AAL shares below £4

ChesterDog

The world does still need resources/commodities.

But not nearly as much as mining/extracting/brokering/futures companies had anticipated/expected/hoped/gambled/predicted it would in the near future.

Initiating/mothballing/decommissioning mines - and even just running them - is a horribly expensive business, where decisions have implications that last for years.

So, although the world will always need commodities, it is not off the agenda that a very large mining company could find itself overstretched and underesourced when things take a downturn (or even just that planned for additional growth is not needed or no longer supported by commodity prices) and simply go bust.

Edit. Look at the situation here with milk producers and their often nebulous margins. That is not because the world doesn't want milk. It just doesn't want as much as the suppliers are producing and the prices are held down as a result.

Thrugelmir

ChesterDog wrote: »

So, although the world will always need commodities, it is not off the agenda that a very large mining company could find itself overstretched and underesourced when things take a downturn (or even just that planned for additional growth is not needed or no longer supported by commodity prices) and simply go bust.

Glencore appears to achieved domination by overpaying for assets. A $30 billion debt pile the result. Ultimately this was it's nemesis.

EdGasket

Thrugelmir wrote: »

Glencore appears to achieved domination by overpaying for assets. A $30 billion debt pile the result. Ultimately this was it's nemesis.

Yeah I bet they wish they were buying Xstrata today!

jamiex

Rather than looking at the share price in terms of where it's been in the past, look at the market capitalisation of the company or the Enterprise Value (if you include the debt).

The question you should be asking is: "Are Anglo American cheap at a market capitalisation of £5.6 billion?"

They have net debt of approx. £7.9 billion so their Enterprise Value is £13.5 billion

To answer that you'll have to predict future profits etc. and whether they'll increase or decline.

But once you start talking about market cap, the fact they were once £30 per share becomes irrelevant, as nobody would call £5.6 billion 'cheap'

george4064

Another big tumble today after the company announced radical restructuring and suspending the dividend;

Radical portfolio restructuring
· Focus on Priority 1 assets to deliver free cash flow and greater returns through the cycle - number of assets to be reduced by ~60%
· Corporate structures and overhead to be aligned to future portfolio
o Consolidate from six to three businesses: De Beers, Industrial Metals, Bulk Commodities
o London office co-locating with De Beers in 2017

Driving operational discipline
· $3.7 billion of cost and productivity improvements targeted from 2013 to 2017:
o $1.6 billion delivered by end 2015(1), including $0.3 billion in 2H15
o $1.1 billion in 2016
o $1.0 billion in 2017, with potential to accelerate in part into 2016
· Care & maintenance / closure of cash negative assets - Snap Lake C&M, Thabazimbi closure

Protecting the balance sheet
· Capex reductions expected of a further c.$1 billion(2) to the end of 2016
o $2.9 billion aggregate capex reduction vs. original guidance(3) for 2015-2017
o $2.5 billion capex in 2017, a c.55% reduction vs. 2014
o SIB & capitalised stripping capex reduction of 30% from 2014 to $2.0 billion in 2016
· Disposals target increased to $4.0 billion - Phosphates and Niobium confirmed for sale
o c.$2.0 billion asset disposals agreed to date
· Dividend suspended in respect of 2H15 and 2016 - upon resumption, policy will change to pay-out ratio to provide flexibility through the cycle and clarity for shareholders
· Net debt guidance at end 2015 unchanged at $13.0 - 13.5 billion, despite price deterioration
· c.$15 billion of liquidity maintained and limited refinancing required in 2016 of $1.6 billion
· Expected impairments of $3.7 - $4.7 billion, largely due to weaker prices and asset closures

Sam_J12

I would take a look at how the company is run, and if the decisions seem to be made in the owners interests. For example, if earnings are retained rather than paid out in dividends, have they been invested in a profitable way? Is the CEO also a major shareholder? Do the actions of the CEO appear to be in the owners interests? Those are the things I would look at.

george4064

Yet another tumble today, the stock's down over 20% in two days..

Strummer22

I will admit to having some money in the commodities sector (not mining, but that doesn't matter) and frankly I've decided not to sell out now and instead take that very long-term view that was talked about above. I do have reasons:

As we see now, all big mining companies and general commodity producers are slashing costs. Exploration and capital expenditure budgets have been drastically cut. This also means writing off unprofitable ventures, such as Anglo closing that coal mine. By focusing on where production is currently good and cheaper, they will maintain production at or near where it is now. As also noted above, the world still needs all the commodities - it just doesn't take much of an oversupply to really dent prices. Anyway, over time, production from currently producing mines and oil fields will become harder and supply will drop, and this will add to the effect of closing less profitable mines/fields. At this point, commodity prices will rise as supply and demand come more into balance. No-one can really tell whether this will be next year, 2018 or 2020/beyond, but it's happened before and would really be a surprise if it didn't happen again.

At this point, as prices rise, exploration becomes much more attractive for companies, who are finally making money on their products and can afford it. With a several year time frame from resource discovery to extraction, we may well see demand outstrip supply and prices spike. The boom-bust cycle will repeat again, I'm afraid.

I'll also say, the reason why share prices are so crazy - Anglo American from £30 to £3, Tullow Oil from £12 to £1.70 for example, is that for the most part shares are valued on their earnings (or some metric thereof). Price to earnings ratio is one of the most popular metrics for valuation, and if a company is losing money the it doesn't have a P/E ratio so price will be based on assets, or market sentiment towards future performance.

So to answer the OP, shares can keep falling, all the way to zero, which is what will happen if no bank considers refinancing the company, no other company wants to buy it and all assets will be sold to pay debt. However that's unlikely for mining behemoths, who instead will have to weather the storm and when they finally start making money again will once again return to a sensible valuation based on their earnings.

Then they will go too far the other way and get a ridiculously inflated valuation based on fantasy future earnings, but that's a whole other discussion...

racing_blue

I am counting on a recovery in the commodities sector, by rebalancing into a broad basket commodity ETF according to pre-defined asset allocation strategy.

AAL though? This morning buyers were only prepared to offer £2.80 per share

snowqueen555

There is no good news coming from anywhere, so I am expexting further drops. I think I will drip feed into a natural resources fund at the smallest sniff of good news.