The doubling of Anglo American's share price since late January means the time could be ripe for a rights issue rather than an asset fire sale to boost its defences against tumbling commodity prices, fund managers say.
The London-listed global miner has insisted it does not need to raise cash and that it plans to sell its iron ore, coal and nickel operations as part of a sweeping overhaul to raise $4-billion this year and cut net debt to $10-billion.
But fund managers say that disposals while commodities prices are bumping along the bottom are likely to take some time, with potential bidders holding off in the hope that assets could become cheaper.
"The recovery in Anglo's shares is a strong incentive for a rights issue," said Michael Hulme, a commodities equity fund manager at Cargminac.
"It might depend on how De Beers is doing, but it's hard to see how they can get away without a capital raise. There are some signs of stabilisation, but fundamentals in commodity markets haven't changed."
Anglo is planning to concentrate on its De Beers diamond business as well as platinum and copper assets.
The company's share price, at about 544 pence, is more than double the levels of late January, when the stock fell to a record low below 220 pence. However, the sector-wide gains could prove fragile, with rises attributed largely to short-covering rather than long-term investors looking for value.
Anglo Chief Executive Mark Cutifani last month said that the industry could not rely on a reversal of the commodity price slump any time soon.
BOTTOM OF THE CYCLE?
"[This year] is already shaping up to be the most challenging yet. Opinions are divided on whether we have reached the bottom of the cycle . . . So things may still get worse before they get better," said Cutifani.
Chief Financial Officer Rene Medori also said at a briefing last month that the company had no plans for a rights issue. "We don't think we will need one," Medori said.
Investec analyst Jeremy Wrathall believes that Anglo should reconsider.
"It would be responsible to raise some money," Wrathall said. "It would be optimal for them to do a rights issue now. They could be missing an opportunity."
A cash pile of $6.9-billion at the end of December – now down to $5.2-billion after Anglo bought back some debt – has given the company some headroom.
Credit facilities of $7.9-billion and an extension of $1.5-billion announced on Tuesday mean that liquidity is unlikely to be a problem.
"But why borrow more when the market has made it possible to raise money," one banking source said. "The assets need to sell at a good price soon, within months. It will be difficult, they are perceived as a distressed seller."
Fund managers say that Anglo may eventually have to raise cash anyway because of high leverage ratios, which don't change with the sale of assets that produce income.
The ratio under scrutiny is net debt to Ebitda (earnings before interest, tax, depreciation and amortisation), which UBS analysts recently estimated at an "uncomfortable" 3.3.
"If you are selling a producing asset, you are selling Ebitda, so your leverage ratios don't change," a UK-based fund manager said. "They could sell Minas Rio, which is not producing at full capacity. If they could get a decent price, they could reduce debt without reducing Ebitda."
Anglo expects Minas Rio to be producing at full capacity of 26.5 million tonnes of iron-ore in 2018.