Debt-light miners set to best weather the commodities slump
Miners with moderate debt levels are set to best endure the commodities slump which currently besets the Australian resources sector.
Bob Kohut writes on the Bull that the debt burden of listed miners will serve as the key factor in determining whether they are able to withstand the market's current round of adverse conditions.
Mining players, as competitors in a capital-intensive industry, frequently avail themselves of debt or equity issuance to finance expansion. Over-optimistic players can be left stranded, however, if too much debt is used for CAPEX spending just as a boom transitions into a slump.
Kohut cites as a salient example the recent travails of Fortescue Mining Group (ASX:FMG), which with an exorbitant gearing ratio of 226% – the highest of any Australian miner – has suffered worst at the hands of the current commodities decline.
Fortescue chairman Andrew "Twiggy" Forrest found himself compelled to ramp up his stake in the company to forestall precipitous share declines, before Fortescue opted to call for a suspension from trading due to its onerous debt woes.
Rio Tinto (ASX:RIO) provides a striking contrast, rising a steady 6% over the past month compared Fortescue's fall of nearly 10%. Rio's gearing ratio of 32.3% is significantly lower than those of both Fortescue's and BHP Billiton's (ASX:BHP) (42.2%).
Although Rio is more diversified than pure iron ore player Fortescue, Kohut asserts that over 90% of Rio's underlying earnings are derived from iron ore operations, indicating that supporters of Rio shares remain undeterred by spot price declines.
Australian miners with negligible debt levels to look out for include Atlas Iron (ASX:AGO) with a gearing level of 1.1%, and Aquila Resources (ASX:AQA) and Gindalbei Metals (GBG), both of whom have zero gearing.