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.
Joseph Cotterill considers the following as important: Debt, Glencore, miners
This could be interesting, too:
John H. Cochrane writes Lend the shutdown?
David writes National Debt Discussion
John H. Cochrane writes Volatility
John H. Cochrane writes Kotlikoff on the Big Con