2015 has been one of the worst years on record for the metals and mining industry. Industry leaders, BHP Billiton (LSE: BLT), Rio Tinto (LSE: RIO), and Glencore (LSE: GLEN) haven’t been able to escape the carnage. Year-to-date and excluding dividends, shares in BHP, Rio and Glencore have slumped 45%, 34% and 69%, respectively.
The question is, will these miners be able to stage a comeback next year, or should investors avoid the sector for the foreseeable future?
Creditors in control
Of the three industry leaders, Glencore is the miner that’s least likely to get on the comeback trail in 2016. Its debt mountain is holding the group back, strangling growth and restricting cash flows at a time when the company should be taking advantage of low commodity prices to acquire distressed peers.
Glencore is now focusing its efforts on shoring up its balance sheet. Since September, the group has raised $2.5bn of equity and struck a $900m deal for an advance sale of precious metals, as well as withholding its dividend.
The key for Glencore now will be to pull its ratio of net debt-to-earnings before interest, tax, depreciation and amortisation below 2.5 times – a level City analysts consider manageable. However, credit rating agency Moody’s believes Glencore’s net debt-to-EBITDA will remain elevated at 3.5 times throughout 2016.
It’s unlikely that the company’s share price will stage a recovery without paying down its debt, so this is a key figure to watch.
Looking for deals
As two of the world’s largest miners, BHP and Rio are well placed to ride out the downturn in commodity prices. That being said, the two miners still have to take drastic action to ensure that they remain profitable throughout this turbulent period.
Unfortunately, as BHP and Rio hunker down to weather the storm, it’s almost certain that the two will cut and rebase their dividend payouts to a more suitable level. Both Rio and BHP spent more on dividends over the past 12 months than they could realistically afford. In both cases, the companies borrowed to fully fund payouts to investors.
With this being the case, it makes sense for BHP and Rio to curtail their dividend payouts.
And according to the Financial Times, BHP’s management is indeed planning a dividend cut next year. However, the cash saved will be used to fund acquisitions. The Anglo-Australian miner is looking for copper and deepwater oil projects to buy in this depressed environment.
Hard to value
At the end of the day, BHP and Rio’s performance depends on the price of key commodities going forward. But with this being the case, it’s almost impossible to value these two miners and conclude if they’re worth buying at current levels.
All in all, BHP and Rio could stage a comeback next year but only if the prices of iron ore, copper, oil and coal recover.