Why Anglo American Plc, Lonmin Plc And Premier Oil Plc Are Toxic Value Traps

The global collapse in commodities prices has been a two-year-long Christmas present for bargain hunters looking to snap up solid companies at relatively low prices. However, investors looking for a value play would do well to avoid Anglo American (LSE: AAL), Lonmin (LSE: LMI) and Premier Oil (LSE: PMO) at all costs for the time being.

Anglo American’s diversified portfolio hasn’t helped arrest the five-year slide in its share price, as the value of core commodities has been in free fall due to falling demand from China and other emerging economies. Now the smallest FTSE 100 stock, Anglo American faces the possibility of losing investment grade credit soon and will need to hasten plans to divest assets and dramatically cut the workforce, by some 55% and 60%, respectively, over the short term in order to conserve cash.

Despite having access to $15bn in cash and undrawn credit lines, analysts believe the company may be forced into a rights issue as it forecasts negative cash flow of $1bn in 2016 and has $8.4bn of debt due over the next three years. With no end in sight to low commodity prices, dividends already halted for 2016, and the possible double-whammy of losing investment grade status and shareholder dilution, I see no reason for investors to jump on the Anglo American bandwagon any time soon.

Down, down, down

Platinum miner Lonmin is in even worse shape, as its third rights issue in six years sent shares tumbling 98% in the past three months alone. While the capital raised will pay down the company’s $185m in net debt and finance capex spending for 2016, the company is still haemorrhaging cash to the tune of $167 in negative free cash flow in the first nine months of 2015 alone.

While Lonmin has cut operating costs per ounce of platinum mined by 23.6% year-on-year, the price of platinum has fallen by 31% over the same period. With the company itself not predicting demand outstripping supply until 2020, there’s little hope of share prices going anywhere but down for some time yet.

Difficult decisions

The suspension of trading in Premier Oil shares on Wednesday morning comes as the company moves forward with plans to buy the UK North Sea assets of German utility  E.ON. The deal is rumoured to be valued at the £100m mark, which would place it close to the total market cap of Premier and is thus classified as a reverse takeover. Adding a possible 12.5k bpd in expensive oil fields is a large bet by management that oil prices will rebound significantly this year, after which Premier has significant debts maturing which operating cash flow will not cover after committed capex at today’s crude prices. 

The company had 5.55m barrels of oil hedged at an average $97 p/b in 2015, but this decreases to 3.65m barrels at an average $68 for this year. Although capex will be lower by half this year and the large new Solan field in the British North Sea will come online, the company will remain significantly lossmaking with Brent Crude at the current $31 p/b price. With a gearing ratio of 59% and no downstream revenue streams, I see Premier’s share price trending nowhere but down for the foreseeable future unless crude prices rise dramatically. 

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Ian Pierce 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.