'We haven't seen enough changes in capital structure and reduction in debt'

Monday, December 4, 2017

Mining companies, which face rising prices of raw materials, need to develop new technology and reduce debt levels to bring down their costs in case of a new price downturn, according to Moody's analyst Barbara Mattos.

Mattos spoke to BNamericas in an interview in Lima about miners' debt levels, costs, financing, metals prices and social conflicts.

BNamericas: One of the main risks faced by commodities-dependent countries like Peru is that of metals price swings. How do you see mining nations in the region coping?

Mattos: In terms of risk, the issue is really prices. We don't see much downturn risk for commodities in general. What we see is China is growing 6-7%, and demand for metals growing 2-3% a year, which is fine. There is upside risk for several metals in terms of market fundamentals like in the case of zinc, where we've seen a strong recovery in prices for lack of supply in the past year or so. In copper we'll probably see prices where they are now. Now, companies can't control prices, but they can control costs. So those are the conditions they have to look at.

BNamericas: The mining industry has made a major effort to cut costs – they've reduced personnel, they've renegotiated with suppliers – but there's still the issue of steel and oil prices and a lot of the supplies they use. Have companies done enough to reduce debt so they're not quite so vulnerable to cash flow issues?

Mattos: In terms of costs, it's hard for them to go further. Perhaps in the case of new projects they could work on new technology which could lead to lower costs. What we haven't seen enough of yet is changes in capital structure and reduction in debt levels, perhaps refinancing short-term debt. Companies have leveraged up their debt structure to make investments in recent years and those investments were important to bring up their production volumes. It's very important for companies today to control their costs as much as possible and work on their capital structure to make sure they have a cushion in case they see more of a downturn in the future. They can control that.

BNamericas: We're seeing a lot of influence from base metals which depend on China and the construction industry. How can companies cope with price volatility in precious metals considering they're so hard to forecast?

Mattos: It's really hard to forecast, although for silver not as much as there's a large component of industrial demand for silver – roughly 60% of the demand is related to industrial activity, it's not so much of an investor hedge. It's a different story for gold – we see prices reacting to inflation, linked to the US dollar and with what happens to US interest rates.

BNamericas: The mining industries in countries like Peru and Chile have been struggling with permitting and authorizations for the next wave of mining projects. How much of a risk do you see that posing to the mining industry?

Mattos: When we think about the next wave of projects, we see globalization. It's more difficult in general for the industry on a global basis, not just in Peru and Chile. Deposits are also located in countries that have a higher political risk, where we see more resource nationalism and protectionism in the industry. There are social issues with the local communities, but we don't see it [being] as difficult in Peru as in other parts of the world like Africa. In some countries it's even harder to get a permit, after accidents in Brazil and like in Canada. That's going to be the reality – it's going to take longer to get permits, and also governments will have to compromise getting investments with achieving better economic and social conditions for the local population.

About Barbara Mattos

Barbara Mattos, who formerly worked at ABN Amro, FRAM Capital, Santander Investment and Cambridge Energy Research Associates, has been at Moody's since 2011. Mattos holds an MBA from Yale School of Management.