One of the world’s largest mining companies just announced massive spending cuts…
Anglo American (AAL.L) is the world’s fifth-largest mining company. It mines metals like nickel, copper, and iron ore, the main ingredient in steel. The global commodity collapse has hit Anglo hard.
Over the past year, the Bloomberg Commodity Index, which tracks 22 different commodities, has dropped 28%. The index is at its lowest level since May 1999.
Nearly all commodities are down big. The price of iron ore has dropped 40% this year. Copper has dropped 27%. It’s now at its lowest level since 2009. And nickel is near a 12-year low…
Anglo’s sales for the first half of the year declined 19% from the previous year. The company also posted a £3.02 billion ($4.56 billion) loss during the first half of 2015, compared to a £1.46 billion profit in the first half of 2014.
• Last week, Anglo suspended its dividend…
It won’t pay another dividend until at least 2017.
This is a big move for Anglo. For five years running, the company has maintained or increased the share of profits it paid out as dividends. The Wall Street Journal reports that the dividend cut should save the company about $1.7 billion.
Investors hate dividend cuts. They see a dividend cut as a clear sign that the company is in serious trouble. And more often than not, they’re right…
In general, companies only cut dividends after they run out of other options. A struggling company will usually sell off parts of its business or lay off workers before cutting a dividend.
• Yesterday, Anglo announced more drastic spending cuts…
The company plans to eliminate 85,000 jobs, or 63% of its total workforce. Anglo also plans to close 60% of its mines and cut capital spending by $700 million.
On top of that, the company plans to sell about $4 billion worth of assets. The huge asset sale may include South African platinum deposits, Australian coal assets, and copper mines in Latin America.
Yesterday, Anglo’s share price plunged 11.3% on the news. It was the stock’s worst day since 2009. It’s now down 71% on the year.
Anglo is now the second-worst-performing stock on the London Stock Exchange. Only Glencore PLC (GLEN.L), the world’s third-biggest miner, is doing worse.
Glencore suspended its dividend payments, saving the company $2.4 billion. It also announced plans to sell $2 billion in assets and raise $2.5 billion by issuing new shares.
• Energy pipeline company Kinder Morgan is also in “survival mode”…
Kinder Morgan (KMI) is North America’s largest energy pipeline company. It operates 84,000 miles of oil and natural gas pipelines.
In theory, a big portion of Kinder’s revenues are not directly tied to energy prices. The company markets itself as a relatively safe way to invest in energy on its website.
…[W]e operate like a giant toll road and receive a fee for our services, generally avoiding commodity price risk.
But, in reality, Kinder Morgan’s stock has collapsed along with commodity prices…
Since last June, the price of oil has dropped 63%. And the price of natural gas has dropped 54%.
As of Tuesday, Kinder Morgan’s stock was down 63% on the year.
• Kinder Morgan slashed its fourth-quarter dividend payment by 75% yesterday…
The company will now pay a $0.125 dividend instead of the $0.51 dividend it had planned. Kinder Morgan’s stock price jumped 6.9% today on the news. However, the stock is still down 60% on the year.
Management hopes the dividend cut will help protect its credit rating…
A week ago, credit rating agency Moody’s said it would downgrade Kinder Morgan’s credit rating to “junk” status if the company doesn’t improve its financial health. A credit downgrade would make Kinder Morgan’s borrowing costs go up.
• Meanwhile, U.S. energy junks bonds have plunged 25% since the price of oil peaked last summer…
The junk bond market is where companies with shaky finances borrow money. Junk bonds are riskier than bonds issued by healthy companies, so they pay higher yields.
When the economy slows, companies in bad financial shape often feel it first. That’s why economic trouble tends to show up early in the junk bond market…
Over the past four years, U.S. oil and gas companies have issued $213 billion in junk bonds. Now that energy prices have collapsed, many of these companies are struggling to pay off their debts.
In September, The Wall Street Journal reported that the default rate for U.S. energy companies jumped from 3.3% in August to 4.8% in September – its highest level since 1999.
Yields on energy junk bonds, which reflect companies’ borrowing costs, have jumped to 13.4%. That’s the highest rate since 2009, according to Bloomberg Business.
• Bloomberg Business reported that many more energy companies are in financial trouble.
On Monday, Bloomberg wrote:
The number of companies that are rated in the lower tiers of junk and have negative outlooks has risen to the highest in five years, according to Moody’s Investors Service and Standard & Poor’s.
Investors are scrambling to get out of energy junk bonds. But there are very few buyers.
With about 43 percent of high-yield energy bonds trading below 80 cents on the dollar…it’s becoming increasingly difficult for investors to buy and sell with ease.
• Like most commodities, the oil and gas markets are cyclical…
They go through big booms and big busts.
Right now, the U.S. energy sector is in a huge bust. Energy prices have collapsed to multi-year lows. And the market is struggling to pay off years of excessive borrowing. The process could take a long time to play out.
At some point, there will be tremendous opportunities to buy beaten-down energy companies. We’ll let you know when it’s time to hunt for bargains in the energy sector.
Chart of the Day
The global mining industry is a disaster…
Today’s chart shows the stock performance of the world’s largest mining companies. This includes Vale (VALE), Rio Tinto (RIO), BHP Billiton (BBL), Anglo American, and Glencore.
The chart uses each company’s adjusted share price, which accounts for stock splits and dividends.
All five giant miners have plummeted this year…
Glencore and Anglo American are the two worst-performing stocks on the London Stock Exchange. Glencore is down 71.1% this year. Anglo American is down 70.9%. Both stocks are trading at record lows.
Delray Beach, Florida
December 9, 2015
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