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BUSINESS DAY TV: Commodity prices ‘have further to fall’
by Transcript Services, January 13 2016,
2016-01-14 14:12:57.0
Transcript Services, January 13 2016
BUSINESS DAY TV: Commodity prices ‘have further to fall’
PETER Major is a mining analyst at Cadiz Corporate Solutions and Craig Pheiffer is from Absa Wealth and Investment Management.
BUSINESS DAY TV: It’s time to take a look at our chart of the day. According to this chart from Bloomberg, mergers and acquisitions (M&A) in the mining sector have seen a steep drop since the $1.4-trillion collapse in the value of mining stocks since 2011 ... 2015 saw $54bn worth of deals done, and that’s the lowest since 2003. But some analysts believe that the rout in commodity prices and increasing debt could see a pick-up in M&A activity with the likes of Rio Tinto and BHP Billiton best poised to benefit.
Peter Major, mining analyst at Cadiz Corporate Solutions joins us on the line now with his views. As overall distress grows are you seeing opportunity or panicking with the majority right now?
PETER MAJOR: It’s definitely opportunities like we’ve never seen. Maybe a little bit in 1998-99 but the companies today are just in such stress and there seems to be more panic than we’ve seen in any of the previous decades from 1960 on that I’ve lived and dealt with mining companies. So yes I’m very positive there are going to be deals out there because so many companies are in bad shape. They’re not able to pay back their debt, they’re not even able to make some of the interest payments, and a lot of them can’t function at today’s commodity prices ... almost 90% of the companies that we’ve looked at just have horrendous amounts of debt and the debt was taken to buy assets that aren’t producing any kind of profit, anywhere close (what) the metal prices received. So what’s going to happen, it’s either going to be closures or rationalisation and because so many of these companies are really good assets, really good operations, there won’t be closure. There are too many opportunities, too many other countries with a lot of money like China, and still the Middle East that are going to take advantage of that situation.
BDTV: Is it surprising that we haven’t seen extensive amounts of M&A activity so far?
PM: The reason we haven’t seen it so far is that commodity prices are still falling, even though they took big tumbles last year, look where oil is today, it’s down to about $32 (a) barrel and we thought it was Armageddon when it cracked $40 just a couple of weeks ago and we really thought, can anyone sustain production below $50 that we saw a couple of months ago. So it’s really because the commodity prices have not yet bottomed. We thought platinum bottomed a couple of months ago when it got up to $880, $890 and now it’s right back down to $830. So companies know, acquirers know that if commodity prices are still tumbling down, these asset prices are going to go even lower and so they’re reluctant to go in and buy something that the odds are better than 50-50 they’ll be able to get it for less in a very short time.
BDTV: Having said that, financially strong and low-cost producers ... those aren’t necessarily the cheap ones, so surely what will come under scrutiny is the quality of those fantastic assets available at distressed prices.
PM: There’s a tremendous amount of quality out there. If I just take an example, BHP Billiton, Anglo’s, Rio Tinto, the three of them dealt in quality assets and so I don’t really think any of them have bad assets because some assets they overpaid for, they got some assets that still need quite a bit of capital expenditure but they’re not bad assets. So you could really be choosy in acquiring now, it’s all to do with what the forecasts (for) commodity prices are going to do in the next year, two years, three or four ... but there’s an overabundance of good assets so you don’t have to look at bad assets. You can get good assets at very good prices.
BDTV: Okay, so we’ve got Rio Tinto and BHP Billiton amongst best placed to grab assets sold by those desperate to sell right now, stem losses or pay down debt. Where do you see them casting their nets because what seems to be in vogue is the copper market specifically, and that’s being cited as a major target for the world’s two biggest mining companies?
PM: You know you seem to know more about this than me ... what have you been doing after work ... I’m not sure how to answer that correctly....
BDTV: All we’re doing is fuelling some speculation.
PM: Yes I can see that ... one thing is for sure, it’s not just companies that are in trouble, its countries as well. The Middle East is a giant company reliant on oil, China is a giant company ... it relies on exports and it relies on growth and those countries also took out tremendous amounts of debt so there’s a lot of parallels between companies and countries. So, yes, China is still very rich and there is a logical acquirer but those companies, even if they’ve got money, if they look at how their operations are bleeding so much at home, they have to make a decision.... Do they buy a foreign company and then close down all their operations at home? It’s logical that’s what they should do because companies like Anglo’s, Billiton, Rio’s can produce much higher quality commodities at a much lower price than the majority of Chinese production, just look at iron ore. It’s not that there are rich companies and rich countries with no debt just waiting to do it and I believe that’s taking a little bit longer to see transactions here.
BDTV: We’ve got Craig Pfeiffer from Absa Wealth and Investment in the studio with us and he has a quick question for you.
CRAIG PHEIFFER: Thanks, I was going to ask, which of those companies you thought did have the capacity. We look at some companies like BHP Billiton, we’re talking about cutting their dividend, cutting back capex, is it a case with companies like those that they’re actually going to switch out of assets, sell some, acquire some and that’s where we’ll see the pick-up in M&A, or even at spot prices that are still quite distressed?
PM: If I was running the companies, that’s exactly what I’d be doing. First thing is I would cut the dividend because the money you spend on that dividend you can buy something on multiples of the value so I don’t know why these companies didn’t flat out suspend dividends a year and a half ago, I really don’t. They could have done so much good with that money. And then the next question you said is, what about capex ... I couldn’t agree with you more. The capex that continues to fund a lot of projects, whatever happened to putting a project on care and maintenance.... But we all know you can buy operating mines, you can buy mines that are built for 20% or 30% what it costs to build another one, so I don’t know why they hadn’t suspended the dividend and the capex two years ago and then just been on the prowl and do some hard negotiating for quality assets that have a long life and that are proven and known as opposed to greenfields.
