OREANDA-NEWS. Fitch Ratings believes that Australia-based Emeco Holdings Limited (Emeco, 'B-'/Negative) has sufficient liquidity for 2016. The company, which rents its equipment to mining companies, improved performance in Chile and several regions in Australia in the first six months of the financial year ending on 30 June 2016 (FY16). We estimate that these regions, in aggregate, will account for nearly 50% of Emeco's FY16 EBITDA. However this was offset by weaker performance in Canada and the prolonged weak crude-oil price environment that is affecting the oil sands miners there.

Fitch expects Emeco to meet the higher end of its EBITDA guidance of AUD53m-57m for FY16, which is broadly in line with our previous expectations. The expected 30% growth in EBITDA from the prior year reflects the company's efforts at streamlining its operations amid prolonged low global commodity prices.

Emeco's Negative Outlook reflects the inherent uncertainty in the prices of key commodities that may force miners to delay or halt production, or continue to trim costs, weakening Emeco's earnings further in the next 12-18 months. The greatest threat to Emeco's operations continues to stem from its exposure to oil sand miners in Canada, who are among the highest-cost producers of crude oil, amid the continued glut in crude supply.

However, most major oil sands miners typically choose to keep producing oil despite making losses over multiple years, and therefore may continue to use mining equipment. This is because of the high sunk costs of their projects, high costs of stopping production, such as the risk of damaging existing reservoirs, and payback periods that can be several decades long. This, together with Emeco's near-term liquidity buffers, and its improved performance in other divisions, supports the company's 'B-' rating.

We estimate that Emeco will not generate sufficient cash to cover its capex in FY16, before any asset disposals, but that the arising cash outflow can be comfortably absorbed using the company's existing liquidity sources. At end-2015, Emeco had available liquidity of around AUD88m in the form of undrawn committed credit lines and cash. Emeco disposed of AUD9m of idle assets in 1HFY16, but will find it increasingly difficult to dispose of its idle assets amid continued weak industry fundamentals.

Contracts with Chilean copper miners, which we estimate will account for more than 10% of Emeco's EBITDA in FY16, continue to perform well with 93% of its fleet utilised during 2QFY16. Emeco's Chilean business is more robust than its other divisions because it serves some of the world's lowest-cost copper miners, who would be more resilient in a prolonged downturn in copper prices. Fitch currently expects a modest decline in the average copper price in 2016, and a slow recovery in 2017 and beyond.

Emeco's rental contracts in Queensland and New South Wales in Australia, which we estimate will account for more than a third of its EBITDA in FY16, are also showing more stability - the company has put more of its idle fleet to work in existing coal projects in New South Wales, and has contracted a new project in Queensland. These should support stronger EBITDA in FY16 compared with FY15. Fitch currently expects a modest and gradual price recovery in thermal and coking coal in 2016 and 2017, in spite of weaker demand from China, as we expect more supply sources to halt operations at current prices.