As tumbling commodity prices erode earnings for the world’s biggest miners, investors are focusing on how the industry will cope with its near record levels of debt. It’s looking increasingly ugly.
While overall borrowings from the 10-largest mining companies fell slightly last year, it’s still close to an all-time high of $US145 billion ($202 billion). At the same time, profits are expected to drop to a six-year low, according to Bloomberg estimates, hampering their ability the pay down the debt pile.
Against a backdrop of a deteriorating outlook for economic growth in China, the industry’s biggest customer, investors have retreated from the world’s largest producers.
“The debt pigeons are coming home to roost at many heavily indebted mining companies,” analysts at Investec wrote in a note Wednesday. “The heady days of the super-cycle were fuelled by cheap debt, which was eagerly taken on by mining companies in order to buy (overpriced) assets or to build new mines.”
“Due to the length of time it takes to build a new mine, the effects of these excesses are only now being felt and unfortunately this comes at a time when the cold wind of a Chinese slowdown is blowing through the market,” Investec said.
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