Perhaps more so than any other related enterprise, the mining of precious metals is directly underpinned by the price of gold. When prices are high, mining firms enjoy all the spoils of a booming industry: fresh investment, increased activity, and expansion by companies both large and small.
This is precisely was happened from the period that stretched roughly from 2008 to 2012. However, some of the industry’s largest players made aggressive expansion efforts that seemed to assume the good times would never stop rolling. Naturally, these expansions were fueled by credit. As a result, many major miners became deeply encumbered with debt that they couldn’t pay off when the commodities sector slumped into a bear market.
As these “lean times” dragged on longer than expected, the trend across the industry for big miners was debt reduction, typically through the sale of assets. This strategy has helped put the major mining companies in a much more advantageous financial position now that the precious metal markets have finally turned around.
Gold Mining Rebound
One example of this debt-reduction approach was how Barrick Gold (ABX), the world’s biggest gold miner, sold off $5.6 billion in company assets—a significant 40% reduction of its debt burden. Reuters reports that Barrick and its peers are now “breaking from their monologue on cutting costs and debt because of tumbling gold prices” thanks to the surge in bullion prices, prompting “miners from Canada to Australia and South Africa” to focus on ramping up production again. Investors are taking an interest in these firms once more due in part to their improved balance sheets.
With the experience of volatile metal prices in the past, companies are striving both for increased production and profitability “at a range of prices.” Nonetheless, the signs have been encouraging: the Philadelphia Gold & Silver index of mining companies (XAU) has doubled so far this year while the leading stock indices are still offering meager single-digit returns year-to-date.
This improved landscape has been evidenced by investors bringing new funds to bear in the corporate bond market. Bond price spreads—a general measure of creditworthiness—have recovered for many miners, responding to the lower risk of default. Data compiled by Bloomberg show that the “amount of metals and mining bonds trading at distressed levels fell this month to $26 billion from a peak of $86 billion in February.” Included in this escape from distressed status are the bonds of industry leaders such as Glencore (GLEN), Freeport-McMoRan (FCX), an Anglo American (AAL).
Even with the vast improvement for the gold mining sector and broader minerals extraction industry, however, there are reasons to be cautious that everyone may not be “out of the woods” quite yet.
“One of the things that we’ll continue to look at is the ability of companies to execute on things like asset sales for debt reduction,” Matthew Moore, a senior analyst for rating company Moody’s commented.
Overall, one would expect that the major miners won’t repeat their mistakes from the past several years if indeed there is a downturn in commodity prices this time around.
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.