The turmoil in the mining sector could get worse as resource companies struggle with debt repayments. Numerous companies are now trying to renegotiate their borrowing facilities which may result in higher interest rates and a strain on their finances for a longer period.
‘This is not a normal cyclical downturn, but rather, one we perceive to be unprecedented,’ says credit agency Moody’s. ‘Stress on companies in the metals and mining industry could surpass what we saw during the 2008/2009 period.’
Moody’s has warned that it may have to downgrade the credit ratings for multiple mining companies after a review of the sector.
It has placed 55 companies in the metal and coal sectors with A1 to B3 credit ratings under review. ‘While severity varies among issuers, all are impacted and many companies could be downgraded, some multiple notches,’ it says.
The review should be mostly done by the end of March and will consider each miner’s asset base, cost structure, likely cash burn and liquidity, as well as strategies for coping with a prolonged downturn. ‘We will assess each company's cash flow and credit metrics closer to our latest stressed price assumptions and the relative rating positioning,’ says Moody’s.
It has also placed 120 oil and gas companies under review for the same reasons as the miners.
The threat of credit rating downgrade is very important for companies and their investors. Many banks won’t lend money to companies if their rating falls below certain investment grades, others would impose higher interest rates and therefore push up a miner’s cost of servicing its debt.
The issue was one of the main reasons why Glencore’s (GLEN) share price was hammered in 2015 as analysts feared a credit downgrade would hurt its business if it didn’t find a way of strengthening its balance sheet and protecting its existing credit rating.
Debt repayment problems are omnipresent at both ends of the market spectrum.
It looks like gold miner Aureus Mining (AUE:AIM) has put itself up for sale two months after having to undertake a heavily-discounted emergency fundraising. It has managed to defer its first debt repayment due on 31 January with a view to agreeing a new schedule once an upgraded mine plan has been produced by the end of February.
Aureus shocked the market in November 2015 with a $21.5 million debt and equity financing to support its balance sheet and make sure the newly-opened New Liberty deposit in Liberia could keep going. The mine start-up didn’t quite go to plan, causing delays to hitting commercial production levels. This had a knock-on effect to forecast revenue generation and impacting the company’s working capital position.
New shares were issued at 5p, which represented a 62% discount to the previous trading day’s closing price. Aureus has seen its share price fall from 20p in October 2015 to now trade at a mere 2.63p.
The miner has appointed RBC Capital Markets to help undertake a strategic review of the business. Historically that has meant looking for a strategic investor or an outright buyer for a company.
It would be a real shame to see Aureus taken over on the cheap as it does have some decent projects which in the right commodities and financial environment would provide the backbone of a very good business.
Global Resources Investment Trust (GRIT) is also feeling the pain of the depressed commodity market. It floated on the stock market in March 2014 as a bold call that the mining industry slump had gone past its worst, so there were bargain investments to be made. We wrote this article at the time of the IPO to discuss the challenges facing the fund.
Having floated at 100p, it now trades at a fraction of this price at 2.5p and has turned to shareholders with cap in hand after breaching its 9% convertible loan notes coverage ratio. The shares today fall 70% alone after announcing plans to issue new shares to Middle Eastern group Primestar at 2p, as well as offering existing shareholders the right to buy stock at the same price.