Sharp rise in prices of some commodities gives companies breathing space, improving cash flow and allowing payback of some borrowings

By Rhiannon Hoyle in Sydney and Alex MacDonald in London 

Global mining companies have pushed hard to ditch their debts: They have sold pits, laid off workers and pruned expenses from every part of their businesses. This year, an extra tailwind from improving commodity prices is helping miners' repay borrowings more quickly than expected.

The signs of improving balance sheets haven't come a moment too soon for investors who have seen dividends cut recently as mining companies have prioritized reducing their debt loads.

A decadelong China-led commodities price boom had encouraged executives to build out networks of pits, railways and ports and make costly acquisitions to grow. By the end of 2013, the world's top five mining companies had nearly US$120 billion in net debt on their books, roughly five times more than a decade earlier.

Concerns about miners' debt levels intensified earlier this year, when Moody's Investors Service cut the credit ratings of major companies including BHP Billiton and Rio Tinto. It even downgraded the debt of Anglo American PLC to junk status.

But the sharp rise in the prices of some commodities this year has given companies some breathing space. Iron ore is up 40% so far this year, for example, while thermal-coal prices are up by one-third. In turn, that has helped improve cash flow, allowing for some debt reductions.

Mining stocks have rallied and the prices of credit-default swaps, which act as insurance against a debt default, have tumbled. Once-panicked investors are breathing a sigh of relief, although most caution that these companies still have some way to go. BHP, the world's No. 1 mining company by market value, is to report its annual earnings on Tuesday and is expected to restate its focus on reducing debt.

Anglo American said last month its net debt had fallen to 35.4% of its equity -- a commonly used measure of company indebtedness -- from 37.7% at the end of 2015. Rio Tinto shaved its so-called gearing ratio to 23% from 24% over the same period.

Anglo has been restructuring its business as it looks to shore up its finances. It plans to sell more than half its operations to focus on diamonds, platinum and copper.

Although the company reported a steep first-half loss a little over two weeks ago, its net debt fell to $11.7 billion as of June 30 from $12.9 billion at the end of 2015, thanks mainly to cost-cutting.

"Not only should Anglo American hit its year-end net debt target [of less than $10 billion], but we believe it could also hit its medium-term target of $6 billion in the next 18 months," Canaccord Genuity said in a recent note.

BHP, too, has made strides in the past few years, although it has faced unexpected costs linked to a dam failure at its Samarco Mineração joint venture. That disaster, which killed 19 people and polluted hundreds of kilometers of rivers in Brazil, has also hit partner Vale SA, another of the world's big miners.

Analysts expect BHP to report a small rise in its net debt on Tuesday, alongside what could be its worst net loss since the company was formed through the merger of BHP Ltd. and Billiton PLC in 2001. The company is expected to record an annual net loss of roughly $5.8 billion.

Still, Credit Suisse forecasts that BHP could pare its net debt to $19.1 billion by mid-2018, from $24.4 billion at the end of June last year. UBS says it could be as low as $16.6 billion by mid-2018.

Easing concerns over the mining company's finances are reflected in the sliding cost of credit-default swaps on its debt. The cost of protecting $10 million of BHP debt against nonpayment over a five-year period was last week down to $124,000 annually from as much as $252,000 in February, according to data group Markit.

There have been similar declines for BHP's peers. The cost of insuring $10 million of Rio Tinto debt against default fell to $136,000 last week, from as high as $279,000 in February. The same credit-default swaps for Glencore PLC -- which aims to cut its net debt by as much as one-third this year -- have tumbled from more than $1 million early this year to roughly $250,000 now.

"There is no question that the market thinks the debt issues are not an issue at all" for Glencore, said Nik Stanojevic, equity analyst at Brewin Dolphin, citing the magnitude of the drop in the cost of those swaps. Brewin Dolphin, a private wealth firm, owns Glencore shares.

Still, some investors say they hope mining companies keep debt reduction a priority.

The improvement in commodity markets has taken the issue "off the agenda, but if China has another hiccup and prices come off then people will be worried again," said Andrew Lapping, deputy chief investment officer at South Africa-based Allan Gray.

Write to Rhiannon Hoyle at rhiannon.hoyle@wsj.com and Alex MacDonald at alex.macdonald@wsj.com

 

(END) Dow Jones Newswires

August 16, 2016 02:48 ET (06:48 GMT)

Copyright (c) 2016 Dow Jones & Company, Inc.
BHP (NYSE:BBL)
Historical Stock Chart
From Feb 2024 to Mar 2024 Click Here for more BHP Charts.
BHP (NYSE:BBL)
Historical Stock Chart
From Mar 2023 to Mar 2024 Click Here for more BHP Charts.