Black swan…Fair enough. Agreed. Cost/benefit of an equity raise to maintain IG is probably more favorable to fall to high yield. They’d need to raise a lot more equity to support the balance sheet than they did in 2009.
^I think that’s the primary issue. It’s mainly about them getting from now to maybe 2018 with 1) a strained balance sheet from the O&G acquisitions working against them 2) elevated CAPEX occuring though mid 2016 and 3) copper and oil prices in the gutter.
At this point the big negative is the supply / demand picture over that time period while positive catalysts (for the firm, not necessarily equity) will either be an equity issuance, asset divestiture at fair value, Chinese infrastructure stimulus or my personal hope and dream Barrick or BHP making an equity backed offer.
Colorfully put 
Your own?
I have a few years experience trading the base metals, precious, and steel at the institutional level here in London so here is my $0.02.
The short answer : I personally think it would be way too early for any kind of investment in the equities, with the possibility of it being _ at least _ a few years too early. I don’t think they represent a value investment currently.
The long answer : I also have done some personal investing in the commodity equities but got out completely around 2011. Suffice to say that I do not have any plans to invest in them again currently and don’t expect to (personally) for at least 1-2 years, maybe a lot longer.
10 years ago these metals, like most commodities, where enjoying the kind of bull market not seen since the 1970s. Global demand and growth, led far and away by China, was strong and was expected to increase. Funds, banks, and retail where pouring in to the market (basically it was f’in nuts), and inflation expectations where very high as we all know. Now the situation is almost the exact opposite. The metals are in a bear market, global growth has slowed dramatically. Many funds have not surprisingly shut up shop or gone on to the next play, many of the banks have been taken out of the market due to new regulations restricting their trade in the business (a very good thing in my opinion). In short it is possible that the prices of these metals are going to be subdued for quite some time. For example 1-2 years if inflation takes off again, or then 5, 10, maybe even 20 years if the analogy of the current market to that of the 1970s holds. I think the metals prices are in for more pain in the near term, I don’t think the current sell-off is finished yet.
So personally I’m not investing in the metals or their equities at the moment, and think that you would be risking tying up money in a trade going nowhere/down for a protracted amount of time as you and others have said. There are far better opportunities elsewhere in my opinion. If you where really keen I suppose you could put 5% of your portfolio down on one of the stocks and play the odds, but I would personally consider this a very speculative position.
Thanks for the superb analysis Tommy83, Black Swan, and others. You can offer much more insight into the equity fundamentals than I can currently. As I am sure you may already know the traders of the specific metals obsess over the technicals/charts (some of the more “local” traders don’t even look at the warehouse stock reports, lol) so if anyone is interested in where the metals prices are going I would highly recommend keeping an eye on those charts. (Currently they say: more pain expected, longs stay away.)
Cheers and have a good weekend all.
As far as I know, it is.
i also got out in 2011, luckily. and in 2012, called a 15-20 year bear market. i’m sticking to it. don’t invest until 2026 at the earliest. it all has to do with long-term trends of the decline in capital intensity in Chinese GDP and appreciation of the USD. these cycles usually last 15-20 years.
Potentially even longer.
Pretty much every single financial ratio is significantly overstated, expect deep dividend cuts and massive write offs by end of year.
I definitely think it’s too early to go long metals and miners. There is plenty of competition from countries outside of North America that just don’t care about free markets or ordinary competition. Those governments will do whatever it takes to subsidize some of those mining operations, because at least it creates jobs and keeps mutiny and rebellion at bay (e.g. Western China). There is so many crappy miners out there that are levered to the hilt, I think it’s far easier to pick ones that are going to go bankrupt than to figure out who to go long at this point since it’s somewhat akin to catching a falling knife.
Will keep a close eye on the markets but will hold off as many other posters have noted. It will be interesting to see what implications low commodity prices will have on the wider stock market. I saw some chart posted somewhere that whenever there has been a large disconnect between stock market levels and commodity prices i.e. high stock values and low commodity prices this was always followed by a large sell off in stocks and this disconnect has never been larger than it currently is
Many thanks to all for the very good inputs.
I wonder if Bromion is out there shorting some shitty mining stock. Yeah. Where are you bro ?
FCX export permit was approved and copper has stabilized today. That being said, still not the bottom for these guys.
I am shorting every small and mid cap miner with leverage that I can get borrow on, especially the juniors. They are all huge turds that are capable of destroying capital like no other.
I don’t run money and don’t short for my personal portfolio, but I agree with Numi. These companies just seem broken to me. I’ve seen some pretty prominent value managers just get crushed in the last couple of years continuing to buy these stocks on the way down. Yuck!
We’re basically long bonds of a bunch of names in the space and related whiel shorting their stock. Has been working with mixed results but this entire space is basically capital destruction and no good roic projects rolled into one.
Can you explain this trade a little more?
why would you hold their bonds, their cfs look turrible.
The trade used to make more sense before since the stocks still had market caps. We generally avoided stocks with high met coal exposure since those companies were generally high on the cost curve.
But at a high level (I don’t know much about FCX/adjustements needed for balance sheet/we’re not involved in this name) lets use FCX as an example. You think the equity is basically a zero at $12.5bn equity and $38bn EV but you would certainly buy this company if you were able to get it interest free at $12.5bn EV no questions asked(at this point the stock = 0.5 per share or so since it will trade as an option). Analysts are expecting this company to produce ~$18bn sales and $5.5bn of EBITDA this year which seems to be expected to grow.
If my bloomberg is right all $21bn of debt they have is senior unsecured. You can buy the $2bn issue of 5.45% 2043 at 74c. So if the company went bankrupt right now you would be getting FCX at ~$15bn. You short enough equity to hedge yourself down to $12.5bn EV to protect your downside and your earning a yield of almost 8% on your long vs 7% on your short (usually much higher on long vs short’s dividend, but basically you are carry positive). This trade is basically long volatility with a positive carry and potential to own the company at a price that you can’t achieve from equity markets alone. Also note that if the company goes through restructuring you will basically be the equity without the $450mm annual interest expense they’re paying (in most other cases I find interest expense = EBIT).
Of course they can pull on their revolver and do other things to put debt ahead of you but this is just a high level picture of a possible trade. It’s usually much trickier than I described b/c u have to read covenants, adjust liabilities, understand possible scenarios but this is the general idea.
Unfortunately, you can’t do this with most coal stocks at this point in time because they have too little market cap to hedge with.
This seems like a very lucrative trade. I honestly don’t know why a lot of this space has market cap > 0.
That’s cool, we don’t get to play with more advanced trades like that in our shop. Is there a good book that explains these sorts of trades and concepts I could check out? I think I’m following but could definitely spend some more time on it.
My book was my boss :\
There’s another level of issues with IG bonds losing their IG status since IG people sell out and IG bonds tend to have very poorly written covenant sections.
Also condolences on being brough FCX as a legacy position. I am very familiar with how frustrating those situations are.