The metals and mining industry (XME) is going through a terrible slowdown. To add to this, most companies have huge debt on their balance sheets. Most of this debt is the result of acquisition activity as well as expansion projects undertaken by mining companies.
Companies were banking on an appetite for Chinese metals that seemed unending a couple of years ago. However, the dynamics have changed in the last few quarters. Now, as Chinese demand has slowed, mining companies are looking at every possible way to cut their debt levels. In this part of the series, we’ll explore what options different mining companies are considering to raise cash.
Freeport-McMoRan (FCX) is looking at alternatives, including asset sales of both energy and copper, equity issuance, and a stake sale in its Indonesia operations. Overall, Freeport-McMoRan is planning to generate $5–$10 billion to shore up its balance sheet. The company is looking at multiple transactions to achieve this steep target.
On the other hand, Teck Resources (TCK) has totally ruled out equity issuance as an option to raise cash. During the company’s 4Q15 earnings call, Teck’s CEO Don Lindsay said, “Our main objective is to go through this severe down cycle without issuing any equity so that on the other side of the cycle we can position ourselves to have excellent share price performance when we’ll have more production per share.”
Instead, Teck is looking at selling some of its non-core infrastructure assets to raise cash. According to Teck, the company may also look at streaming transactions. In a typical streaming transaction, a third party provides upfront cash to a mining company and gets a share of future production.
Last year, Teck Resources did a streaming transaction at the Antamina mine in Peru (EPU), where it sold its share in silver production. BHP Billiton (BHP), Glencore (GLNCY), and Mitsubishi are the other partners in the mine.
Mining companies’ dividends have also fallen prey to the current commodity slump. We’ll discuss more on this in the next part of the series.