Glencores (LSE: GLEN) late-September $2.5bn share placing hardly took the market by surprise. Many analysts had been expecting a rights issue for some time. Although, whether this cash call will be Glencores last is a question thats still up for debate.
Indeed, despite the $2.5bn placing, conducted as part of the groups $10bn debt reduction package, Glencores debt pile still amountsto more than $25bn. Moreover, the black-box nature of Glencores highly leveraged trading business means that its difficult for City analysts toaccuratelyassess the companysdebt exposure.
For example,analysts at Macquarie believe that the price of the three key commodities Glencore producers (coal, copper and nickel) would only have to increase by a total of 8% to rebalance the companys balance sheet. That said, if the price of these commodities fell 8%, Glencore could be forced into conducting anther share placing.
Meanwhile,analysts at Morgan Stanley believe that Glencores shares could rally to 217p within six months if commodity prices improve. If not, Glencores shares could fall to 17p. Analysts at Investec note that if commodity prices remain at present levels for an extended period, Glencores shares could fall to zero over the long term. Although, once again this thesis is invalid if prices recover.
So it really is difficult to tell if Glencores troubles are over or not.
Back against the wall
After Glencores cash call, many City analysts have started to speculate that Anglo American (LSE: AAL) will be the next miner to ask shareholders to help pay down debt. The company is seeking to raise $3bn by selling non-core assets and cutting jobs to trim costs.
By offloading itstarmac business, two copper mines and three gold mines the company has been able to raise just under $2.5bn leaving it with net debt of $11.5bn.
Anglo has a long-term net debt target of $10bn to $12bn. the company reported a $3bn loss for the first half of the year and the dividend is currently costing the group more than $1bn per annum.
If commodity prices fall further, Anglos hand could be forced. Some City analysts are already predicting that Anglo will conduct a rights issue to lower its debt and strengthen the balance sheet to help it navigate through the commodity downturn.
Mining cash
Like Anglo, Vedanta Resources (LSE: VED) is also struggling to reduce the pile of debt it has built up over the past six years. Reported net debt is just over $8bn,9.4 times estimated 2016 earnings before interest tax, depreciation, and amortization (EBITDA). A debt to EBITDA ratio of more than two times is usually considered excessive.
Vedantahas already axed its interim dividend payout as it looks to preserve cash although, the group had previously promised to protect the dividend at all costs. Management will consider whether to payout a final dividend alongside full-year results.
To try and strengthen its balance sheet, Vedanta is trying to buy out the 40% of Cairn India, its oil subsidiary, that Vedanta Ltd. doesnt already own. The merger will give Vedanta access toCairns cash hoard, which can then be used to pay off debt. But its proving difficult to convince Cairns shareholders to sell.
A safer bet
If you’re not comfortable with the volatile returns and high level of risk that comes with investing in the mining sector, a more defensive play suchUnilevermight be a better pick.For example, over the pastthree years Unilever has outperformed Glencore by approximately35% per annum including dividends.
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Unilever has actually been picked by the Motley Fool’s top analystsas one of thetop five sharesyou should hold in your investment portfolio, due to the company’s defensive nature and hefty dividend payout.
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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.
