BHP Biliton chief Andrew Mackenzie. Picture: David Geraghty
BHP Biliton chief Andrew Mackenzie. Picture: David Geraghty

Clean bill of health for mining giants

AUSTRALIA's two major miners, BHP Billiton and Rio Tinto, would be able to survive a sharp downturn in China without major financial damage, according to a new analysis.

Ratings agency Standard and Poor's has given the mining titans a clean bill of health after stress testing what would happen to the duo if commodity prices plunged.

It follows years of deep cost cutting, debt reduction and a commitment from management at the miners to not repeat the boomtime mistakes that resulted in billions of dollars of shareholders' money burnt in overpriced or abandoned projects.

Standard and Poor's modelled a one-year collapse in commodity prices sparked by a sudden shock in China, which is the world's biggest buyer of minerals such as iron ore, copper and coal.

A BHP coal mining operation in central Queensland. Picture: BHP
A BHP coal mining operation in central Queensland. Picture: BHP

The ratings agency concluded the world's five biggest miners - BHP, Rio, Glencore, Anglo American and Brazilian iron ore major Vale - would survive a sudden revenue plunge without having their credit ratings cut.

"The major miners are well-positioned to absorb a potential external shock after completing their debt reduction plans, supported by a currently low commitment to growth capital expenditure," primary credit analyst Elad Jelasko said. "Under our stress test, an extended price shock does not lead to downgrades."

A company's credit rating influences what it pays for its debt. BHP and Rio both have an upper-medium A-grade rating at Standard and Poor's

The agency based its stress test around key commodity prices falling 10 per cent below the lows hit in 2015 that severely tested miners across the globe.

Both BHP and Rio have stripped billions of dollars from their cost bases and slimmed down their global portfolios through asset sales and spin-offs over the past four years.

Rio rewarded investors with a record dividend at its full-year results in February while BHP shareholders are waiting on a sugar hit when it wraps up a sale of its US onshore oil and gas division.

Standard and Poor's said the impressive recovery in commodity prices of the past two years and efficiency drives by management had turned the major miners into "cash machines" and allowed them, quicker than expected, to reduce high levels of debt built up during the boom.

It warned commodity prices would "run out of steam" sooner or later but concludes "it will take more than a price shock to shake the balance sheets of the big five".

It also cautions that while its analysis modelled a sharp downturn in commodity prices linked to reduced Chinese demand, it did not try to forecast the fallout from a "full-blown trade war" breaking out across the globe.

A South32 coal mine in Klipspruit, South Africa.
A South32 coal mine in Klipspruit, South Africa.

Standard and Poor's concludes the biggest threat to the health of the nation's two key miners is management returning to their old ways - splashing big money on dud projects.

"What could trigger downgrades of miners? The short answer is a deviation from their current financial policies, especially in tandem with a material drop in prices," Mr Jelasko writes in the report.

"Such a change could take the form of large growth projects, opportunistic acquisitions, or pressure from shareholders to optimise the capital structure by increasing leverage."

Shares in BHP gained 1.1 per cent on Tuesday to close at $34.23. Shares in Rio climbed 0.9 per cent to $81.62.