Mining Sector’s Outlook Worsens: Moody’s

Moody's Investors Service has downgraded the outlook for the global mining industry as economic and energy issues are negatively impacting demand and reducing profits for companies. Mexican mining companies are no exception as they have reduced their product and profit guidance for 2022, mainly due to inflation.

Moody's has downgraded the outlook for the mining industry from stable to negative as the global economic slowdown worsens. The rating agency warned that earnings before interest, taxes, depreciation and amortization (EBITDA) will decrease significantly for producers, especially those of copper, nickel, aluminum and zinc. All these mining companies are expected to produce lower volumes, have higher input costs and sell at lower prices.

“[EBITDA and prices] will remain higher than in pre-pandemic years but below the record-high levels seen in early 2022,” said Barbara Mattos, Senior Vice President, Moody’s.

So far, aluminum has been the metal that was hit the hardest, as prices have fallen abruptly from record highs while input costs remain high. Meanwhile, although gold and silver are considered hedges against inflation, prices are falling due to higher interest rates and the strength of the US dollar.

Jackie Przybylowski, Analyst, BMO Capital Markets Metals & Mining, warned that the major challenge for most mining companies is inflation. For byproduct companies, costs inflate due to higher primary product prices or lower by-product costs. This latter issue is severely impacting base metals companies that saw significant profits come from their byproducts in previous years.

“On average, C1 cost guidance of base metals companies under our coverage has increased by 13 percent since 2022 guidance was first released, while precious metals producers under our coverage have seen cost guidance increase by 2 percent. Across our coverage universe, royalty and streamers excluded, 2022 unit cost guidance has increased by 7 percent since it was initially released,” wrote Przybylowski in an August research note.

In Mexico, several mining companies announced that their operations have been affected by inflation. For instance, Argonaut Gold said that if the trend continues to increase mining costs, it will adjust its 2022 cost guidance to a higher figure. Fresnillo announced that for the coming quarters it will still have to deal with a tight labor market, global supply chain bottlenecks and inflation.

Endeavour Silver highlighted that as inflationary pressures continue to increase, the prices of key materials such as reagents, explosives, diesel and energy, as well as operating and development costs, could grow.