LatAm Miners Coming Back

01/10/2013 6:00 am EST


Rudy Martin

Editor, Investing Insight

Low but rising expectations are on board for mining operations in Latin America, observes Rudy Martin of Latin Stock Investing.

Standard & Poor's Ratings Services announced that it views the outlook on the Latin America's crucial metals and mining sector for 2013 as mostly stable. "Metal prices should continue to drop in 2013," S&P said, "but given the still relatively high prices for some products, such as copper and iron ore—and several producers' low-cost positions—we expect companies to post adequate cash flows and benefit from strong liquidity."

The S&P report noted that overall, companies in the region benefit from strong business risk  profiles. "Out of the 18 companies we rate, over 70% are in the 'BBB' category, and only five have speculative-grade ratings," the ratings firm said. "The investment-grade rated companies  generally have good financial flexibility because of their ample internal cash generation and good access to the debt markets."

While economic growth in Latin America has slowed in line with the global economy, S&P said it expects real GDP growth for the region to average about 2.7% this year and then recover to around 3.5% in 2013, assuming Brazil's economy picks up following a number of fiscal incentives and more flexible monetary policies. "We expect economic growth in Chile, Mexico, and Peru to remain about the same as in 2012," S&P noted. "Domestic demand in these countries was strong enough to offset the drag from abroad, and we expect this trend to continue in 2013."

The prospects for slower global economic growth will continue to keep a lid on metals and mining product prices, in S&P's view. It feels that sovereign distress in Europe and uncertainty due to potential fiscal adjustments in the US could add to commodity price volatility. S&P's "base case scenario" is for growth in the US to hold fairly steady, up slightly to 2.3% in 2013 from 2.1% in 2012, while Chinese GDP will accelerate to 8.2% in 2013 from 7.5% in 2012, while Europe will contract around 0.8% in 2012, with no growth for 2013.

"As a result we expect small price increases in iron ore and copper exports from Latin America or potentially marginal drops from current levels," reports S&P. "We also predict that steel prices will remain mostly flat due to excess supply and subdued demand in the developed world. In terms of cost inputs, we expect pressures on labor costs and some volatility in energy prices, which we assume the companies can absorb without significant impact on their operating margins."

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