Its starting to become clear that over the next 12 to 24 months the face of the mining industry will change drastically.
Many miners will not be able to make it through the downturn. Indeed, a number of once-great miners around the world have already collapsed this year.
But canLonmin(LSE: LMI),Glencore(LSE: GLEN),Anglo American(LSE: AAL),KAZ Minerals(LSE: KAZ) andAntofagasta(LSE: ANTO) survive the downturn?
Room for manoeuvre?
Lets start with Lonmin. Unfortunately, Lonmins management warned at the end ofJuly that the group wasreviewing its capital structure amid the need to re-finance debt facilities. That doesnt sound good.
Falling platinum prices have erasedLonmins profitability and while the company hadnet debt of $282m at the end of March, well within available committed debt facilities of $563m, Lonmin is losing money fast. Its only a matter of time before the company breaches debt covenantsor is forced to announce a rights issue.
Dependant on debt
Glencores marketing and trading arm makes heavy use of debt to fund trades. But to maintain its reputation with counterparties, Glencore needs to keepits investment grade credit rating, although the companys credit profit is rapidly deteriorating.
According to analysts,Glencore has around $50bn of debt, or $30bn if inventories are counted as cash. Attimeof writing, Glencores market cap. is only $37bn (24bn).
To maintain its investment grade credit rating, City analysts calculate Glencore needs to lower debt by a total of $4bn or increase earnings by 15%. If Glencore loses the investment grade rating, the companys marketing division, which is set to report earnings beforeinterestof $3bn for this year, will struggle to operate as credit dries up.
Drastic action
Anglo American is taking drastic action to slash costs and improve margins. At the end of July, management announced that the company was planning to cut6,000 jobs as part of its cost-cutting programme, which is targeting $1.5bn per annum of cost savings over the next 18 months. Moreover, Anglo is looking to reduce its portfolio of assets from55 to 40, reducing the group employee count by 35%.
Anglo had cash of $7bn at the end of July. Together with undrawn debt facilities of $7.9bn and planned asset sales, Anglo has plenty of cash to remain afloat throughout the current market.
Problems piling up
Earlier in the year, City analysts warned that KAZ Minerals future required almost perfect project delivery. As the copper price iscurrently languishing around a six-year low, KAZ is unlikely to achieve that.
Inaddition, the companys debt pile is still growing and is not expected to peak until 2017at a perilous $3bn, three times more than the companys current market cap.
Best in class
Antofagasta has the strongest balance sheet of this group. At the end of 2014 the company reported a net cash position of around $300m. Many City analysts believe thatAntofagasta is one of the markets most defensive mining stocks as, along with a cash balance, the group has an average cash operating cost of about $1.40 per pound, against a copper spot price of $2.50.
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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.