Weak commodity prices and rising debt levels are beginning to have an impact on the balance sheets of many miners. As banks have become increasingly reluctant to extend credit lines at favourable rates to companies in the mining sector, Glencore (LSE: GLEN), Lonmin (LSE: LMI) and Hochschild Mining (LSE: HOC) are three miners that have recently been forced to raise cash through share issuances and asset sales.
Glencore
Glencore, which has been slow to restructure and preserve cash flow, only decided to take drastic action in September. In order to reduce its cash burn and focus on shoring up its balance sheet, the company has scrapped its dividend entirely and plans to raise another $2.5 billion through new stock issuance. Together with asset sales, Glencore plans to cut its debt pile by $10 billion by the end of next year.
Although abandoning its dividend and raising fresh equity has had a very negative impact on Glencore’s share price, these actions should have a positive impact on the group in the long term. Shoring up its balance sheet would likely prevent a downgrade of its credit rating, and maintaining access to funding should help it to turnaround its prospects.
There are many reasons why Glencore is in a strong position to make a turnaround. Firstly, its commodities trading business reduces the volatility of its earnings. Trading profits are generally less correlated to commodity prices and are therefore less affected by the commodities downturn.
Another important attraction of Glencore is its exposure on base metals, which accounts for almost half of its EBITDA. The outlook for base metals is more attractive than many other commodities because supply growth is likely to fall short of demand in the medium term. The likely transition from a slight market oversupply to a small deficit should support higher prices in the medium term.
Lonmin
Lonmin is seeking to raise $400 million from a rights issue, which is more than the value of its current market capitalisation. Although the size of its equity raise is very high relative to the value of its shares, the company does enjoy broad shareholder support. Investors know the company does not have sufficient financial resources to sustain the group though the current low price environment and understand that this is the only option to save the company.
But, although Lonmin benefits from continued access to funding, the outlook for the platinum miner remains unattractive. Oversupply in platinum market is unlikely to go away any time soon: the miner needs to lower its production costs drastically to return to profitability, but the prospects of that happening seems to be low.
Hochschild Mining
Hochschild Mining — which plans to raise £64.8m through a rights issue — is in attractive turnaround play, because it is ramping up production from its new low cost Inmaculada mine. The ramp-up of production from the Inmaculada mine is expected to lower Hochschild’s overall all-in sustaining production cost by at least 15% this year to around $13-14 per ounce of silver.
This would mean Hochschold’s production cost would once again fall well below the market price of silver, and this should also mean the miner is set return to profitability by the second half of 2015. With profitability set to turnaround, so too could its share price.
