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A history of leverage and the mining industry, 2010-2015

Summary:
Or, in chart form via Investec… How taking on cheap debt to build fancy holes in the ground (to feed Chinese demand) blew up shareholder value in the world’s biggest miners. Click to enlarge. As Investec notes (emphasis ours): It is the rising percentage of debt that makes this cyclical downturn so toxic for equity holders. Strangely enough, BHP Billiton, Rio Tinto and Anglo American started this century with not dissimilar gearing ratios (defined here as net debt to market capitalisation), ranging between 15% (Anglo American) and 27% (BHP Billiton)… As we progressed into the Supercycle, shareholders began to own a greater proportion of the overall enterprise value of the company, with average gearing (net debt:equity) falling to 8% in FY05/06. The adoption of debt-based growth strategies in recent years, especially after the GFC, has led to profound changes within the sector. The ready availability of low-cost debt encouraged companies to take on additional gearing to finance the race to grow production, with iron ore development and expansions being the key culprits. The recent fall in commodity prices has compounded the proportion of earnings consumed by debt service – both interest and repayments.

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Joseph Cotterill
Joseph is the FT’s Southern Africa correspondent based in Johannesburg, after previous stints as private equity correspondent and on the Lex column. But he still writes for Alphaville, which he joined way back in March 2010 — right in the middle of the Greek bailout crisis. He has been very interested in all things credit and sovereign debt ever since…

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