Industry Profiles
Mining & Quarrying Industry DSO Drops, Bad Debt Allowance Remains Low
January 21, 2009
Photo courtesy of Hecla Mining
The Greens Creek mine near Juneau, Alaska,
owned and operated by Hecla Mining Co.,
contains silver, zinc, gold and lead.
Mining for the world's finite supply of coal, silver, copper, gold and other minerals is both costly and risky. Little wonder then that the credit standards of the 26 companies in the mining & quarrying industry grouping of the CSI are the fourth highest of the 70 industries covered by CreditPulse. These companies set an example for credit standards that other industries would be wise to follow.
The five core credit and accounting benchmarks for the mining & quarrying industry remain steady with the exception of two: the days' sales outstanding (DSO) and current ratio benchmarks, which both moved in opposite directions -- one positive (DSO) and one negative (current ratio).
The DSO benchmark for the mining & quarrying industry fell to 43.05 days from the 2006 figure of 46.41 days, a decrease of 3.36 days, according to the 2007 Credit Standards Index (CSI), the latest annual benchmark information available for public companies. Median DSO came in at 35.88 days down from the 40.23 median figure from 2006.
DSO averages in mining & quarrying range widely from the 13.70 days average of Harry Winston Diamond Corp, a $679 million diamond miner based in Toronto, Ontario (Canada) to the 95.13 days of Coeur d'Alene Mines Corp, a $215 million gold and silver mining company based in Coeur d'Alene, Idaho. High DSOs, however, are the exception and not the rule in this industry.
The bad debt allowance (BDA) benchmark for mining & quarying remained unchanged from the previous two years at 1.1 percent. Median BDA is even lower at 0.7 percent. In addition, an average of 24 percent of the BDA was utilized for accounts receivable write-offs, according to valuation data provided by 13 of the companies.
Hecla Mining Company in Coeur d'Alene, Idaho has the highest credit standards in the mining and quarrying industry with a CSI score of 1.20 (see below). James Sabala, chief financial officer of Hecla, explains one reason why: "We sell all of our metals on a direct basis and funding occurs at the same time so we, in effective, have no credit risk. Our accounts receivable reflects the difference between provisional pricing when the order is taken and final pricing upon settlement, which is usually a couple of months down the road. Our customers pay in advance based on preliminary evaluation."
Write-offs in this industry are few and far between as evidenced by the overall low BDA percentages and the fact that eight companies in this industry find it unnecesary to even reserve for bad debt, more than any other industry. Only two companies in the industry group had BDA percentages above the CSI aggregate average of 4.0 percent: Peabody Energy Corp, a $4.6 billion coal mining company based in St. Louis, Missouri, with a BDA of 4.4 percent and USEC, Inc., a $1.9 billion uranium miner based in Bethesda, MD with a BDA of 6.4 percent.
Operating cash increased slightly to 21.6 percent from the 2006 industry benchmark of 20.9 percent. Current Ratio was the only other benchmark to experience significant change as it dropped to an industry average of 2.09 to 1 from the 2006 figure of 2.33 to 1, a fairly sizable decrease and the only unfavorable development for the industry. The overall CSI aggregate benchmark is 2.56 to 1.
Current ratios in mining and quarrying vary from the high 8.62 to 1 reported by Hecla Mining Company, a $223 million silver and gold mining company to the low 0.46 to 1 reported by Vulcan Materials Company, a $3.3 billion sand and gravel mining and concrete company based in Birmingham, Alabama.
Receivables securitization, a form of specialty financing that involves removing a portion of the accounts receivable from the balance sheet through a special-purpose entity (SPE), is used by 12 percent (three) of the companies in the mining and quarrying industry group. Fording Canadian Coal Trust in Calgary, Alberta; Consol Energy, Inc., in Pittsburgh, Pennsylvania; and Peabody Energy Corp in St. Louis, Missouri use some form of a/r securitization. Peabody Energy has the lowest CSI rating in the industry with a 3.40.
Industry Brief
Mining and quarrying companies are engaged in exploring, mining, smelting and refining the major natural resources of the world with the exception of oil. Mettalic resources such as silver, zinc, lead, copper and gold are used in the manufacture of electronic circuitry, telecommunications equipment, plumbing pipes and fixtures, transportation equipment and industrial machinery. Coal is the predominate resource used by utilities to generate electricity. Sand, rock and asphalt are used to build everything from bridges to buildings. Uranium is used to generate nuclear power.
The 26 companies in the mining and quarrying CSI industry grouping have an average annual revenue of $5.7 billion, led by three of the largest mining companies in the world -- BHP Billiton Ltd, based in Victoria, Australia; Companhia Vale do Rio Doce, based in Rio de Janeiro, Brazil and Rio Tinto plc, based in London, England. Mined metals and minerals have an annual value of some $350 billion, according to Mining Journal Online, an industry trade publication.
The Coal Industry
Coal probably ranks second only to oil as one of the most important natural resources on the planet. Coal is used to generate approximately 40% of the world's electricity and approximately 64% of the world's steel supply, according to the World Coal Institute. Coal reserves can be found in almost every country in the world and some 50 countries are currently mining the substance.
China produces more coal than any other country in the world followed by the United States. India, Australia, South Africa, Russia and Indonesia are the other largest coal producers. The United States, however, has the largest known coal reserves in the world with proved reserves totaling 247 billion tons, according to BP Statistical Review of World Energy, a noted industry authority. Russia is second with 157 billion tons in reserves and China is third with 115 billion tons in reserves. Yanzhou Coal Mining Company Ltd., a $2 billion coal mining company located in Zoucheng, China, is the fourth rated mining company in the CSI industry group with a 1.90 score.
In the United States, coal consumption has increased from 398.1 million tons in 1960 to approximately 1.2 billion tons in 2007, according to the U.S. Department of Energy. Coal is used primarily by power plants to generate electricity, by steel companies to produce coke for use in blast furnaces and a variety of other uses such as providing heat and power to foundries, cement plants, paper mills, chemical plants and other manufacturing and processing facilities. Peabody Energy Corp is the largest private-sector coal company in the world, according to its 2007 annual report.
Photo courtesy of World Nuclear Assoc.
Cameco Corp headquarters in Saskatchewan,
Canada. Cameco is the world's largest
uranium producer.
Copper and Uranium
Copper is the world's third most widely used metal behind iron and aluminum and an important component in the world's infrastructure. Copper is a material with multiple applications in the electrical energy, telecommunications, building construction, transportation and industrial machinery businesses.
Uranium is used almost exclusively to fuel nuclear power plants for the generation of electricity. Currently, nuclear power plants generate approximately 16 percent of the world's electricity, according to the World Nuclear Association, an industry trade group based in London.
Uranium is produced by a small number of companies in relatively few countries. Canada is the world's largest uranium producer accounting for approximately 25 percent of the world's production. Australia, Kazakhstan, Niger, Russia, Namibia, Uzbekistan and the United States are the other leading uranium producing countries. Cameco Corp, a $2.3 billion company based in Saskatoon, Saskatchewan, is the largest uranium mining company in the world.
