The metals and mining sector is capital intensive in nature. Miners have to invest regularly to upgrade their facilities as well as invest in new projects. As a result, copper miners often borrow money to meet their capital requirements. However, leverage is a double-edged sword. Companies that have higher financial leverage generally outperform their peers during an upcycle. However, during market downturns, which are more of a norm rather than an exception in the copper industry (XME), companies with higher financial leverage come under selling pressure.
Along with financial leverage, copper miners also have leverage to copper prices. For instance, Freeport-McMoRan (FCX) expects its fiscal 2018 EBITDA (earnings before interest, tax, depreciation, and amortization) to rise or fall by $360 million for every $0.10 per pound increase or decrease in copper prices. Other miners like Glencore (GLNCY), Southern Copper (SCCO), and Teck Resources (TECK) also have varying sensitivities to copper prices.
Comfortable leverage ratios enable a company to pursue organic as well as inorganic growth without worrying much about the capital requirements. Furthermore, companies with lower leverage ratios have better credit ratings, which lower their financing costs. In this series, we’ll do a comparative analysis of copper miners’ leverage ratios. We’ll compare mining companies’ financial leverage based on different financial metrics. Let’s begin by looking at the interest coverage ratio in the next article.