BHP Billiton fix too late to avert Moody’s ratings downgrade
The end to its dividend policy and capex cuts have not been enough to prevent a ratings downgrade for BHP Billiton.
The end to its progressive dividend policy, more capital expenditure cuts, and a settlement on the Samarco iron ore tailings dam disaster in Brazil has not been enough to prevent a credit rating downgrade for BHP Billiton from Moody’s.
But the two-notch downgrade from to A3 from A1 — with a negative outlook — does leave BHP as the only miner to have stayed in the A-ratings club after last year’s horror shakedown in commodity prices. It follows last month’s rating downgrade for Rio Tinto from A3 to Baa 1 by Moody’s.
Moody’s said the downgrade reflected the deterioration in the company’s earnings and cash flow, which has led to significantly weaker credit metrics. BHP showed no interest in engaging Moody’s on the subject, simply saying in response that it remained committed to “maintain its strong balance sheet through the cycle’’.
Moody’s noted BHP’s recent measures to protect its balance sheet by dropping what had become a $US6.5 billion ($8.87bn) annual commitment on dividends, and by slashing its previous guidance on capex for this year and next by $US3.5bn.
But it is of the view that the pressure from lower commodity prices means a tough 12-18 months ahead before BHP’s credit metrics improve to “more appropriate levels’’.
Moody’s kicked off its industry-wide ratings reviews in December after coming to the unsurprising conclusion that there had been a “fundamental downward shift in the global mining sector, with the downturn being deeper and the recovery likely to take longer than previously expected”.
“While lower freight costs and depreciation of the Australian dollar have helped reduce BHP’s input costs, the drop in commodity prices has, and will, continue to significantly impact the company’s performance,’’ Moody’s said.
BHP shares nevertheless continued to rally from recent lows, closing yesterday 42c, or 2.4 per cent, higher at $17.67, with the gain again outperforming that of Rio Tinto (1.5 per cent) as it did on Thursday (3.1 per cent versus Rio’s 2 per cent).
The kick along this week has been a response to the de-risking of BHP’s financial exposure to the tailings dam collapse in which 19 people died last November at the half-owned Samarco operation in Brazil.
The de-risking came in an agreement with Brazil’s national government and the two states most affected by the disaster, Minas Gerais and Espirito Santo. The agreement replaced an earlier $US5bn clean-up and compensation claim from the governments with a deal under which the bill could be less than $US2.3bn. Moody’s said the settlement was a positive.
Under the deal Samarco, owned equally by BHP and Brazil’s Vale, will fund the required annual payments, with a restart of its 30 million tonne a year mining operation the key.
If Samarco cannot cover the payments, BHP and Vale will pick up the tab. Moody’s said if that was to happen, the magnitude of the potential payments by BHP would be manageable.
While the governments have backed the settlements, Brazilian prosecutors pursuing possible criminal actions for the dam disaster and investigating its cause were reported by Reuters to be critical of the compact.