As if there wasn’t enough chatter for investors to digest already, I thought I’d take this morning to toss my own thoughts onto the bonfire of opinion that has engulfed the mining sector.
Glencore Plc
The prospect of zero real earnings growth, no dividend and a great deal of price uncertainty all mean that Glencore (LSE: GLEN) would probably pose a challenge to the most accomplished of financial modellers. Each of these things make valuation difficult.
Although commodity price swings may continue to be a source of volatility for the shares, my own view is that it will be developments on the balance sheet that ultimately determine the fate of Glencore. Leverage and debt reduction targets will be the primary focus of investors from here onward.
While management places net debt at $29bn and has pledged to reduce this to the “low 20s of billions” over the medium term, a more conservative approach to calculating net debt could push this figure above $40bn.
Clearly, it’s a big job the board faces, which means that further disappointments or bouts of share price weakness can’t be ruled out.
Anglo American
In December, Anglo American (LSE: AAL) became the latest miner to suspend its dividend, after announcing a ‘radical restructuring’ programme at its investor day.
Although the restructuring will see Anglo hiving off assets and reducing headcount by more than 50%, some have worried that it doesn’t go far enough, prompting speculation about the possibility of a rights issue.
To me, Anglo’s problem is not one that a rights issue would really solve because its balance sheet isn’t an issue to the extent that it is elsewhere in the sector. With gearing at 35% and debt/equity at 0.58 times, there are many more ‘stretched’ balance sheets across the mining space.
However, if Anglo’s profitability is to be ensured, the cost base will still need cutting drastically, even if commodity prices were to stabilise at current levels. But with the right amount of reorganisation, I get the impression that management could probably turn things around here within a reasonable period of time.
BHP Billiton Plc
Last week’s decision to impair its US shale assets, although necessary, has been controversial for BHP (LSE: BLT) investors given that it has spent over $20bn attempting to buy a presence in the market over the last decade.
My view on the company is similar to that of Anglo in that it doesn’t have the same balance sheet issues as the more beleaguered miners. This suggests that, after taking a more critical look at its portfolio, the group should be able to see out the current downturn.
Given its scale and balance sheet, it may even benefit from the downturn eventually because as other companies become more distressed, their assets will become cheaper.
On the downside, management is yet to take the plunge when it comes to dividends. Consensus estimates still have it paying more in dividends than it earns this year and next. Until management bites this particular bullet, it will remain a downside risk to the shares and detract from efforts to bolster the balance sheet.
If I had to make a call here I would say that February’s results will probably see the dividend scrapped for the foreseeable future, along with the announcement of BHP’s own ‘action plan’ on costs and capital expenditure.
