- ``The debt pigeons are coming home to roost,'' Investec says
- Investors concerned about balance sheets, future dividends
As tumbling commodity prices erode earnings for the world’s biggest miners, investors are focusing on how the industry will cope with its near record levels of debt. It’s looking increasingly ugly.
While overall borrowings from the 10-largest mining companies fell slightly last year, it’s still close to an all-time high of $145 billion. At the same time, profits are expected to drop to a six-year low, according to Bloomberg estimates, hampering their ability the pay down the debt pile.
Against a backdrop of a deteriorating outlook for economic growth in China, the industry’s biggest customer, investors have retreated from the world’s largest producers.
“The debt pigeons are coming home to roost at many heavily indebted mining companies,” analysts at Investec Plc wrote in a note Wednesday. “The heady days of the super-cycle were fueled by cheap debt, which was eagerly taken on by mining companies in order to buy (overpriced) assets or to build new mines.”
“Due to the length of time it takes to build a new mine, the effects of these excesses are only now being felt and unfortunately this comes at a time when the cold wind of a Chinese slowdown is blowing through the market,” Investec said.
Concern that slowing Chinese growth will sap demand for commodities has driven a 28 percent decline in the Bloomberg World Mining Index this year. As commodity prices slumped, investors are concerned about the sustainability of dividends.
Last week, Glencore Plc Chief Financial Officer Steven Kalmin said the miner and commodity trader could pay a dividend and sustain its credit rating, or walk and chew gum as he put it.
On Tuesday, BHP Billiton Ltd.’s CEO Andrew Mackenzie stated the company’s “resolute commitment” to their policy to maintain or raise its dividend. The yield on its London shares exceeded 9 percent this month, the highest on record.
BHP didn’t “appear too uncomfortable with any credit-rating downgrade from the balance sheet being put under increased pressure from lower commodity prices,” Citigroup Inc. analyst Heath Jansen wrote in a report Thursday, following a meeting hosted by BHP’s CFO Peter Beavan.