Tuesday, 8 December 2015

Anglo American backed into a corner with nowhere to go

The biggest news the world woke up to today is that of ailing mining giant Anglo American releasing a statement in which it plans to radicalise its existing restructuring program in order to create balance sheet stability as it battles the commodities crisis that's lead it and all other commodity producers into a frantic push to keep shareholders happy.

One of the measures that will be put in place is the suspension of dividends for the second quarter of this year and the remainder of 2016 with management discretion going forward. This is the first time in 6 years that the company has had to take such action and second in the entire history with each occurring in relative short span of one another, there does seem to be a whiff of crisis in the air.
The share price sold off quickly on the news as it had done 6 years prior as investors looking for certainty in terms of annual income were sent rushing to the sidelines in search of better prospects.

I'm a firm believer of the saying that charts don't lie and the one shown below illustrates how difficult this stock has had it over the past decade going into the Financial Crisis and all the way back down to critical levels and then a resurgence of buyers that bought into the Chinese growth story and the potential boom it was going to produce within the resources sector.

But you'll note that once the Fed began the biggest monetary stimulus program ever, this mark the peak of most commodity producers as the trend in China started to fade and the world needed impetus to move forward. However with most expansionary investment directed towards the Chinese economy one could say that the industry was heavily leveraged and wouldn't respond well to even a small pullback in commodity prices.

It took a while before we saw any evidence of gluts appearing in the market but when they did the market immediately focused its attention on it and since then haven't let go.

We've seen distress from the likes of big names players such as Glencore whose own plans to expand were dashed and resulted in an about turn stance to be taken as it tries to rid itself worth of a third of its debt. If Glencore could so easily become a target to those feeling skittish about the sector then the likes of Anglo American stood no chance in the face of worrisome reports fuelling the markets concerns.

I've mentioned it a few times before and I think the point that I'm trying to hammer home is so well exhibited in the case of the commodities crisis, when you see smaller players taking the heat there's worry but not enough to warrant the selloff we seeing at the moment. It's only when the bigger players start feeling the pinch that much of the attention needed in the sector is concentrated and the necessary leadership appears to fix the mess.

We've seen recently the world's biggest mining group, BHP Billiton, grappling to contain the damage from a dam collapse in Brazil where the economic and environmental impacts aren't even close to being tallied up as the mining company tries to prevent further damage being done. It's events like these that make management to start focusing on prudence rather than aggression in saving their organisations anymore operational damage and begin the process of cutting back.

I think we seeing the beginning of the end of the resource rout in my opinion but the effects are yet to fully come to market and it may be we see further downside in the months to come however it wouldn't be absurd to follow these stocks closely for green shoots as indications of the storm passing, but for now I'd stay clear while the chaos draws those seeking glory in a pile of rot.  
Following on from the commodities rout, Oil has broken past lows last seen 6 years ago as OPEC failed to reach an accord to the production cuts needed to drive the oil price upwards leaving the door open to nations doing as they wish. Iran has expressed its intention to get production back on track but I wouldn't envision other members to execute the same strategy.

It becomes a matter of price of currency versus the price of commodity and it would do well if the struggling members of OPEC were to halt their production for a while given that there's a glut it wouldn't increase pressure on the price at all.

This I believe will be the action taken by those finding it difficult to find foreign income receipts from the world that drain its reserves of necessary money to fund trade. Starving off supply will increase demand in tiny increments depending on the amount of suppliers who engage in it but if one nation succeeds at proving its effectiveness they others may be pushed to join.
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