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Debt buybacks signal recovery in mining sector

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Debt buybacks signal recovery in mining sector

The recent uptick in debt buybacks in the mining industry hassparked optimism that the mining sector is recovering.

Various companies undertook such moves in the week to April 29.

Evraz Plcbought back US$184.4 millionworth of notes due April 2017 and 2018, with settlement to occur April 28.

ArcelorMittalsaid it will redeem onMay 20 all of its outstanding US$1.4 billion 4.5% notes due Feb. 25, 2017, usingproceeds from its US$3 billion rights offering earlier in April.

Meanwhile, FortescueMetals Group Ltd. issueda voluntary redemption notice to holders of its 8.25% senior unsecured notes duein 2019, paying down a further US$577 million worth of debt. It will reduce theAustralian iron ore producer's interest payments by US$48 million each year andpush up the total amount of debt repurchased over the last 2.5 years to US$4.8 billion,of which US$1.7 billion was bought back in 12 months.

Fortescue's ambition to reduce debt was also by improvements in the U.S. debtmarket. As of end of March, the ASX-listed miner's net debt stood atUS$5.9 billion and its cash balance continued to grow to US$2.5 billion.

"[Fortescue] is pursuing exactly the right strategy, usingthe short-term windfall created by the surprisingly high iron ore price to reducelonger term debt," analysts at Investec commented in an April 27 note. 

Fortescue's market capitalization more than doubled since itsJanuary low and now stands at US$7.3 billion. This took the company further outof the "price discovery zone," a psychologically important level whennet debt is greater or equal to market cap, the Investec analysts said.

In another case, DetourGold Corp. bought backnotes from Paulson & Co. Inc. for US$76.9 million, plus accrued and unpaid interestof US$1.7 million, using existing cash on hand.

The move came at the same time the precious metals miner revealeda net income result of US$27.6 million for the first quarter, which saw Detour Goldback in black for the first time following several consecutive quarters of losses.

"As the company's financial position continues to strengthen,we have taken this opportunity to further reduce debt levels," CFO James Mavorsaid. "With increased confidence in our mining operation and a stronger goldprice environment, we would now expect to re-finance less than [US]$300 millionof notes at maturity."

"The number of companies buying back their debt is growingand we believe this is a key indicator of the improving health of the sector,"the Investec analysts said in the same note.

"The recent rally in commodity prices effectively meansthat the mining industry has passed 'Go' and collected £200 in a figurative gameof Monopoly. Companies are now in better shape and hence better placed for any pitfallsto come," they added.

However, not all debt repurchases were "opportunistic"moves.

Rio Tintoagreed to buy back US$1.36billion in debt under its planned US$1.5billion debt buyback program. The company also seeks to buy back Dutchauction securities, which include its 6.500% US$1.75 billion notes and 2.250% US$1.25billion notes due 2018.

"Rio is simply using excess cash to reduce gross debt levels,one of the reasons Moody's downgradedthe company from A3 to Baa1," Investec analysts flagged in an April 29 report.