Why Bankruptcy Might Be the Mining Industrys Last Best Hope
For the world’s ailing metals-mining industry to have any hope of a turnaround, more producers may have to go belly up.
Companies that dig up everything from gold to copper have failed to stem a prolonged collapse in mineral prices mostly because not enough mines are closing. Years of increased output have created global surpluses just as slower economic growth erodes demand. Unprofitable operations were kept alive by across-the-board cuts in operating costs, lower energy prices, a strong dollar and the unfulfilled hopes by mining executives that markets will improve.
“We are going to see bankruptcies,” Evy Hambro, who manages Blackrock Inc.’s $3.5 billion World Mining Fund, said at a conference in London on Tuesday. “Some companies have been praying for commodity prices to deliver a kind of escape route from the problems that they face. That’s clearly gone the other way.”
While nobody expects industry giants such as Rio Tinto Group or BHP Billiton Ltd. to go bust, higher-cost producers and those unable to raise more cash are vulnerable as a measure of base-metals prices heads for a third straight annual decline. The loss of value means more companies are getting closer to default, Moody’s Investors Service said Wednesday.
There have been some production cuts, but the rout has deepened because companies are still supplying more metal than is needed around the world. Most mining executives don’t want to trim even unprofitable output because the resulting tighter supply and higher prices would benefit rivals.
China, the world’s biggest metals user, has been mostly to blame for the price slump. The Asian country’s economy is expanding at the slowest rate in a generation, curbing demand, just as new mines planned during an almost decade-long bull run in commodities are coming into operation.
“We need to see supply cuts across these markets to try to bring them back into balance,” said Colin Hamilton, global head of commodities research at Macquarie Group Ltd. in London. “It’s either companies making the decisions themselves, or it comes through a full process of people dying very slowly.”
A gauge of contracts on the London Metal Exchange has slid 26 percent this year, the most since 2008, to near the lowest in six years. About 15 percent of copper production and a quarter of zinc output are unprofitable, while 60 percent of aluminum and 70 percent of nickel are supplied at a loss, according to Standard Chartered Plc.
First-half profits slumped at least 30 percent for Rio Tinto, Glencore Plc and Anglo American Plc, while BHP Billiton’s full-year earnings slid 52 percent. The biggest producers have proved the most efficient at pumping out more material at lower costs, while smaller companies have struggled.
“You’ve got to allow the markets to work,” Tom Albanese, chief executive officer of Vedanta Resources Plc and the former CEO of Rio Tinto, said in a Bloomberg Television interview on Tuesday. “It creates a prisoner’s dilemma in terms of what it means for the broader sector, but it’s logical and it’s in the best interests of those companies.”
Producers have been sustained by cash piles that are now eroding, Moody’s said in a report on Wednesday. But even running out of money hasn’t stopped supply.
Last month, Lonmin Plc shareholders agreed to hand the company $407 million as the platinum producer sold billions of shares at a fraction of the market price to keep its mines running. Gold miner Petropavlovsk Plc, once valued at more than $3 billion, sold $335 million of shares and bonds to avoid insolvency earlier this year. Both will keep producing into markets contending with prices at multiyear lows.
"We’ve seen very, very few bankruptcies over the past two or three years, despite the fact people are losing money and commodity prices have been coming lower,” Macquarie’s Hamilton said. “That’s been part of the problem."
Those that have gone bust include two U.K.-listed iron-ore producers in Sierra Leone whose mines have since been bought and are planned to resume output. U.S. coal producers Alpha Natural Resources Inc., Patriot Coal Corp. and Walter Energy Inc. have sought bankruptcy protection this year.
Weaker currencies in resource-rich countries such as South Africa, Australia and Chile have helped keep mines alive by cutting production costs because the output is sold in dollars. But that benefit is a “finite lifeline” and won’t protect the industry from lower commodity prices forever, said Joe Wickwire, a fund manager at Fidelity Investment Management.
Glencore CEO Ivan Glasenberg has been one of the industry’s more outspoken figures, bemoaning rivals for oversupplying the market and saying they’d “screwed up” by building too many mines. He’s tried to revive commodity prices by cutting coal, copper and zinc output. But even after pledging to reduce zinc production by a third, it’s done little to slow the slump.
“As commodity markets fall further, production will have to be cut,” said Christoph Eibl, CEO of Tiberius Asset Management AG, which has $800 million in commodity investments. “Producers will have to go bankrupt."
Article from:- http://www.bloomberg.com