If Lonmin (LSE: LMI) shareholders have suffered some of the biggest losses in the mining sector this year, investors in Anglo American (LSE: AAL) and Glencore (LSE: GLEN) have not been far behind.
Lonmin shares are down by 95% so far in 2015, while Anglo and Glencore have both fallen by 60%-70%.
These falls suggest that Anglo and Glencore could be heading for a Lonmin-style financial crisis, but I don’t think this is likely. In this article I’ll explain why and ask if any of these shares are a buy at today’s prices.
Anglo American
Anglo’s shares have fallen steadily as City analysts have cut their earnings forecasts for the firm. Back in January, Anglo was expected to report earnings of $1.60 per share for 2015. Today, that figure has dropped by 54% to just $0.73.
That’s not all. Although Anglo has a diverse portfolio of assets, many of which are operating profitably, the firm’s debt levels are a concern. Net debt was $11.9bn at the end of July. This needs to come down further.
The latest City forecasts suggest that the group will cut the dividend by 24% this year. I think a bigger cut is likely. There’s also a chance that Anglo will be forced to raise money in a rights issue or placing.
Anglo shares currently seem reasonably priced on 10 times forecast earnings. They may fall further but I don’t expect a Lonmin-style crash. Even if a rights issue is necessary, this isn’t a failing business.
Glencore
A sharp change in investor sentiment earlier this year forced Glencore to start taking action to reduce net debt, which was $30bn at the end of June.
Since then, Glencore has raised $2.5bn in a share placing, saved $2.4bn by cancelling the next two dividend payments and raised $0.9bn from a gold royalty deal. The firm is targeting a $5bn reduction in net debt to $25bn by the end of 2015, which looks reasonable to me.
However, profits are likely to remain low. The latest market forecasts show that Glencore is now expected to report earnings of 9.6 cents per share for 2015, 75% less than was forecast in January.
As with Anglo, Glencore shares now look quite reasonably valued. At 97p, they trade on a 2015 forecast P/E of 14, falling to a P/E of 12 for 2016.
Glencore’s debt remains very high, and I’d prefer to invest in Anglo. But both firms do offer recovery potential, as long as you accept the risk that the commodity market may not have reached the bottom yet.
What about Lonmin?
In my view, Lonmin remains a sell. The forthcoming 46-for-1 rights issue means that shareholders will be diluted by around 94% if they do not participate. Lonmin is effectively cancelling its existing equity base and refinancing the firm by issuing a new set of shares.
A successful turnaround isn’t impossible, but it does seem a big challenge. Unlike Glencore and Anglo American, Lonmin operates in just one sector, the South African platinum industry.
This brings with it a lot of problems: low platinum prices, high-cost, labour-intensive mines and problematic industrial relations. It’s a potent recipe for more problems, in my view, unless platinum prices start to recover.