Defaults are on the rise in the metals and mining sector in 2019, and many of the companies are based in the U.S., according to S&P Global Ratings. Most of the defaults in 2019 were either missed interest payments or distressed debt exchanges.
The May 9 default of Pennsylvania-based hydraulic fracturing sand producer Preferred Proppants LLC brought the total number of global corporate defaults to 43 in 2019. With five defaults, the mining, metals and steel sector accounts for the third-highest number of defaults year-to-date in 2019, behind the oil/gas and retail/restaurant sectors.
Two of the five defaults in the sector are thermal coal producers. Seaborne demand for the fuel has improved in recent years, but U.S.-based thermal coal producers continue to struggle under sharply decreased demand from domestic power generators, which are retiring coal-fired power plants and replacing them with other forms of generation. While thermal coal producers have had some success with placing tons in export markets, those opportunities took a hit early in 2019 for those without exposure to the coking coal used in the steelmaking process.
"As bullish as seaborne coking coal has been, seaborne thermal coal remains in a slump," MKM Partners LLC executive director Daniel Scott wrote in a May 24 note to investors. "After a very strong 2018 year for pricing, a confluence of events has led to a collapse in pricing. Weather, strong stockpiles in European ports, ample thermal supplies, weak LNG pricing, and Japanese reactor restarts has resulted in a dramatic drop in seaborne thermal pricing, with delivery into Europe now pricing near $60/metric ton, as compared to around $100/metric ton as recently as last fall."
Cloud Peak Energy Inc. missed debt payments before filing for bankruptcy, largely due to depressed demand for Powder River Basin coal. The company's business is vulnerable to domestic and international market conditions, and some of its production has become uneconomical due to competition from coal and natural gas, which compounded upon operational challenges at one of its three coal mines, S&P Global Ratings warned in a March rating action when the company first missed its debt payment.
"We anticipate the challenging operating conditions at the Antelope mine to persist into 2019 causing higher production costs," S&P Global Ratings wrote. "This dynamic will continue to erode the company's already thin operating margins. Finally, we do not expect that Cloud Peak will be able to offset some of the domestic decline with export sales, because the lower international price and transportation disadvantages limit price realizations."
Murray Energy Corp., which has long focused on thermal coal production, recently ventured into the metallurgical coal space with the bankruptcy sale acquisition of Mission Coal Co. LLC. The acquisition followed a distressed debt exchange in March. Shortly after the exchange, S&P Global Ratings raised Murray Energy's rating to reflect expectations that the company would lower its adjusted leverage due to lower cash costs, improved price realizations and continued debt repayment.
However, Murray Energy's estimated total 2019 adjusted debt burden of $4.9 billion, which includes $1.7 billion in pension and post-retirement obligations, remains high compared to its peers. Ratings also warned that the company may not have sufficient liquidity from operations and cash on hand to meet about $407 million coming due in 2021.
"The company is partially offsetting domestic weakness with export volumes, which we assume will be about 11 million tons in 2019, about 20% of total volumes sold," S&P Global Ratings wrote in March before the acquisition of Mission Coal assets. "Despite its efforts to mitigate the impact of weak market conditions, we expect the company to operate at about 6.5x-7x stand-alone adjusted leverage by the end of 2019, about two times higher than our average adjusted leverage expectation of 11 U.S.-based coal mining peers."
Three of the five defaults in the metals and mining sector so far in 2019 have been U.S.-based companies. That follows the broader trend, where the U.S. accounts for 30 of the 43 global corporate defaults, while Europe and emerging markets only recorded five defaults each in the early months of 2019. Aggregate defaults in the U.S. and Europe are about 30% higher than at this point in 2018, S&P Global Ratings noted.
Other metals and mining companies with defaults in 2019 include Canada-based, copper-focused Imperial Metals Corp., which refinanced US$98.4 million worth of senior notes and secured extensions on four credit facilities in mid-March, and Belgium-based, zinc-lead-focused Nyrstar NV, which earlier that month secured a lock-up agreement with creditors for a recapitalization.
Debt offerings were generally higher in April, with all convertible and nonconvertible debt representing 75% of the US$1.20 billion total raised, according to data from S&P Global Market Intelligence's Metals and Mining Research team.