London 14/01/2016 - Bankruptcies, asset sales and a lack of expansionary capex will alter leads to significant changes to the mining industry landscape, market participants told FastMarkets.
A sustained period of multi-year lows in metals prices - copper, aluminium, zinc and tin are at their cheapest since 2009 and nickel its lowest since 2003 - is the main driver of this transformation.
"These are very troubling times. Producers are pinning their hopes on a price rally to bail them out but that is unlikely," Societe Generale analyst Robin Bhar said. "There will be more write-downs and impairments - there is going to be blood on the streets."
According to market participants, the boom-and-bust commodity cycle is at its most difficult period, one characterised by liquidations, dividend cuts, production cuts and asset write-downs. Further casualties are expected until the market exits this phase and prices start to stabilise.
"There is no doubt that there will be further profit warnings from the mining industry as metal prices continue to fall. I also expect further write-downs at asset level as book values come under pressure from declining commodity prices. Auditors will likely adopt a much more cautious tone from now on," Jeremy Wrathall at Investec said.
To date, the major names are still standing but balance sheets have taken a hit, with investors increasingly nervous.
"There will be production closures and [miners] will have to sell assets, and that hits revenue," Bhar said. "It is a vicious circle - some are in a real bind and I do not see how they can survive. There will be some bankruptcies and I would not be surprised if some well-known names are taken out."
Indeed, shares in many mining heavyweights fell further today. Freeport, which has made headlines this week when its share price plunged below $5 on the NYSE following a downgrade by ratings agency Fitch, was last at $3.73.
The precipitous drop has increased the speculation that it may have to sell assets to secure funds, not least of all to keep its cash-hungry oil business operations, John Meyer at SP Angel told FastMarkets.
While he suggested that Freeport might have to sell its Grasberg mine in Indonesia to do so, others doubted such a development would emerge given that Grasberg is a prize asset: it is the world's largest gold mine and the third largest copper mine.
"While it is unlikely that these assets will be on Freeport's initial list of divestments, they are the sort of assets that other majors would actually be keen to acquire, unlike much of what is currently on the global auction lot," Investec said.
Glencore was one percent lower on the LSE at 71.13p, not far from September and all-time lows of 66p. The company has already implemented a range of measures to halt its equity slide including reducing production for copper, zinc and lead and putting some of its operations up for sale.
Again, speculation is rife over its next steps - Glencore's debt levels are particularly acute given the stresses on the balance sheet from its struggling copper and coal businesses, Bhar said.
"They need to sell their assets but it is a slow process and they need the cash flow to service debt," he added.
Rio Tinto edged 0.12 percent lower to 1,681.50p while BHP Billiton was up 3.52 percent at 641.40p but still close to 10-year lows hit earlier this week.
"BHP moved early to cut off its extremities severing South32 from its corporate body, while Rio Tinto has been quiet cutting out higher cost mines from its portfolio," Meyer said.
Any buyers of distressed assets would be able to pick them at "attractive prices", Bhar said, which could result in a radical transformation of the metal landscape by the time prices turn upwards again.
"The chapter 11s have not happened yet but they will. The resulting fire sales could be attractive for those able to purchase at a lower price," a London-based analyst said. "The vultures are circling."
And, while several forecast a "bloodbath" in the sector, it could reverse the slump in prices.
"It might turn out to be the saviour of metals. Capacity closures will come what may and, while not all will be voluntary, this may put a bottom on prices. The market has been fabricated on easy money and credit and this is now starting to come back to haunt," Bhar said.
(Editing by Mark Shaw)