Markets

Lisa Abramowicz is a Bloomberg Gadfly columnist covering the debt markets. She has written about debt markets for Bloomberg News since 2010.

If it sounds too good to be true, well, you know the rest.

Credit investors are facing an offer that on its surface sounds pretty amazing: Bonds of metals or mining companies are promising tons and tons of yield, in some cases more than 100 percent in just one year. There’s a problem of course. Buyers may end up just losing their money altogether.

Many of these companies will be pushed out of existence within the next few years unless commodity prices and global growth rebound drastically, which seems less and less likely as time goes on. And even if these corporations manage to stay alive, they’ll have a hard time making payments on a pile of debt that has almost tripled since the end of 2008.

Two of the world’s biggest mining companies, Anglo American and Freeport-McMoRan, are already planning to cut their businesses substantially in the wake of a collapse in commodity prices. Anglo American suspended its dividend, plans to sell assets and close mines and will eventually employ 50,000 people, compared with 135,000 now, Chief Executive Officer Mark Cutifani said on a conference call with reporters Tuesday. Freeport-McMoRan also cut its dividend and is extending spending and production cutbacks as the copper producer tries to preserve cash.

Meanwhile, their bondholders have been suffering, with about $4 billion of Anglo American’s dollar-denominated bonds losing almost 15 percent this year and $11.7 billion of Freeport-McMoRan’s notes declining by about 32 percent, Bank of America Merrill Lynch index data show. 

Plunging Prices
Debt investors are losing faith in the world's biggest metals and mining companies.
Source: Finra's Trace bond pricing, Bloomberg

Both of these behemoths still carry investment-grade ratings and aren't likely to simply close up shop in the near future. The dollar-denominated debt of their speculative-grade peers, however, has been decimated, losing almost 26 percent on average in 2015. 

Bonds of Arch Coal have lost more than 90 percent of their value this year, with prices on some of its notes falling to just a penny on the dollar as it heads toward bankruptcy, while debt of Cliffs Natural Resources has fallen 46 percent and Murray Energy has plunged more than 66 percent. Prices have fallen so low that investors who buy some of these bonds will now get almost all their money back if the company manages to make its routine bond payments for just one year. Sounds great on paper, but that’s a big if.

It’s hard to see an easy path to a rebound in these debt values and a reversal in fortune for metal and mining companies. These corporations are hurting because crude oil prices are down 35 percent just since June, copper has plunged 21 percent and iron ore has lost 28 percent. Magnifying the effect is the amount of debt these companies have sold in the past seven years as the Federal Reserve’s monetary policies suppressed borrowing costs.

Heavy Load
Metal and mining companies have almost tripled their U.S. debt piles since 2008.
Source: BofA Merrill Lynch US Metals, Mining & Steel Index

The face value of the Bank of America Merrill Lynch U.S. Metals, Mining & Steel Index swelled to $148 billion by the end of 2013 from $53 billion at the end of 2008. Yields on the debt fell as low as 3.3 percent on average in early 2013 but have doubled since then.

Even if mining and metals companies manage to reduce their costs drastically, they still have to generate enough revenue to pay back their obligations. That’s looking increasingly difficult as China’s economy, once a primary driver of copper and oil demand, slows and relies more on service-based businesses rather than industries.

It’s no wonder some of these notes are in a veritable free fall. This isn’t a screaming buy signal. It’s a sign of more pain to come.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Lisa Abramowicz in New York at labramowicz@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net