Canadian mining and energy companies are facing a new set of woes: credit downgrades and writedowns.
Moody's Investors Service put a dozen mining companies and a swath of oil explorers on notice for a potential downgrade as oil and metal prices remain weak. A downgrade would drive up companies' borrowing costs at the same time that their cash flow is being hit by the lower commodity prices.
Meanwhile, Barrick Gold Corp. warned of a $3-billion (U.S.) impairment charge on its Pascua-Lama gold project in the Andes and a key Dominican Republic gold mine.
The world's biggest gold producer was the first of the senior Canadian miners to announce writedowns, foreshadowing another brutal year for the industry.
"There will for sure be more writedowns,"said Kerry Smith, an analyst with Haywood Securities.
Barrick slashed the assumed price of gold it uses to test for potential impairments to $1,000 (U.S.) an ounce from $1,250 in the previous year. Goldcorp Inc. said on Friday that it is currently running impairment testing. The company is also expected to record charges when it announces year-end results.
"The price of gold is down so when they do their annual impairment testing, they will have to reduce their assumptions," said Siddarth Subramani, an analyst with Veritas Investment Research. "Goldcorp will probably have a writedown of some sort," he said.
This new round of charges comes after four consecutive years of declining metal prices. The yellow metal is trading around $1,100 an ounce, down 40 per cent since 2011. Miners have already recorded massive charges related to expensive acquisitions, mothballed projects and costly mines.
In addition, companies are expected to slash their reserves of gold in the ground. Last year, Newmont Mining Corp. and Goldcorp used a $1,300 gold price to calculate their unmined precious metal, now considered high given where bullion is trading at today.
The slowdown in China's economy has wreaked havoc on the natural-resources sector. Minerals such as iron ore and metallurgical coal have declined more than 70 per cent. Oil's recent fall to around $30 a barrel has led to thousands of layoffs in Canada's energy patch, as well as a mild recession. Other parts of the country's economy have been hit by the rapid decline in crude prices, including real estate and financial services.
Moody's said China's slowing growth will put even more pressure on natural resources companies. "This is not a normal cyclical downturn, but a fundamental shift that will place an unprecedented level of stress on mining companies," it said in a note announcing the potential downgrades.
The credit agency said it expects to cut most companies' ratings by at least one notch and believes that many of the miners could face "multi-notch declines."
Barrick's debt is already at the lowest investment grade rating and is in danger of falling into junk status – though the company reduced its debt levels by 25 per cent last year. Goldcorp is at the second-lowest investment grade rating.
Meanwhile, many other miners on the Moody's list are already in junk territory. Those include New Gold Inc., Taseko Mines Ltd., Teck Resources Ltd., Lundin Mining Corp. and Iamgold Corp.
Moody's also placed 19 Canadian energy exploration and production and services companies under review for a potential cut. This comes a month after the agency put the ratings of some of the country's biggest energy companies on review, including Canadian Natural Resources Ltd., Canadian Oil Sands Ltd., Cenovus Energy Inc., Encana Corp., Suncor Energy Inc. and Husky Energy Inc.