BDTV: It certainly sets up a very interesting landscape for 2016....
2016-01-14 14:12:57.0
PETER Major is a mining analyst at Cadiz Corporate Solutions and Craig Pheiffer is from Absa Wealth and Investment Management.
BUSINESS DAY TV: It’s time to take a look at our chart of the day. According to this chart from Bloomberg, mergers and acquisitions (M&A) in the mining sector have seen a steep drop since the $1.4-trillion collapse in the value of mining stocks since 2011 ... 2015 saw $54bn worth of deals done, and that’s the lowest since 2003. But some analysts believe that the rout in commodity prices and increasing debt could see a pick-up in M&A activity with the likes of Rio Tinto and BHP Billiton best poised to benefit.
Peter Major, mining analyst at Cadiz Corporate Solutions joins us on the line now with his views. As overall distress grows are you seeing opportunity or panicking with the majority right now?
PETER MAJOR: It’s definitely opportunities like we’ve never seen. Maybe a little bit in 1998-99 but the companies today are just in such stress and there seems to be more panic than we’ve seen in any of the previous decades from 1960 on that I’ve lived and dealt with mining companies. So yes I’m very positive there are going to be deals out there because so many companies are in bad shape. They’re not able to pay back their debt, they’re not even able to make some of the interest payments, and a lot of them can’t function at today’s commodity prices ... almost 90% of the companies that we’ve looked at just have horrendous amounts of debt and the debt was taken to buy assets that aren’t producing any kind of profit, anywhere close (what) the metal prices received. So what’s going to happen, it’s either going to be closures or rationalisation and because so many of these companies are really good assets, really good operations, there won’t be closure. There are too many opportunities, too many other countries with a lot of money like China, and still the Middle East that are going to take advantage of that situation.
BDTV: Is it surprising that we haven’t seen extensive amounts of M&A activity so far?
PM: The reason we haven’t seen it so far is that commodity prices are still falling, even though they took big tumbles last year, look where oil is today, it’s down to about $32 (a) barrel and we thought it was Armageddon when it cracked $40 just a couple of weeks ago and we really thought, can anyone sustain production below $50 that we saw a couple of months ago. So it’s really because the commodity prices have not yet bottomed. We thought platinum bottomed a couple of months ago when it got up to $880, $890 and now it’s right back down to $830. So companies know, acquirers know that if commodity prices are still tumbling down, these asset prices are going to go even lower and so they’re reluctant to go in and buy something that the odds are better than 50-50 they’ll be able to get it for less in a very short time.
BDTV: Having said that, financially strong and low-cost producers ... those aren’t necessarily the cheap ones, so surely what will come under scrutiny is the quality of those fantastic assets available at distressed prices.
PM: There’s a tremendous amount of quality out there. If I just take an example, BHP Billiton, Anglo’s, Rio Tinto, the three of them dealt in quality assets and so I don’t really think any of them have bad assets because some assets they overpaid for, they got some assets that still need quite a bit of capital expenditure but they’re not bad assets. So you could really be choosy in acquiring now, it’s all to do with what the forecasts (for) commodity prices are going to do in the next year, two years, three or four ... but there’s an overabundance of good assets so you don’t have to look at bad assets. You can get good assets at very good prices.
BDTV: Okay, so we’ve got Rio Tinto and BHP Billiton amongst best placed to grab assets sold by those desperate to sell right now, stem losses or pay down debt. Where do you see them casting their nets because what seems to be in vogue is the copper market specifically, and that’s being cited as a major target for the world’s two biggest mining companies?
PM: You know you seem to know more about this than me ... what have you been doing after work ... I’m not sure how to answer that correctly....
BDTV: All we’re doing is fuelling some speculation.
PM: Yes I can see that ... one thing is for sure, it’s not just companies that are in trouble, its countries as well. The Middle East is a giant company reliant on oil, China is a giant company ... it relies on exports and it relies on growth and those countries also took out tremendous amounts of debt so there’s a lot of parallels between companies and countries. So, yes, China is still very rich and there is a logical acquirer but those companies, even if they’ve got money, if they look at how their operations are bleeding so much at home, they have to make a decision.... Do they buy a foreign company and then close down all their operations at home? It’s logical that’s what they should do because companies like Anglo’s, Billiton, Rio’s can produce much higher quality commodities at a much lower price than the majority of Chinese production, just look at iron ore. It’s not that there are rich companies and rich countries with no debt just waiting to do it and I believe that’s taking a little bit longer to see transactions here.
BDTV: We’ve got Craig Pfeiffer from Absa Wealth and Investment in the studio with us and he has a quick question for you.
CRAIG PHEIFFER: Thanks, I was going to ask, which of those companies you thought did have the capacity. We look at some companies like BHP Billiton, we’re talking about cutting their dividend, cutting back capex, is it a case with companies like those that they’re actually going to switch out of assets, sell some, acquire some and that’s where we’ll see the pick-up in M&A, or even at spot prices that are still quite distressed?
PM: If I was running the companies, that’s exactly what I’d be doing. First thing is I would cut the dividend because the money you spend on that dividend you can buy something on multiples of the value so I don’t know why these companies didn’t flat out suspend dividends a year and a half ago, I really don’t. They could have done so much good with that money. And then the next question you said is, what about capex ... I couldn’t agree with you more. The capex that continues to fund a lot of projects, whatever happened to putting a project on care and maintenance.... But we all know you can buy operating mines, you can buy mines that are built for 20% or 30% what it costs to build another one, so I don’t know why they hadn’t suspended the dividend and the capex two years ago and then just been on the prowl and do some hard negotiating for quality assets that have a long life and that are proven and known as opposed to greenfields.
BDTV: It certainly sets up a very interesting landscape for 2016....
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