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Anglo American plc needs an equity raise now – CIBC

Anglo American PLC has unveiled an overhaul of its group operations, along with several other measures aimed at cushioning the blow from depressed commodity prices.

The measures include a reduction in capex, massive staffing cuts, shutting down assets that are free cash flow negative, selling other assets, and suspending its dividend.

Despite all these measures, CIBC World Markets analyst Ben McEwen expects Anglo’s free cash flow will remain at negative US$1 billion in 2016.

As a result, he warned that the mining giant’s net debt will continue to climb, with net debt to EBITDA poised to exceed 4x, based on the company’s own projections.

“While Anglo points to its restructuring action and some US$15 billion in liquidity as a buffer to offset financing risks, liquidity along is increasingly unimportant,” the U.K.-based analyst told clients.

More debt requires more equity and, therefore, a higher likelihood of equity dilution.

Anglo might have enough operating asset value to provide equity holders some value, but McEwan noted that it may not be sufficient if spot commodity prices don’t improve.

As a result, the analyst is forecasting more action will be taken in the form of a US$3-billion equity raise, followed by asset sales. And if commodity prices continue to weaker, he expects further material equity dilution.

“With regards to equity issuance, we have seen the impact of delaying until the 11th hour at Lonmin,” McEwan said. “Lonmin waited and waited… and waited… and waited… hoping for a turn in metals prices that never eventuated. As a result, its balance sheet continued to deteriorate and the company was forced into several (progressively more) dilutive equity issuances.”