Weak commodity prices and rising debt levels are beginning to have an impact on the balance sheets of many miners. As banks have become increasingly reluctant to extend credit lines at favourable rates to companies in the mining sector, Glencore (LSE: GLEN), Lonmin (LSE: LMI) and Hochschild Mining (LSE: HOC) are three miners that have recently been forced to raise cash through share issuances and asset sales.
Glencore, which has been slow to restructure and preserve cash flow, only decided to take drastic action in September. In order to reduce its cash burn and focus on shoring up its balance sheet, the company has scrapped its dividend entirely and plans to raise another $2.5 billion through new stock issuance. Together with asset sales, Glencore plans to cut its debt pile by $10 billion by the end of next year.
Although abandoning its dividend and raising fresh equity has had a very negative impact on Glencores share price, these actions should have a positive impact on the group in the long term. Shoring up its balance sheet would likely prevent a downgrade of its credit rating, and maintaining access to funding should help it to turnaround its prospects.
There are many reasons why Glencore is in a strong position to make a turnaround. Firstly, its commodities trading businessreduces the volatility of its earnings. Trading profits are generally less correlated to commodity prices and are therefore less affected by the commodities downturn.
Another important attraction of Glencore is its exposure on base metals, which accounts for almost half of its EBITDA. The outlook for base metals is more attractive than many other commodities because supply growth is likely to fall short of demand in the medium term. The likely transition from a slight market oversupply to a small deficit should support higher prices in the medium term.
Lonmin is seeking to raise $400 million from a rights issue, which is more than the value of its current market capitalisation. Although the size of its equity raise is very high relative to the value of its shares, the company does enjoy broad shareholder support. Investors know the company does not have sufficient financial resources to sustain the group though the current low price environment and understandthat this is the only option to save the company.
But, although Lonmin benefits from continued access to funding, the outlook for the platinum miner remains unattractive. Oversupply in platinum market is unlikely to go away any time soon: the miner needs to lower its production costs drastically to return to profitability, but the prospects of that happening seems to be low.
Hochschild Mining which plans to raise 64.8m through a rights issue is in attractive turnaround play, because it is ramping up production from its new low cost Inmaculada mine. The ramp-up of production from the Inmaculada mine is expected to lower Hochschilds overall all-in sustaining production cost by at least 15% this year to around $13-14 per ounce of silver.
This would mean Hochscholds production cost would once again fall well below the market price of silver, and this should also mean the miner is setreturn to profitability by the second half of 2015. With profitability set to turnaround, so too could its share price.
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Jack Tang 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.