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By Jeremy Glaser | 03-09-2011 04:46 PM

Rising Commodity Prices a Boon for Miners' Balance Sheets

The unexpectedly quick rise in commodity prices after the downturn has allowed many miners to paper over their balance sheet sins, says Morningstar's Dan Rohr.

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. Rising commodity prices have been hot news recently, and it might not be good for all industries, but the mining industry is one that could certainly benefit from these rising trends. I am here with Dan Rohr. He is an analyst at Morningstar. We're going to take a look at the credit quality of some miners and see how rising commodity prices will affect that.

Dan, thanks for joining me today.

Daniel Rohr: Thanks for having me, Jeremy.

Glaser: So, how have the mining companies recovered from the depths of the downturn?

Rohr: Well, it's been quite a roller-coaster ride for the mining industry. In the days leading up to the financial crisis, if you would recall back to the first half of 2008, commodities were doing phenomenally well. Then financial crisis hit. Commodities fell through the floor, and the balance sheets at a lot of these companies deteriorated rapidly. Then of course, as we all know, commodity prices rebounded quite a bit quicker than most folks thought, primarily attributable to a massive surge in Chinese fixed asset investment.

As we stand today, this surge in commodity prices has allowed these firms to paper over perhaps some of their balance sheet sins of the past, such as acquisitions made at the top of the market. And leverage-coverage metrics look excellent, pretty much across the board and at least among the issuers that we cover on the credit side.

Glaser: So now has there been any differentiation between different types of commodities? Have some done better than others?

Rohr: Sure, sure. Some have done better than others; copper, probably more than any other has been star of the show. You could put metallurgical coal in that bucket, as well. While copper is down a little bit from the highs it reached in February 2011, it's well, well above historical norms. It's trading around $4.20 a pound I believe, which is quite a bit more than the cost of digging the stuff out of the ground.

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