London Mining is accusing Glencore of refusing to pay an advance payment, for iron ore to be mined at the companys mine in Sierra Leone.
Winners and losers
It would be easy to assume that London Mining, being a small-cap underdog, would regard Glencores support as invaluable, doing everything that it could to maintain a good relationship. However, according to the companys management other commodity trading houses have been fighting to get their hands on this additional supply, ever since the disagreement with Glencore was announced. So, it would appear as if London Mining has the upper hand here.
For Glencore, however, the dispute over payment and cancellation of supply could be good news. Indeed, the price of iron ore has recently fallen to a five-year low, amid oversupply. London Mining itself has been forced to defer a $175m mine expansion plan and put off $20m of non-essential capital expenditure because of weak prices.
Glencore on the other hand has almost no exposure to iron ore, a trait that has been praised by analysts. The group approved a $900m mine project in Mauritania earlier this year but thats it.
But will the outlooks for Glencore and London Mining change after todays news? Well, initial indications lead to the conclusion that the two parties will quickly find new partners to replace existing commitments. As mentioned above, London Mining has already received calls from other trading houses asking to take Glencores place.
Further, Glencore as one of the worlds commodity giants, is unlikely to have a hard time finding another miner willing to sign an offtake agreement with it. The company is seeking to increase its exposure to iron ore and there has been speculation that Glencore could make a bid for iron ore giant Rio Tinto.
All in all though, as the price of iron ore is falling, Glencore is likely to profit the most from this disagreement.
Unfortunately, London Minings outlook is more uncertain. In particular, as the price of iron ore falls, London Minings short-term liquidity is being squeezed. At the end of June the company had $282m of net debt, compared to the firms current market capitalisation of only 33m, or $54m. Management has agreed a $30m revolving, two-year financing facility to meet near-term commitments. This still requires approval from existing lenders.
What should you do?
With the price of iron ore slumping, London Mining is likely to suffer, which will mean further pain for shareholders. Nevertheless, in the long-term, the market should return to normality but while you wait, it would be nice to receive some income.
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Rupert Hargreaves 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.