A Major Miner Suffers From Commodity Downturn

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What's going on?

The large, London-listed mining company Anglo American reported a $5.5 billion loss for 2015.   It also disclosed an aggressive plan to cut costs in an effort to survive the massive current commodity downturn.

What does this mean?

Anglo will, over time, sell most of its coal, iron ore and nickel operations – these commodities were particularly attractive when China’s economy was booming. It will keep its copper, diamonds and platinum businesses in the hopes of remaining exposed to the ‘consumer economy’ in China (think: diamond engagement rings for the growing middle class).

By closing or selling most of its mines, Anglo aims to significantly reduce the amount of debt it has. The plan is to operate as a leaner company that will profit from the products it continues to mine. That theory, however, depends on Anglo getting a decent price for the mines that it is fairly desperate to sell – something which could be tricky.

Why should I care?

The bigger picture: This is a classic example of a struggling market going through consolidation. When commodities were booming, Anglo and most other mining companies were buying mines. But now, Anglo and others are being forced to sell mines at knockdown prices in order to survive. If commodity prices do recover, the buyer(s) of those mines stands to profit, potentially, quite considerably.

For mining stocks: Mining stocks have actually had a great start to 2016. Anglo’s share price is up a stonking 75% from its low in December. Companies like Glencore, Rio Tinto and BHP Billiton have also seen their share prices rally significantly. Commodities like iron ore have had a pretty good rally: its price at its highest level since November. A recent pickup in demand from China appears to be the reason, although it’s unclear whether that is merely a temporary “bounce” or a more sustainable trend. It’s a good area to keep an eye on as it could be signaling some rebound in Chinese demand (possibly as a result of the Chinese government boosting lending by banks to companies).

Originally posted as part of the Finimize daily email.

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