The Impact Deleveraging Will Have on the Mining Sector

Benjamin discusses deleveraging by comparing and contrasting past and current applications. In past recessions, companies deleveraged assets by issuing dilute of stock to the parent

1 min Read
06.3.2014

By Benjamin Cox

Managing Director of Oreninc Prior to founding Oreninc, Mr. Cox served as a senior analyst at the D.E. Shaw Group and as a consultant with the GLG Group, where he worked directly with 15 Wall Street teams in the mining deal space. Currently, he holds the position of Chief Executive Officer of Roche Bay plc, an iron ore mining company with leases in Nunavut, Canada. Mr. Cox is also the Chief Executive Officer and a Director of Aston Bay Holdings Ltd. (TSX-V:BAY), a copper and zinc company with properties in Nunavut, Canada. Mr. