[miningmx.com] – AT the time Ivan Glasenberg’s Glencore was linked with a takeover bid for Rio Tinto, in July 2014, the South African mining magnate was worth about R70bn, and riding the proverbial crest.
Last week’s selling of Glencore’s stock, however, has reduced Glasenberg’s wealth to only R16.4bn, representing his 8% share of the R205bn at which Glencore is valued at the time of writing, and very far from the R880bn at which it was once valued. It now has a value of about R345bn.
What this tells us is how quickly investors are changing the mining market, especially in respect of companies carrying excessive debt such as Glencore which has net debt of $30bn and intends to reduce this to the low $20bns.
Lonmin is another example. As of March 31, Lonmin had net debt of $282m comprising of cash and cash equivalents of $60m and borrowings of $342m.
What’s more alarming is that a year earlier, it had net debt of only $29m and a market value of R29bn compared to its R12bn a year later, and most alarming of all: the paltry R3bn the company is worth today (although up 70% in the last seven days).
There has been speculation that Lonmin can’t be refinanced and that it might be put up for business rescue in order to protect the assets, although it’s share price gains suggest that’s less likely now. Wherever Lonmin is heading, it’s not the same place as Glencore.
At any rate, these two companies typify the dangers of the current market and perhaps more importantly, how swift and efficiently the market works out the inherent risks.
Another volatile stock is AngloGold: its shares are up 16% in the last 30 days, and 22% higher in the year to date, as it completed the sale of its US operations and put its troublesome Ghana mine Obuasi in joint venture with Randgold Resources which the latter will manage.
It has paid off its high interest bond, due next year, and has no need of further asset sales – a measure of self-help in respect of the balance sheet the market has duly rewarded.
“Mining companies gorged themselves on cheap debt to grow production following the Chinese stimulus that occurred in the wake of the GFC [global financial crisis]. The consequences are only now coming home to roost as mines take a long time to build,’ said Hunter Hillcoat, an analyst for Investec Securities in London recently.
“In the current climate, debt is fast becoming the most important consideration for mining company management. “Never under-estimate the ability of debt to undermine the value of equity’, neatly sums up the problem that equity holders face when considering how the highly leveraged companies, such as Glencore, see their much diminished earnings absorbed by the obligations to debt-holders,’ Hillcoat added in a report that was largely attributed with the liquidation in Glencore shares.
Of course, what’s hoped for is the resuscitation of the commodity markets, but Hillcoat thinks metal prices will remain under the cosh for “several years’ yet while Goldman Sachs said it was very difficult to say if equities in the sector had hit the bottom.
“Few investors we spoke to appeared willing to call the bottom in the mining equities,’ it said in a report on September 23, roughly a week before Glencore, Anglo American and a slew of other mining diversified were hit by hard selling.
“We feel that some clarity that China demand is stabilising is required to put a floor under mining stocks for the time being,’ Goldman Sachs said in its report.
