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By Elisa Maurice
We believe deleveraging in LatAm metals and mining has positioned issuers to withstand the global headwinds driving metals price volatility.
As COVID-related lockdowns in China and fears about global growth persist, metals prices have been particularly adversely impacted. Iron ore is off almost 15% since March highs and 41.1% after peaking in July 2021. Copper is down over 13% since peaking in March, and zinc has lost more than 17% from highs in April.
Price recoveries in the near to medium term will likely depend on key factors, including: the speed with which key cities in China reopen, Chinese stimulus to offset the economic impact of lockdowns, the effect of higher rates on global growth, and any impact of rising COVID cases in the West. Longer-term pricing trends should be dictated by growing demand and constrained supply, but the timeline for returning to trend remains uncertain.
Globally, Chile and Peru are the number one and two copper producers, respectively. Brazil is the second-largest producer of iron ore, and Peru is the second-largest producer of zinc. Within the emerging markets corporate universe, Latin American metals and mining includes the largest iron ore producer in the world, three of the largest copper producers, and several significant zinc producers.
Fortunately, LatAm metals producers are coming off a period of higher metals prices that have buoyed miners’ balance sheets, and prices remain elevated relative to historical levels. Iron ore surged $240/ton in the summer of 2021 and remains well over $100/ton, copper is still over $4/pound, and zinc is well above prices seen in 2021 due to supply constraints. As a result, net leverage in the sector has been trending lower as miners have reduced debt and grown production since the last cyclical downturn.
LatAm miners have deleveraged to their lowest levels seen in years—with the overall trend in net leverage across the sector declining as metal prices recovered from the trough of 2015. Considering the recent high price environment, miners have been focused on cash distributions to shareholders, share buybacks, and liability management. In 2016, the average net leverage of eight of our issuers was about 2.8x, as compared to roughly 0.7x in 2021. We expect some of this distribution activity to stabilize at lower levels in the near term as prices move lower.
Overall, companies in the LatAm metals and mining sector are well positioned to endure short-term adverse conditions in metals markets and can expect to see a positive shift in sentiment as China reopens and expectations for global growth stabilize.
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