Commodity prices have taken a real beating over the past 12 months and many miners have seen their share prices slump as a result.
However, within the past few weeks, sharp declines in the price of copper, have really hammered home the fact that the mining industry is now is trouble. As a result, investors are now starting to abandon the sector, but is it really time to jump out of mining stocks?
Copper issues
Antofagasta’s (LSE: ANTO) is well aware of falling commodity prices. It’s estimated that for every 10% decline in the price of copper, the company’s earnings per share will fall by 21%. Unfortunately, over the past few days the price of copper has plunged to new lows not seen since the financial crisis. In percentage terms, the red metal has fallen nearly 20% during the past three months.
Still, Antofagasta has average costs near $4,500 per tonne and low net debt, so the company is not in trouble yet — copper is currently trading at around $5,500 per tonne.
Debt worries
Vedanta Resources (LSE: VED) is also suffering from a falling copper price. According to City analysts, a 10% decline in the price of copper translates into a 31% decline in earnings per share for Vedanta. And for Vedanta this is especially bad news because the company’s complex corporate structure and high level of debt means that the company is especially susceptible to falling commodity prices.
Indeed, Vedanta has $2bn of debt falling due during 2016, which it could struggle to repay if copper price remain depressed. Moreover, some analysts are concerned that the company has already breached banking covenants. Vedanta is going to struggle over the next few years.
Tough choices
It’s not just Vedanta that’s struggling with a large debt pile. Glencore (LSE: GLEN), one of the industry’s largest players, is also grappling with a hefty debt pile.
However, unlike other miners, Glencore needs to maintain an investment grade credit rating in order for its marketing/trading division to continue to function effectively. The company has around $15bn of net debt funding its marketing arm, which is expected to provide 45% of group profit this year.
Any deterioration in credit quality would likely mean higher financing costs, while reducing debt would mean a fall in profits. The company is stuck between a rock and a hard place. Still, Glencore is one of the industry’s largest players and is unlikely to go out of business any time soon.
Low cost producer
As Vedanta struggles, KAZ Minerals (LSE: KAZ) is well placed to weather the copper storm. After a group restructuring last year, in which the group disposed of its high-cost, low-quality copper mines, KAZ is now one of the lowest cost producers around.
What’s more, the group is set to benefit from the devaluation of the tenge, Kazakhstan’s currency, which tends to follow the rouble. Devaluation would lower the group’s costs further.
Shedding assets
Anglo American (LSE: AAL) is also planning to shed assets in order to remain competitive. Management has earmarked $3bn to $4bn of assets for sale, including coal mines platinum mines in South Africa and copper assets in Chile. These sales should help strengthen the company’s balance sheet, helping the group to ride out the weak commodity pricing environment — a prudent move by management.
Actually, Anglo is one of the few miners that is working hard to unlock value for investors. Indeed, the group has already decided against a corporate spin-off, opting for piece-by-piece asset sales as management believes higher asset prices will be achieved. For this reason, I think Anglo is one of the best picks in the mining sector.
