Shares in commodity group Glencore rose by 7% today after the firm buckled to market pressure and announced a plan to raise $2.5bn by selling new shares.
Investors seem confident that this new money, which forms part of a $10bn debt reduction package, will put the firm on a more secure financial footing.
In today’s article, I’ll ask whether shareholders in Lonmin (LSE: LMI), Anglo American (LSE: AAL) and Premier Oil (LSE: PMO) should expect a similar announcement over the next few months.
Lonmin
News that Glencore is raising cash from its shareholders seems to have reminded the market that the situation at platinum miner Lonmin is much worse.
Lonmin shares fell nearly 10% today, to a new all-time low of 24.8p.
I’m not surprised. Although Lonmin’s latest update suggests that underlying cash costs of production are now slightly lower than the average sale price for its platinum group metals, this isn’t enough to return the firm to profit.
The firm recently appointed a finance expert to assist with its turnaround plans. Lonmin’s latest accounts suggest to me that the group may now be very close to the limit of its borrowing facilities.
Lonmin has promised to provide news on refinancing by the time of its full-year results in November. I believe a placing or rights issue is likely to be part of the solution.
Anglo American
FTSE 100 multi-commodity miner Anglo American is in a stronger financial position than Lonmin. It’s profitable and generates free cash flow.
Despite this, the market thinks that Anglo has too much debt, and I agree.
The group paid $456m in interest costs during the first half of the year and has net debt of $13.5bn. However, only $764m is due for repayment in the current year. What’s more, Anglo still has undrawn facilities of $7.9bn, and a cash balance of more than $7bn.
I think Anglo may be able to reduce debt without a cash call, by cutting spending and selling certain assets.
One problem area is the firm’s platinum division. Talks are currently under way with South African firm Sibanye regarding the possible sale of Anglo’s Rustenburg platinum operations. This high-cost, labour-intensive mine is one of Anglo’s biggest headaches. A sale would be a concrete step towards a turnaround.
At less than 700p, I rate the shares as a bargain buy.
Premier Oil
Premier’s decision to develop the Solan and Catcher fields in the North Sea using debt is standard industry practice. It’s just unfortunate that the oil price has fallen by 50% since work started.
First oil is expected from Solan at the end of this year, with Catcher due to start producing in 2017. As Solan production gets underway, Premier plans to use the untaxed cash flow from this field to reduce its debt levels and help fund the completion of Catcher.
With net debt now standing at $2.1bn, the firm’s lenders will be watching closely to make sure this happens. If not, shareholders could be asked for some fresh cash.
I suspect Premier will avoid a cash call, but may be forced to slow future expenditure even more than planned. This could result in disappointing results for shareholders, despite Premier’s operational success.