It’s starting to become clear that over the next 12 to 24 months the face of the mining industry will change drastically.
Many miners will not be able to make it through the downturn. Indeed, a number of once-great miners around the world have already collapsed this year.
But can Lonmin (LSE: LMI), Glencore (LSE: GLEN), Anglo American (LSE: AAL), KAZ Minerals (LSE: KAZ) and Antofagasta (LSE: ANTO) survive the downturn?
Room for manoeuvre?
Let’s start with Lonmin. Unfortunately, Lonmin’s management warned at the end of July that the group was reviewing its capital structure amid the need to re-finance debt facilities. That doesn’t sound good.
Falling platinum prices have erased Lonmin’s profitability and while the company had net debt of $282m at the end of March, well within available committed debt facilities of $563m, Lonmin is losing money fast. It’s only a matter of time before the company breaches debt covenants or is forced to announce a rights issue.
Dependant on debt
Glencore’s marketing and trading arm makes heavy use of debt to fund trades. But to maintain its reputation with counterparties, Glencore needs to keep its investment grade credit rating, although the company’s credit profit is rapidly deteriorating.
According to analysts, Glencore has around $50bn of debt, or $30bn if inventories are counted as cash. At time of writing, Glencore’s market cap. is only $37bn (£24bn).
To maintain its investment grade credit rating, City analysts calculate Glencore needs to lower debt by a total of $4bn or increase earnings by 15%. If Glencore loses the investment grade rating, the company’s marketing division, which is set to report earnings before interest of $3bn for this year, will struggle to operate as credit dries up.
Anglo American is taking drastic action to slash costs and improve margins. At the end of July, management announced that the company was planning to cut 6,000 jobs as part of its cost-cutting programme, which is targeting $1.5bn per annum of cost savings over the next 18 months. Moreover, Anglo is looking to reduce its portfolio of assets from 55 to 40, reducing the group employee count by 35%.
Anglo had cash of $7bn at the end of July. Together with undrawn debt facilities of $7.9bn and planned asset sales, Anglo has plenty of cash to remain afloat throughout the current market.
Problems piling up
Earlier in the year, City analysts warned that KAZ Minerals’ future required “almost perfect project delivery“. As the copper price is currently languishing around a six-year low, KAZ is unlikely to achieve that.
In addition, the company’s debt pile is still growing and is not expected to peak until 2017 at a perilous $3bn, three times more than the company’s current market cap.
Best in class
Antofagasta has the strongest balance sheet of this group. At the end of 2014 the company reported a net cash position of around $300m. Many City analysts believe that Antofagasta is one of the market’s most defensive mining stocks as, along with a cash balance, the group has an average cash operating cost of about $1.40 per pound, against a copper spot price of $2.50.
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