Eight mining companies - Rio Tinto, Xstrata, Teck, Anglo American, Freeport-McMoRan, Alcoa, Vale, and BHP Billiton - currently hold a total of USD 100bn in net debt (i.e., after deducting cash from debt), but what does it mean in the overall scheme of things? Gold bullion (which recently traded close to dollar record highs) and gold miners aside, in a post-commodity-price-bubble world, mining debt has moved high up on the agenda of investors looking for potential value in the global resources sector.High debt levels not only devalue the potential market valuation of a stock, but can also absorb inordinate amounts of management time, diverting attention from core business affairs, which are tough enough. This has been seen, for example, with Oz Minerals, which may have been rescued by a full take out cash bid from Minmetals.
While just eight mining companies hold USD 100bn in debt, the complexion of the debtors varies widely. Rio Tinto holds the most, in absolute terms, at USD 38.17bn, following its USD 38bn cash acquisition of Alcan in 2007. Given that Rio Tinto's market capitalisation, or value, is roughly equal to its debt, its debt-to-market-value (DMV) ratio can be expressed as 100%.To extinguish its debt, it would have to issue for cash at least one new share for every one it already has in issue - if indeed there are sufficient takers. Given prevailing market conditions, such a generous ratio is unlikely; Rio Tinto would probably have little choice but to offer new shares at a substantial discount.Xstrata, which holds net debt of around USD 16.50bn, is doing just that, with no fear of a hugely dilutive rights issue. The stock currently trades around GBP 6.59 a share, with 978m shares in issue, for a market value of USD 9.4bn, resulting in a relatively high DMV ratio of 176%. Xstrata is currently busy with a two-for-one rights issue, of 1.96bn shares, at just GBP 2.10 a share. If this works, it would raise just short of USD 6bn, most of which would go towards debt reduction.
One of the world's highest DMV ratios, at nearly 800%, is held by Teck, which sits with a market value of USD 1.5bn and net debt of USD 12.05bn, mainly due to its cash-and-shares USD 13.6bn takeover of Fording, which owns one of the world's finest sets of coking coal assets. In that deal, a consortium of banks arranged USD 9.8bn worth of debt finance for Teck, highlighting the belief, by some bankers at least, that the so-called commodities supercycle had legs of steel.
A rights issue for Teck is completely out of the question, requiring at least an eight-for-one rights issue. Any suitor wishing to take the company over would need to examine Teck's real market value. This is calculated conventionally at USD 1.5bn, but including the debt, the real cost of the acquisition would be USD 13.6bn, whether paid for in cash, shares, or a combination of the two.High debt levels were one of the factors cited when BHP Billiton on 25 November 2008 abandoned its bid for Rio Tinto. Even today, BHP Billiton's putative all-paper bid values Rio Tinto at USD 56bn, when Rio Tinto's prevailing market value calculates at a more modest USD 38.1bn, reflecting investor concern with the high level of its net debt, among other issues.Anglo American sits with a DMV ratio of about 56%, with net debt of USD 11bn, worth just over half of its market value. Last week, the group spooked investors with a raft of disconcerting news in its 2008 results release, which included the passing of a dividend for the first time in 70 years.Freeport-McMoRan, the world's biggest listed copper miner, runs a DMV similar to Anglo American's; both stock prices have been heavily punished. The DMV at Alcoa runs at over 100%. This group, which ranked as the world's biggest miner by market value barely five years ago, and now only just scrapes into the Top 50, saw aluminium prices hit six year lows a few days ago. The company was probably saved, for the meantime, when Rio Tinto trumped Alcoa's bid for Alcan back in 2007.The DMV ratio is low at Vale, the world's No 2 miner by value, and at BHP Billiton, the world's biggest diversified resources stock. Vale could clear its net debt of USD 5.61bn by issuing shares less in number than 10% of its existing stock; for BHP Billiton, USD 4.20bn in net debt could be cleared by an issue of less than 5%. Modest debt levels for both groups partly explain why the two names are the most valuable mining stocks in the world, by some margin.Given the chaos in global markets, and the ongoing freeze in debt markets, mining companies are deploying conventional and unconventional ways of raising fresh capital. Over the past few months, mining stocks have raised more than USD 34bn in fresh non-bank cash. The biggest chunk of this amount, at USD 19.5bn, is by way of Rio Tinto wanting to sell USD 7.2bn in convertibles to Chinalco, a Chinese aluminium maker, and selling certain equity stakes in some prize underlying Rio Tinto assets, also to Chinalco, for USD 12.3bn.On Wednesday, Australia's Fortescue ran a vaguely similar deal through the market, selling 225m new shares, raising the equivalent of about USD 365m, from China's Hunan Valin. Just prior to the transaction, Fortescue, a rising iron ore miner, sat with the equivalent of some USD 3.19bn in net debt, giving it an impressively high DMV of 61%. Fortescue's stock price, trading nearly 80% of its highs, is even more battered than those quoted for Anglo American or Rio Tinto.
Gold, and silver, stocks are at the other end of the scale. Capital raisings by gold stocks, mainly by way of bought deals, have reached nearly USD 4bn in total over the past couple of months, led by the 30m shares sold by Newmont for USD 1.1bn, and USD 450m in convertibles sold by the same company, making a big dent in its net debt of USD 2.94bn as of 31 December 2008. Larger operating gold companies, such as Barrick, the biggest of all, tend to have modest DMVs; in some cases, the DMV goes negative, where net debt is replaced by net cash, as seen at Goldcorp.
Mosaic, a big potash miner, boasts an impressive negative DMV; PotashCorp, the global sector leader, offers one of about 12%. Some other big miners have also been relatively conservative in managing debt positions, not least Southern Copper, Norilsk, and Anglo Platinum. The latter three companies, however, continue to suffer under battered stock prices, given the negative price evolution of copper, nickel and platinum group metals.SELECTED MINING NET DEBT: MARKET VALUE RATIOS
Note: most debt numbers are as at 31 December 2008
Source: market & company data; analysis by Barry Sergeant.