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At the Tights before Numbers

17 August 2020 by jbchevrel

RIO 5y CDS peaked at 150bp in March. BHP 5y CDS peaked at 140bp. Now these are back to 48bp and 43bp. These had started the COVID crisis (2/21) at 35bp and 32bp. RIO products include iron ore, aluminum, copper, diamonds, gold, industrial minerals (borates, titanium dioxide and salt), and thermal and metallurgical coal. BHP does some uranium and petroleum on top of the main ones (iron ore, metallurgical coal, copper). This retracement is broadly in line with the retracement of the itraxx Australia index (80% area). At the end of 2019 both had seizable cash balances reported. RIO had c$11b cash on balance sheet. BHP had c$16b. RIO net income recently ranged from -$1b (2015) to +$14b (2018) and BHP -$6b/+$8b. Both now benefit from the iron ore price rally. BHP and RIO have benefitted from Australia's handling of the virus propagation, more effective than in some competing regions including Southern America. So far, the tensions between China and Australia have not impacted RIO and BHP CDS., although it remains one of the risks in the medium term. Although imposing duties on Aussie raw materials would be counter-productive for China right now, it is probable that China will achieve its plan to source most of the raw materials it needs in Africa in the future. In the shorter run, the solid recovery in raw-material-intensive sectors and countries has helped the likes of RIO and BHP, something that should be confirmed by the release of BHP Q2 numbers overnight (2330 LT, before the Australia open).