Fitch Ratings Director Jay Djemal said that Latin American Metals and Mining observed that higher operating costs remain entrenched. The report said that “Higher operating costs will continue in 2013 for metals and mining. Cost pressures will increase for power, fuel, labor, operating materials, and maintenance.”
Fitch noted that “Engineering costs have also increased due to a dearth of qualified mining exports. Cost efficiency programs will help tackle the higher cost environment in 2013.”
Nevertheless, Fitch Ratings considers Latin American copper miners a safe bet in the long term as global copper consumption is expected to grow at an annual average of 4% next year based on expectations of a soft landing in China and an anemic economic recovery in developed nations.
Fitch analysts said that “Copper prices are supported by strong demand fundamentals, with Fitch’s price assumptions at USD 3.40 per pound in 2013.”. Their long-term price assumption is USD 2.72/lb in 2014.
The analysts advised that “The Latin American copper mining companies rated by Fitch exhibit a robust track record in their long-term credit ratios. They are expected to maintain their low leverage and strong coverage ratios through the next year.”
The world’s largest copper company, Codelco, “has exhibited very strong long-term average credit metrics commensurate with its ratings category, and is well placed in the second quartile cost curve to withstand the lower copper price environment expected in 2013.”
The analysts said that The lowest cost copper producer in Fitch’s Latin American universe is Southern Copper Corporation with a cash cost per pound of copper of 65-cents net of by-products during the first nine months of this year. SCC will continue to be very profitable at Fitch’s mid-cycle copper price assumptions for 2013 and 2014.”
Fitch said that “Issues that will continue to affect the sector in 2013 are declining ore grades and increased operating costs, namely labor, materials and energy.”
NICKEL
As demand for stainless steel has been softening and is expected to remain fairly flat this year, “Fitch expects stainless steel production to remain at current levels through 2013 absent restocking through the supply chain.”
Nickel’s primary use is in the manufacture of stainless steel. Nickel prices are currently below marginal cost (estimated at USD 9/lb) and above average costs for nickel in pig iron (NPI) (estimated at USD 7.50/lb).
The analysts said that “Fitch believes the nickel market will be fairly balanced through 2013 with NPI curtailments but the market is at risk of oversupply. There has been a dearth of additions to the project pipeline, which should result in tighter supply beyond 2017. Fitch expects nickel producers at average costs to earn EBITDA margins of 15% on average over the next 18-24 months.”
ZINC
Fitch anticipates zinc prices will remain above marginal cost next year.
The World Bureau of Metal Statistics reported zinc surpluses of 293,000 metric tons for the first nine months of this year. Some portion of excess zinc stocks is tied up in financing transactions.
Fitch expects excess zinc capacity to persist through 2013 with a likelihood of surplus production. “Longer term, closure of large mines reaching the end of reserves will help bring the market into balance,” Fitch analysts advised.
Fitch expects zinc prices to remain above the marginal cost of 70-cents per pound and EBITDA margins for average cost producers of 20%.
Peru’s Volcan Compania Minera benefits from being a first quartile producer of zinc, mainly because of its by-products of silver, lead and copper. The company has historically generated strong cash flows are a result of its low-cost position that was just USD 0.024/pound for the first nine months of this year.
“This position will allow the company to remain highly profitable among its peers in the zinc industry during 2012,” Fitch analysts advised.
