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Inflation, Interest Rates, and Supply/Demand Destruction: Downside Risks in the Mining Industry

DBRS Morningstar notes there are no apparent near-term catalysts for reversing the rise in inflation and borrowing costs, setting the stage for further drops in supply and demand. Nonetheless, we believe inflationary pressures on the mining industry have likely peaked in the near term. Also, higher interest rates shouldn’t directly contribute to greater operating costs at existing mines but could delay future project development. That said, if spot prices remain at current levels, DBRS Morningstar believes most of its rated mining issuers should generate sufficient revenue to offset the inflationary pressures on mining operations over the next year, especially given the pullback in energy and steel prices since the spring. Additionally, DBRS Morningstar-rated mining issuers have collectively reduced debt by approximately USD 50 billion between 2016 and 2021, which, along with approximately USD 2 billion lower annual debt service costs, should provide an additional cushion for their financial risk profiles. During the same period, these mining issuers also paid out approximately USD 130 billion in dividends, a significant portion of which were discretionary special dividends. By suspending discretionary dividends, these mining issuers can conserve cash to cushion the impacts of recessionary levels of inflation and interest rates.