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Lonmin Plc & Anglo American plc: Commodities Clangers Or Brilliant Bargains?

Another week, another disastrous turn for the world’s metal markets.

Critically for Anglo American (LSE: AAL), iron ore sunk to its lowest in a decade at just above $38 per tonne yesterday, meaning the critical steelmaking ingredient has shed 45% of its value since the turn of the year.

Base and precious metals have held above recent multi-year lows, but the prospect of more poor economic data from China promises to send prices lower again sooner rather than later.

Indeed, metal prices continue to struggle despite news of huge production cuts in Asia. Today China Hongqiao announced it was shuttering 250,000 tonnes of capacity immediately, after similar cutback announcements in the Chinese copper and nickel segments.

While demand indicators continue to worsen, in my opinion commodity prices are likely to keep on following suit. Indeed, three-month aluminium futures at the London Metal Exchange sank further below the $1,500 per tonne marker despite today’s news from China.

Can restructuring stop the rot?

Against this worsening outlook, Anglo American was this week forced to intensify restructuring to soothe its sickly balance sheet and mitigate the effect of further revenue pressure.

The diversified digger announced a raft of measures, from banging the dividend on the head with immediate effect; initiating $3.7bn worth of cost improvements through to the close of 2017; and substantially slashing capital expenditure over the next few years. The firm also plans to increase asset sales to $4bn.

Anglo American has seen its share price tank 75% since the turn of 2015 as all its major markets have sagged – it’s a major player in the iron ore, coal, copper, nickel, platinum and diamond sectors.

And with the supply/demand dynamics in these areas set to worsen – the effect of a cooling Chinese economy and industry indiscipline in rowing back production levels – I reckon the bottom line should continue to tank at Anglo American.

A 54% earnings decline is pencilled in for 2015 and a 36% slump is anticipated for next year. Even though the mining play deals on an ultra-low prospective P/E rating of 7.2 times, I believe a backcloth of deteriorating resources prices (and consequently the potential for further earnings downgrades) still makes Anglo American a hugely-unappealing stock pick despite this week’s developments.

Platinum play on the rocks

Dedicated platinum producer Lonmin (LSE: LMI) announced its own restructuring measures in recent months, initiatives that included shuttering shafts at its Marikana complex to remove 100,000 tonnes of material from the market by 2017.

And to keep the company ticking over until the market imbalance improves, Lonmin last month raised more than $400m through a rights issue. This isn’t the first time the South African business has been forced to tap investors for cash as production and wider market issues have stung.

But I believe things could become even more difficult at Lonmin as platinum prices lack an obvious catalyst to charge higher. The metal continues to languish around the seven-year lows of $824 punched in late November. And further plunges could be on the cards amid weak physical demand, fears over auto sales in Chinese showrooms, and a rampant US dollar.

Lonmin is expected to clock up losses of 24 cents per share in the period to September 2016, a second successive year in the red if realised. With the business facing heavy cost pressures as well as a troubled top line, I believe Lonmin remains a risk too far for sensible investors.

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Royston Wild has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.