Glencore (LSE: GLEN) and Anglo American (LSE: AAL) have crashed to new lows this week, as investors seem to be ready to throw in the towel on these highly leveraged miners.
Unfortunately, concerns about the state of the mining sector aren’t just limited to Glencore and Anglo. Investors are also selling BHP Billiton (LSE: BLT) and Rio Tinto (LSE: RIO). Selling pressure has pushed the share prices of these two miners to six-year lows.
Time to buy?
At first glance, it looks as if it could be time to buy BHP and Rio after recent declines. After all, as the saying goes, “the time to buy is when there’s blood on the streets,” and in the mining sector there’s certainly plenty of blood on the streets.
What’s more, at present levels BHP and Rio certainly look attractive as income investments. Specifically, according to City figures, BHP supports a dividend yield of 8.5% and Rio supports a dividend yield of 6.7%.
Still, as commodity prices remain depressed, with no signs of a recovery in sight, City analysts are becoming seriously concerned about the sustainability of these dividends. According to analysts’ figures, if commodity prices remain at current levels Rio and BHP will spend around 50% of operating cash flow over the next few years funding the payouts. This leaves little room for capital spending or debt repayment.
That said, both Rio and BHP have stronger balance sheets than the likes of Anglo and Glencore. BHP’s net gearing (debt minus cash) is around 40%, and income from the company’s operations covers interest payments 30 times. Rio’s net gearing is around 30%, although interest payments are only covered 2.5 times by income.
Down but not out
Glencore and Anglo are in dire straits. Glencore’s huge debt pile is a noose around the company’s neck. The group has little financial flexibility, and as mining profits fall, it’s becoming less and less likely that Glencore will be able to pay down its debt mountain. Even after Glencore’s $10bn debt reduction plan, announced at the beginning of September, City analysts believe that the company’s restructuring is far from over. Additional asset sales are likely and possibly even a rights issue.
With its $43.5bn debt pile, Anglo is facing the same pressures as Glencore. And, even though the company is seeking to raise $3bn by selling assets and cutting jobs, Anglo will have little room to manoeuvre financially if commodity prices remain depressed. Anglo’s dividend costs the company more than $1bn per annum — an expense the company could do without right now.
Wait on the sidelines
It’s difficult to tell what the future holds for Glencore, Anglo, BHP and Rio. If commodity prices stage a rapid recovery, these miners could quickly recover. However, if commodity prices remain depressed for an extended period, there’s no telling which companies will be able to survive the downturn.
As a result, until the mining sector’s outlook improves, it might be wise for investors to watch from the sidelines.
