By Rhiannon Hoyle and Alex MacDonald
SYDNEY--Global miners have pushed hard to ditch their debts:
They have sold pits, laid off workers and pruned expenses from
every part of their businesses. This year, an extra tailwind from
improving commodity prices is helping miners repay borrowings
quicker than expected.
The signs of improvement in miners' balance sheets haven't come
a moment too soon for investors who have seen dividends cut in
recent times as companies have prioritized reducing their debt
loads.
A decade long China-led commodities price boom had encouraged
executives to build out networks of pits, railway and ports and
make costly acquisitions to grow. By the end of 2013, the world's
top five miners had nearly $120 billion in net debt on their books,
roughly five times higher than a decade earlier.
Concerns about miners' debt levels intensified earlier this
year, when Moody's Investors Service cut the credit ratings of
major companies including BHP Billiton Ltd. and Rio Tinto PLC. It
even downgraded the debt of the once-mighty Anglo American PLC to
junk status.
But the sharp rise in the prices of some commodities this year
has given companies some breathing space. Iron ore is up 40% so far
this year, for example, while thermal coal prices are up by a
third. In turn, that has helped improve cash flow, allowing for
some debt reductions.
Mining stocks have rallied and the price of credit-default
swaps, which act as insurance against a debt default, have tumbled.
Once panicked investors are breathing a sigh of relief, although
most caution these companies still have some way to go. BHP
Billiton Ltd., the world's No. 1 miner by market value, reports its
annual earnings on Tuesday and is expected to restate its focus on
reducing debt.
Anglo American said last month its net debt had fallen to 35.4%
of its equity--a commonly used measure of company
indebtedness--from 37.7% at the end of 2015. Rio Tinto shaved its
so-called gearing ratio to 23% from 24% over the same period.
Anglo has been in the midst of a drastic restructuring of its
business as it looks to shore up its own finances. It plans to sell
more than half its operations to focus on diamonds, platinum and
copper.
Although the company reported a steep first-half loss a little
over two weeks ago, its net debt fell to $11.7 billion as of June
30, down from $12.9 billion at the end of 2015, thanks mainly to
cost-cutting.
"Not only should Anglo American hit its year-end net debt target
[of less than $10 billion], but we believe it could also hit its
medium-term target of $6 billion in the next 18 months," Canaccord
Genuity said in a recent note.
BHP, too, has made strides in the last few years, although it
has faced unexpected costs linked to a dam failure at its Samarco
Mineração joint venture. That disaster, which killed 19 people and
polluted hundreds of miles of rivers in Brazil, has also hit
partner Vale SA, another of the world's big miners.
Analysts project BHP will report a small rise in its net debt on
Tuesday, alongside what could be its worst net loss since the
company was formed through the merger of BHP Ltd. and Billiton PLC
in 2001. The company is expected to record an annual net loss of
roughly $5.8 billion.
Still, Credit Suisse forecasts that BHP could get net debt down
to $19.1 billion by mid-2018, from $24.4 billion at the end of June
last year. UBS says it could be as low as $16.6 billion by
then.
Easing concerns over the miner's finances are reflected in the
sliding cost of credit-default swaps on its debt. The cost of
protecting $10 million of BHP debt against nonpayment over a
five-year period was last week down to $124,000 annually from as
much as $252,000 in February, according to data group Markit.
There have been similar falls for its peers. The cost of
insuring $10 million of Rio Tinto debt against default fell to
$136,000 last week, from as high as $279,000 in February. The same
credit-default swaps for Glencore PLC--which aims to cut its net
debt by as much as a third this year--have tumbled from more than
$1 million early this year to roughly $250,000 now.
"There is no question that the market thinks the debt issues are
not an issue at all" for Glencore, said Nik Stanojevic, equity
analyst at Brewin Dolphin Ltd., citing the magnitude of the fall in
the cost of those swaps. Brewin Dolphin, a private wealth firm,
owns Glencore shares.
Still, some investors say they hope miners keep debt reduction a
priority.
The improvement in commodity markets has taken the issue "off
the agenda, but if China has another hiccup and prices come off
then people will be worried again," said Andrew Lapping, deputy
chief investment officer at South Africa-based Allan Gray.
Write to Rhiannon Hoyle at rhiannon.hoyle@wsj.com and Alex
MacDonald at alex.macdonald@wsj.com
(END) Dow Jones Newswires
August 15, 2016 09:32 ET (13:32 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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