LatAm miners on track for stronger second half of 2020

LatAm miners on track for stronger second half of 2020

Bonds Debt Capital Markets Corporate & Sovereign Strategy Fixed Income Economy & Policy Andean Brazil Chile China Mexico Latin America Coronavirus

Latin America's metals and mining companies, by and large, are expected to have a stronger second half results in pandemic-riven 2020, with demand from Chinese steel makers and rising commodity prices underpinning their results, Fitch Ratings said in a new report.

"Leverage and liquidity are manageable for most issuers," Fitch said in its report.

The revenues for the region's metals and mining companies will continue to be "highly linked" to economic growth in China, the report said, while also adding that the recovery of Brazil's economy will play a key role in the performance of steel producers.

Fitch said it recently increased the economic growth forecast for China to 2.7% from 1.2% for this year while it revised the economic contraction forecast for Brazil to 5.8% from 7.0%. 

"Latin America metals and mining results exceeded expectations for 2Q20. Strong Chinese commodity demand has bolstered prices and will result in a strong 2H20," Joe Bormann, an analyst at Fitch said in the report.

The upward revision of gold and zinc prices will help Peruvian miners in the second half of the year, after they went through a 10-week shutdown from March to May. "Brazilian steel producers will also benefit from tight supply of steel in the market that has allowed them to raise prices," the report said, adding that copper and iron ore producers will also have a better than expected second half of the year.

But Fitch did warn that the pandemic can still wreak havoc on the industry within the region.

"Coronavirus containment delays are expected to hit demand in Europe, the United States, and Latin America. Without more vibrant demand from outside of China, the price improvements we have seen in 2H20," the report said.

Fitch said companies such as Chile's Codelco, Mexico's Peñoles, Peru's Nexa, and Brazil's Vale, which tapped the international credit markets during the pandemic are able to manage their liquidity and leverage.

However, Peru's Volcan is in a more precarious position, Fitch said, adding that it and fellow Peruvian miner Buenaventura while having improved results in the second half of the year will still face credit pressure.

In the case of Volcan, after securing some $300 million in syndicated loan financing in August to shore up its position, the company has a $600 million bond maturing in February 2022. That bond, sold in 2012, currently trades at just above par, with a yield of 5.16% and a 5.375% coupon, according to data provider Refinitiv.

"In order to improve the likelihood of the successful refinancing of this debt, Volcan will need to raise cash to lower debt through some combination of the sale of non-core assets and/or an equity offering. If this does not happen by YE2020, the ratings will also be downgraded to the low 'B' category," Fitch wrote.