Mining to get worse before it gets better

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The heads of major miners expect the downturn to get worse before it improves, as the industry begins tearing through existing cash reserves.

Anglo American head Mark Cutifani and current Vedanta Resources CEO – and former Rio Tinto chief – Tom Albanese are both pointing to more turmoil for the mining industry in the coming months.

“This is exactly where we were in the late 1990s,” Albanese, told Bloomberg Television.

“The survivors were the ones that enjoyed the benefit when China kicked in starting in 2003. Those who can manage their balance sheets the best in this period of time, manage their assets the best, stay opportunistic. We could be OK.

“We’re all quite hesitant to say to say the bottom is here and has turned.”

Cutifani gave a similar outlook, talking of ‘grim’ markets and more job losses ahead for the industry at a mining industry event earlier this week.

“Things may still get worse before they get better,” Cutifani said.

“We can’t rely on a reversal of this price slump any time soon. For many of us in the industry, 2016 is already shaping up to be the most challenging yet.”

He went on to state that no miner has been untouched by the downturn.

This current situation is compounded by the latest data from the London Stock Exchange, which found LME listed companies cash held fell by 1.1 billion pounds over the last 12 months.

A study by Banc De Binary outlined how ongoing weakness both in demand and commodity prices has seen miners turn to their existing cash reserves to prop up their operations, City AM reports.

“Mining companies are starting to burn through their cash reserves as demand for commodities falls further, especially from the vital Chinese market,” Oren Laurent, founder of Banc De Binary, said.

“As a result of the global turndown in the price of several key resources over the last year, many mining companies are having to reduce their cash piles and add to debt in order to maintain investment or pay dividends.

“Mining companies are being forced to explore all options to arrest their use of cash reserves.

The situation, and views from the majors, is little surprise for a market already pessimistic on the industry.

Analysts expect “little light on the horizon” for the current commodities downturn, expecting it to run for up to several years due to overwhelming imbalances between supply and demand.

Moody’s Investor Service has indicated it is looking at ratings downgrades for 175 mining and energy companies around the world.

“We believe that the current severe downturn in the mining industry represents a fundamental shift in the operating environment and that, as a consequence, a wholesale recalibration of ratings is required,” Moody’s said in a recent sector comment.

“Stress on companies in the metals and mining industry could surpass what we saw during the 2008/2009 period.”

A number of major resources companies have been downgraded, with Standard & Poor’s already shifting its credit ratings for BHP and Glencore.

However it is not all doom and gloom for miners.

Increasing concerns over rising economic risks has caused a surge in mining stocks as investors flock to stable assets.

Albanese explained that many miners will try to wait out the storm.

“We’re putting all our efforts into basically meeting our debt requirements, refinancing where necessary and again recognising the balance sheets are king,” Albanese said.

“Our peers in the sector are doing exactly the same thing. The businesses are just hunkering down and getting that done. Those businesses that are best at it will be best recovering.”