Credit Crisis Seen Cutting Latin American Mine Output

Global metals output will take a medium-term hit as the global credit crisis cuts financing to Latin America's booming metals sector, forcing smaller miners to shelve new projects.

Mining stocks around the world took a beating recently following the US Senate’s vote on the revised $700bn plan to rescue the shaky financial sector. Although the senate passed the bill, the downturn hit prospectors and mid-size miners as well as mining giants.

Global diversified miners BHP Billiton fell nearly 4.0% in London, while Xstrata Plc fell 1.9%. Xstrata dropped plans for a $10bn bid for platinum producer Lonmin Plc, citing financial turmoil and difficult debt terms for the decision.

"We've already all been hit in our market caps," said Joanne Freeze, chief executive at Canada's Candente Resources, a copper company with operations in Peru whose stock was down 7.3% in Toronto.

Candente has money in the bank and a proven resource in the ground. Freeze said small mining companies with limited cash flow would be hardest hit as the credit crisis widens.

Mexico's largest copper producer Grupo Mexico said it was still moving forward with mine expansion plans. With a solid cash position and no net debt, it said it had little immediate need for external financing.

Copper prices on global markets tumbled, hitting $2.80 a pound. Just a few months ago, prices were closer to lifetime highs of around $4 a pound. Analysts say copper may fall further as the credit crisis raises concerns about global demand, depresses commodity prices in general and crimps earnings outlooks for mining companies. Even giant mining companies could delay investments, analysts and industry players said.

"It doesn't matter if you are an extremely well managed bank with little exposure to US subprime debt or not, it is more challenging to raise funds to fund banking activities," said Patricia Mohr, a commodities analyst at Scotiabank. "So credit standards and the cost of credit is rising."

Cash flow shortages

The capital expenditure required to build new mines usually range into the billions of dollars, and few companies can rely on cash flow to cover significant investments.

Investors in small miners in Peru were alarmed last week after Australian miner Strike Resources Ltd said it delayed funding for two iron ore projects in that country, citing credit crisis concerns.

"You need massive capital inflows and yet, the equity side and the credit side are dysfunctional. People don't even trust major banks, never mind some junior company with a resource," said Bart Melek, a Toronto-based analyst with BMO Capital Markets.

Chile's Codelco, the world's largest copper company, declined to comment on global economic turbulence, but chief executive Jose Pablo Arellano said last week the company was keeping a close eye on the situation.

Gustavo Lagos, director of mining studies at the engineering faculty of Chile's Catholic University, said the state company probably would not change mine plans because it is in a drive to replace falling output at most of its mines.

But Codelco is unlikely to embark on new decision-making as long as the crisis persists. "Companies will start to now look very closely at their investments and they will start to be very concerned about some of these projects, especially some of the marginal projects," an executive at one of Chile's largest copper miners told Reuters on condition of anonymity.

Falling prices already are pinching regional economies that depend on metals export revenue, especially Chile, which depends on copper. The crisis may hit Peru less severely, thanks in part to a diverse mix of minerals from gold to lead.

Analysts say all miners must reassess investment plans, especially mines with the highest costs. "Some marginal projects in Peru will fail, but with copper at $3, every copper project in Peru is viable," said Jose Miguel Morales, former president of the national mining chamber.