The Mining Bust Continues to Deepen: Who Will Come Out Strongest?

The collapse in Glencore plc (GLNCF) in recent weeks shows the carnage is far from over in the mining space. In 2014, Glencore ranked as the tenth biggest company in the Fortune Global 500 list of largest companies in the world.

That hasn’t been enough to support the company in recent weeks, shares are down 50% since July, as investors are suddenly fearing the company may be heading for insolvency. The company has had to suspend the dividend and sharply cut expenses and CAPEX to try to save their investment-grade credit rating.

Glencore earns much of its money from trading operations, should it lose the faith of the market, those trading operations would become impossible to continue and the company would take a decisive step towards failure.

When the world’s 10th biggest company enters panic mode and heads ever closer to distress it makes investors wonder just what is still safe in the mining space. Industry leaders such as gold mining giant Barrick Gold (ABX) continue hitting new multi-decade lows over and over.

Unless you’re into catching falling knives, this probably isn’t the time to buy Glencore. So what’s left in the big-cap mining space, especially for yield-hungry investors?

BHP Billiton (BHP) is one obvious choice. As the company’s shares have been shredded over the past year, the yield has now risen to a mouth-watering 7.7%. And shares now trade at 10-year lows.

BHP has a diverse revenue stream, with five commodities driving significant sales for the company. Unfortunately, all five have plunged: copper, petroleum, potash, iron ore, coal, they’re all going down.

Unlike, say, the embattled oil majors, at least BHP has multiple ways to recover. Potash is driven more by agricultural prices, copper by economic growth and the outlook for China. If oil keeps dropping, the likes of BP and Chevron will have to cut their dividends. BHP might be able to hold the dividend if, say, copper or potash bounce.

And in iron ore, its most important product, BHP is the world’s lowest cost producer. It may not be making a lot of money, but at least it has the best cost basis. If the current bust persists, its competitors will have to fold long before BHP would. Perhaps it will even get to buy assets on the cheap to position itself for the next upswing.

Unlike Glencore, BHP has less debt, and a much lower leverage ratio. I’m not convinced BHP can maintain the dividend during these dark times, but it certainly won’t end up in a fight for its mere life, as Glencore currently faces.

Freeport-McMoRan (FCX) seems like another miner that should do alright, all things considered. Freeport is primarily a copper miner, but it also has significant revenue streams from gold and petroleum.

Copper, relatively, appears to be one of the stronger metals markets. And production cuts by embattled Glencore should help the supply/demand equation significantly. And gold is holding up quite well, it’s stayed well bid around $1100/oz even as other commodities have plunged.

Freeport has already done the dirty work. They’ve taken large writedowns and slashed the dividend. They’re cutting costs by 20% for next year.

And Freeport is picking up some quality investors. Most notably the famed activist investor Carl Icahn has taken a large position in the company. The company has a large debtload, but still lower than Glencore on a percentage basis. The company is also intending to launch an IPO of its oil and gas properties that would free up much needed working capital.

While both Freeport and BHP need higher commodity prices before their shares will get their vigor back, both companies look like they have what it takes to make it through the current bust.

Glencore’s sudden collapse is another frightening development for investors in the mining space. However, the takeaway shouldn’t be that the whole sector is uninvestable. The survivors will come out of this with great low-cost assets and a lot less competition to deal with.

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