Last year’s dramatic fall in commodity prices and the subsequent crash in share prices of over-leveraged miners garnered headlines daily. Yet the year-to-date rally of these same commodities companies’ shares has largely gone unnoticed. Is this a true recovery or a mere dead cat bounce?
The end of the China-fuelled Commodity Supercycle has hit diversified giant Anglo American (LSE: AAL) harder than many of its peers. Branching out into mining everything from coal to nickel led to high operating costs and current net debt of $12.8bn. This represents a gearing ratio of roughly 37%, which is high but should prove manageable thanks to $15bn of available cash and credit facilities.
Anglo’s plan to deal with slowing Chinese demand is to slim down dramatically, selling off coal and nickel assets amongst others to focus on diamonds, platinum and copper. Planned disposals in 2016 alone could bring in $3bn to $4bn to be used to lower net debt to under $10bn. Looking ahead, the new, streamlined Anglo American will offer low-cost-of-production core assets that should be free cash flow positive in 2016. However, after their recent rally, shares are priced at a full 30 times forward earnings and with high debt levels likely constraining a return to high dividends any time soon, I won’t be buying the rally.
China syndrome
Kazakh copper miner KAZ Minerals (LSE: KAZ) is even more reliant on demand from China picking up soon as the company is targeting a 275% increase in output over the next three years. Opening the new mines to make this production target have resulted in the company racking up net debt of $2.2bn. With EBITDA of only $202m in 2015, it’s little wonder that the company is expected to be in violation of debt covenants come year-end unless copper prices increase rapidly.
However, KAZ does offer very low-cost-of-production assets and if Chinese demand does continue to grow, even at a slower pace, the company is well positioned to benefit. As its two major new mines begin to come online, capex spending will also tail off dramatically and the company’s debt can begin to be whittled down. With analysts forecasting a return to significant profitability in 2017 and low costs, KAZ could be a good option for investors who are more bullish on copper than I.
Debt load
Indian conglomerate Vedanta Resources (LSE: VED) has interests ranging from oil & gas to power generation and copper mines in Zambia, which have together racked up some $12.2bn of debt. After four years of falling profits as commodities prices fell from 2011 highs, the company has now had to resort to shifting cash from listed and unlisted subsidiaries to pay off group-level debts.
The most urgent of these debts are $1.3bn of loans due this summer. In order to pay these, a partially-listed subsidiary paid a special $1.8bn dividend, of which $1bn flowed to an unlisted subsidiary that can now repay a loan to Vedanta Plc, the UK-listed parent. This type of financial engineering worries me because it can sometimes mean profitable subsidiaries aren’t able to reinvest retained earnings if these profits are used to keep other subsidiaries afloat. This may not be the case with Vedanta, but the mere possibility of it combined with the group’s high debts are enough to keep me away from the shares for the time being.
