Glencore’s (LSE: GLEN) late-September $2.5bn share placing hardly took the market by surprise. Many analysts had been expecting a rights issue for some time. Although, whether this cash call will be Glencore’s last is a question that’s still up for debate.
Indeed, despite the $2.5bn placing, conducted as part of the group’s $10bn debt reduction package, Glencore’s debt pile still amounts to more than $25bn. Moreover, the black-box nature of Glencore’s highly leveraged trading business means that it’s difficult for City analysts to accurately assess the company’s debt exposure.
For example, analysts at Macquarie believe that the price of the three key commodities Glencore producers (coal, copper and nickel) would only have to increase by a total of 8% to rebalance the company’s balance sheet. That said, if the price of these commodities fell 8%, Glencore could be forced into conducting anther share placing.
Meanwhile, analysts at Morgan Stanley believe that Glencore’s shares could rally to 217p within six months if commodity prices improve. If not, Glencore’s shares could fall to 17p. Analysts at Investec note that if commodity prices remain at present levels for an extended period, Glencore’s shares could fall to zero over the long term. Although, once again this thesis is invalid if prices recover.
So it really is difficult to tell if Glencore’s troubles are over or not.
Back against the wall
After Glencore’s cash call, many City analysts have started to speculate that Anglo American (LSE: AAL) will be the next miner to ask shareholders to help pay down debt. The company is seeking to raise $3bn by selling non-core assets and cutting jobs to trim costs.
By offloading its tarmac business, two copper mines and three gold mines the company has been able to raise just under $2.5bn leaving it with net debt of $11.5bn.
Anglo has a long-term net debt target of $10bn to $12bn. the company reported a $3bn loss for the first half of the year and the dividend is currently costing the group more than $1bn per annum.
If commodity prices fall further, Anglo’s hand could be forced. Some City analysts are already predicting that Anglo will conduct a rights issue to lower its debt and strengthen the balance sheet to help it navigate through the commodity downturn.
Mining cash
Like Anglo, Vedanta Resources (LSE: VED) is also struggling to reduce the pile of debt it has built up over the past six years. Reported net debt is just over $8bn, 9.4 times estimated 2016 earnings before interest tax, depreciation, and amortization (EBITDA). A debt to EBITDA ratio of more than two times is usually considered excessive.
Vedanta has already axed its interim dividend payout as it looks to preserve cash although, the group had previously promised to protect the dividend at all costs. Management will consider whether to payout a final dividend alongside full-year results.
To try and strengthen its balance sheet, Vedanta is trying to buy out the 40% of Cairn India, its oil subsidiary, that Vedanta Ltd. doesn’t already own. The merger will give Vedanta access to Cairn’s cash hoard, which can then be used to pay off debt. But it’s proving difficult to convince Cairn’s shareholders to sell.
