Yet another massive mining debt emerges

Rusal's debt standstill, agreed for half of its total USD 14bn in debt, sends fresh shivers down investor spines.

JOHANNESBURG  - 

Unlisted United Company Rusal, the world's biggest miner of alumina and also the biggest aluminium producer, has announced a USD 7.4bn debt standstill, owing to foreign banks, and comprising just over half of Rusal's total debt of USD 14bn. On the one hand, the news highlights the stricken state of the global aluminium sector, one of the worst hit of industrial metals, and indeed, of all commodities. 

On the other hand, the news also highlights the dire straits faced by over-indebted mining companies in general, pointing to the possibility of unpredictably large and serious rearrangements among even the biggest mining companies. 

The Rusal news is country-specific to the extent that talk - now apparently recently abandoned - was that the Russian government would agree to form a mega mining entity where government would hold 25%, plus a vote, in return for absorbing the debt in a number of big mining names, including Siberian nickel miner Norilsk,  plus Metalloinvest (unlisted), Evraz, and Mechel, three of Russia's biggest names in iron ore and steel. 

There was also a similar plan to merge Uralkali and Silvinit, two big potash miners, along with Apatit, a phosphate miner, and also possibly also Acron, a major distributor. Uralkali and Silvinit combined would hold around 20% of global potash capacity, roughly equal to that held by global leader, PotashCorp, which currently ranks as No 7 miner in the world, by market value. Rusal was not set down to participate in any of the now-aborted schemes, but was apparently agreeable to part with its 25% stake in Norlisk. While Rusal has now emerged as a major indebted mining entity, it is not alone. 

Rio Tinto held GBP 38.17bn in net debt on 31 December 2008; since then it has announced asset sales for cash of USD 2.5bn, but far more significantly, is seeking to sell a number of equity stakes in some of its prize underlying operations to Chinalco, a smaller rival, for USD 12.3bn. Rio Tinto also wants to sell USD7.2bn in convertibles to Chinalco. Both potential lines of financing have raised the ire of certain Rio Tinto shareholders. 

Xstrata, meanwhile, is busy with a hugely dilutive equity offer to raise the equivalent of nearly USD 6bn in cash by issuing 1.96bn shares at GBP 2.10 each. While busy raising new cash in unconventional and stressed ways, Rio Tinto and Xstrata hold among the world's highest debt-to-market-value (DMV) ratios, where market value represents the open market value of the stock. In the case of Rio Tinto and Xstrata, the ratios are above 100%, prior to seeking fresh cash capitalisations. 

Teck holds one of the highest DMV ratios, with little prospect of attacking it in any effective manner. Alcoa, an aluminium major, which used to rank as the world's biggest mining stock by market value less than four years ago, no longer makes it into the world's top 20 mining stocks by value. Alcoa's DMV is also above 100%, but it was spared taking over Alcan in 2007, after it was trumped by Rio Tinto, which spent USD 38bn in cash for the acquisition. 

Anglo American and Freeport-McMoRan are also ranked among the more indebted miners, relatively, and, in line with resources companies in a similar position, have been hammered back on the stock price front. However, a good number of listed gold (and also silver) entities, not least Newmont, have been able to raise cash by issuing fresh equity at relatively mildly dilutive rates, due to the strong underpin from relatively high dollar bullion prices. For the majority of stocks outside the gold and precious metals area, fresh capital raising remains tough, whether by equity, debt or otherwise. 

However, one feature of a generally bombed out mining sector has been the readiness - and ability - of Chinese mining companies to come to the party. Emerging Australian iron ore producer Fortescue has raised the equivalent of just over USD 400m in two separate recent equity issues to Hunan Valin. As in the case of Chinalco being smaller than Rio Tinto, Hunan Valin's market value is less than Fortescue's. 

BHP Billiton and Vale, the world's two biggest miners by market value, hold DMVs of less than 5% and 10%, respectively. A number of bigger mining companies, such as Goldcorp and Mosaic, hold net cash, a factor than can be at least partially linked to relatively positive stock price moves found in such a select grouping. 

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