As commodity prices continue to decline, large writedowns have become increasingly common across the mining sector. The Greek deal announced on Monday morning did little to help boost commodity prices, as the underlying fundamentals remain broadly unchanged. Demand from Europe and China for oil and metals remain weak, and increasing global production have led to oversupply in the markets.
Anglo American
Anglo American (LSE: AAL) today announced that it expects to make a writedown of up to $4 billion on the value of its iron and coal mining assets. The miner had already booked impairment charges to the tune of $3.9 billion back in February; but, as commodity prices continued on its downward spiral, profit expectations have fallen significantly lower.
Shares in Anglo American actually rose 1.6% to 888 pence in afternoon trading. Over the past year, Anglo American’s shares have underperformed its peers, having fallen 43% over the past year. But some investors saw today’s announcement as an opportunity to buy its shares on relative weakness.
However, Anglo American’s weak production figures highlights the difficulty it is having in increasing production. Output of most commodities fell in the second quarter of 2015, compared to the same period last year. Iron ore production from South Africa decreased by 9% to 10.4 million tonnes; whilst copper and nickel production fell 5% and 41%, respectively. This was offset by a 60% rise in platinum output and higher coal exports.
Despite recent troubles, Anglo American remains committed to its 6.2% dividend yield.
BHP Billiton
BHP Billiton (LSE: BLT) yesterday announced that it will take a $2 billion writedown on the value of its US onshore oil assets. Back in January, BHP said it was cutting its shale production by 40%, as lower oil prices no longer justify production from higher cost rigs. In total, over the past four years, BHP had booked a total of over $4 billion in impairment charges on its US onshore oil and gas assets, as the company made investments when prices were near their all-time highs.
On a more positive note, BHP benefits from large-scale, low-cost mining projects, which gives it industry-leading profit margins. This means that lower commodity prices have a smaller impact on BHP’s earnings and operating cash flow, which suggests BHP would be able to sustain its 6.3% dividend yield in the medium term.
Vedanta Resources
Vedanta Resources (LSE: VED) took a $6.6 billion writedown on its Indian oil and gas assets back in May, following poor exploration results. But of greater concern had been the difficulty in increasing production, which has kept operating cash flows weak.
With net debt of $8.5 billion, or 2.3x EBITDA, Vendanta has limited financial flexibility if commodity prices continue to decline. Its shares may have a tempting forward yield of 9.2%, but the likelihood that the company could sustain the dividend payments beyond 2015 is fast diminishing.
More writedowns to come?
Although writedowns are non-cash losses, there are a realisation that future profitability will likely be lower than previously expected. To a large extent, the market has already priced the impact of lower commodity prices into the value of these companies’ shares. But with commodity prices likely to remain low for longer, further writedowns are likely.
Of greater concern is the insufficient operating cash flow to fund capital spending and dividend payments. The indebtedness of these miners are expected to steadily increase and, with no bottom in sight for commodity prices, it seems premature to buy these mining shares now.
