Commodities

David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

How hard can it be for a miner to sell some assets when commodity prices are on a tear? Harder than you might think.

Freeport-McMoRan bondholders are said to be standing in the way of a $2 billion sale of its Gulf of Mexico oil and gas fields to Anadarko, Bloomberg News reported late Tuesday. The creditors want to renegotiate terms if their loans remain with Freeport, rather than transferring to the financially stronger Anadarko, according to a letter to the miner.

That's not even the most complicated sale process Freeport is engaged in right now. A $2.65 billion disposal of its 56 percent stake in the Tenke Fungurume copper mine in the Democratic Republic of Congo is in limbo almost five months after it was announced. Second-largest shareholder Lundin Mining is still deciding whether to exercise rights to acquire the interest ahead of the agreed buyer, China Molybdenum, or alternatively to stand pat or sell its own holding.

Breaking Up Is So Very Hard to Do
About a third of the mining M&A deals announced in the second half of last year have been withdrawn or terminated
Source: Bloomberg
Note: Sorted by announcement date. Shows deal status as share of total announced value of deals.

From there, it gets still more complex. The Congolese government-owned miner Gecamines has a 20 percent stake and is threatening to block Freeport's sale and any potential exit by Lundin for good measure. On top of that, the country is verging on political crisis, with 32 people killed last week and 114 arrested in clashes between police and protesters opposing President Joseph Kabila's decision to delay elections due in November.

There are similar problems elsewhere on the continent. South Africa's public-sector pension fund manager, Public Investment Corp., the largest holder of stock in Anglo American, wants a shareholder vote on the mining company's divestment plans. The fund is concerned that assets may be sold too cheaply, given this year's rebound in commodity prices. If the sale goes ahead, it would like to see Anglo American's coal, iron ore and manganese mines bundled with platinum assets that the company is keen to retain.

All these difficulties underline an issue the mining industry has long faced: It's a lot easier to hang a "For Sale" sign on an asset than to replace it with a "Sold" sticker. The recovery in commodity prices has, if anything, made the process harder. Sellers -- and their shareholders -- are naturally less inclined to get rid of projects at fire-sale prices when their earnings prospects start to look rosier.

The Wages of Sin
The most indebted miners have shown the liveliest share price recoveries this year
Source: Bloomberg
Note: Rebased. Dec. 31, 2015=100

The complications should give shareholders pause. Stock in the most-indebted miners has generally outperformed more stable counterparts this year. That's partly a result of how deeply they were sold off at the end of 2015, but it also appears to reflect expectations that they will succeed in rebuilding their balance sheets.

Looked at in terms of interest cover, Freeport and Anglo are still in a sticky place. Despite this year's commodity price rebound, they're not earning enough money to pay their interest bills. Absent asset sales or a further recovery in costs or prices, they're far from out of the woods.

I Don't Owe You Anything
Rio Tinto and BHP Billiton earn enough to pay their debts, but interest cover at Freeport and Anglo is still too low
Source: Bloomberg
Note: Calculated as Ebit/interest. Interest cover below 1 generally means the company must raise capital to meet its debt payments.

Credit investors appear to recognize that. To insure $10 million of Freeport's debt against nonpayment using credit-default swaps, you'd need to hand over about $547,000 -- well down from the peak of $2.6 million in January, but still above the $377,000 at Anglo American, $129,000 at Rio Tinto and $119,000 at BHP Billiton.

Equity investors see fewer distinctions. The enterprise value of Freeport and Anglo is currently 6.7 and 6.3 times forecast Ebitda,  compared with 7.1 times at Rio Tinto and 7.9 times at BHP Billiton.

If the former companies had dragged themselves out of their sales-and-debt morass and were accelerating toward a leaner future, such a narrow discount might be reasonable.

Right now, though, they're still bogged down. Shareholders would do well to remember that.

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

  1. Based on blended forward 12-month estimates.

  2. We're using EV/Ebitda because it's neutral to capital structure, so the results should be less skewed by the differing debt levels of the companies being compared. Using blended forward 12-month price-earnings multiples, BHP Billiton comes out at 27.1 times and Freeport at 12 times, but Rio Tinto and Anglo American show very little difference with ratings of 15.7 and 15.0 respectively.

To contact the author of this story:
David Fickling in Sydney at dfickling@bloomberg.net

To contact the editor responsible for this story:
Matthew Brooker at mbrooker1@bloomberg.net