect balanced supply/demand fundamentals. We also expect steady production across both segments of the industry, because we predict subdued investments in recent years to limit a material increase in output.

We expect the positive trend in capital expenditures (capex) over the past two years to stall in 2019. Both upstream and downstream producers began increasing their capex in 2017 in response to improved market conditions and the completion of restructurings and balance sheet repair. However, we believe producers are now becoming more cautious with capital allocation, due in part to increasingly uncertain demand—mainly in China--and the potential impact of a trade war between China and the U.S. The recent volatility in most mining commodity prices this year also likely plays a role.

Chart 9

Chart 10

Debt / EBITDA (median, adjusted)

Metals & Mining Upstream

Metals & Mining Downstream

6.0x					Global			Forecast
5.0x
4.0x
3.0x
2.0x
1.0x
0.0x
2015				2016		2017	2018	2019	2020

EBITDA (absolute, adjusted)

					Metals & Mining Downstream
					Metals & Mining Upstream
400		USD Bn						Forecast
350
300
250
200
150
100
50
-
	2015				2016	2017	2018	2019	2020

We believe the steady deleveraging trend has mostly played itself out after an earnings upswing and significant debt reduction in recent years, particularly among larger upstream producers. We expect modest earnings growth will result in slightly reduced adjusted debt-to-EBITDA ratios across the industry, led by North America. Our estimates mainly reflect our relatively stable assumptions for prices, output, and debt levels across most regions, which builds some credit buffer against any potential downturn.

We expect relatively flat EBITDA across the upstream and downstream sectors in 2019 and 2020. Our estimates mainly account for stable average metals and mining commodity price assumptions which, for the most part, reflect balanced supply/demand fundamentals. The earnings growth in 2017 and 2018 largely resulted from higher prices and cost rationalization following two years of low prices.

Source: S&P Global Ratings. Revenue growth shows local currency growth weighted by prior-year common-currency revenue-share. All other figures are converted into U.S. Dollars using historic exchange rates. Forecasts are converted at the last financial year-end spot rate. FFO--Funds from operations.

Thanks to healthy demand and relatively low growth in supply, the metal and mining industry is about to close another strong year. Although prices recently softened, the

S&P Global Ratings

November 12, 2018 3