The commodity rout has sent shockwaves across the mining sector. Unfortunately, it’s now becoming apparent that many miners won’t be able to survive the downturn.
Will KAZ Minerals (LSE: KAZ), Vedanta Resources (LSE: VED), Jubilee Platinum (LSE: JLP), Lonmin (LSE: LMI) and African Potash (LSE: AFPO) be able to survive?
Loss-making production
At the end of August, Kaz’s shares jumped by a fifth after announcing the results, which beat expectations.
Since the release of these results, however, a lot has changed. Alongside the half-year results, Kaz revealed that its full-year copper production cost guidance would be in the region of 260 to 280 cents per pound. But at the end of August, the price of copper crashed to 220 cents per pound, indicating that Kaz is losing money on every pound of copper produced.
Essential merger
According to City, it’s essential that Vedanta completes its merger with Cairn India for the company to be able to withstand the weakness in global commodity prices.
It’s so important that Vedanta completes its merger with Cairn India that credit ratings agency, Standard & Poor’s has placed Vedanta on credit watch, ahead of a possible downgrade if the merger doesn’t go ahead.
Vedanta’s management expects the deal to complete during the fourth quarter of 2015. So, investors will have to wait for further clarity on Vedanta’s outlook. Still, management has stated that the company’s 9.4% is here to stay for the time being.
Long way to go
Jubilee Platinum has surged 160% in the last six months weeks but has fallen by more than 30% since the beginning of August. News regarding asset sales, financing deals and the company’s pipeline of projects have all boosted the investment case for Jubilee, although the company has a long way to go before it can stand on its own two feet.
Moreover, it is unclear how the 30% fall in the price of platinum over the past six months will affect the company.
And as the price of platinum slumps, Lonmin’s financial performance is only going for bad to worse. Lonmin is expected to post as pre-tax loss of £90m this year followed by a further £20m loss next year. Further, management is struggling to refinance the group’s debt.
Lonmin may look like a bargain, as it currently trades at a price to book value of just 0.06, but it should be avoided.
Difficult to call
It’s difficult to call African Potash’s outlook. With a market cap. of only £21.5m the company is off the radar of most investors but that hasn’t stopped the stock rising more than 600% over the past three months.
Most of these gains have been driven by the news that African Potash has inked several supply deals for the supply of fertiliser. At the end of last week the company announced that it had agreed on a price of $500 per metric tonne in respect of 50,000 MT fertiliser product to be sold under a supply agreement signed at the end of August. Also, a trade finance facility of up to $50m is currently being arranged for African Potash.
So unlike Vedanta, Lonmin and Kaz, African Potash looks to have a bright future ahead of it, as management push through the company’s business plan.
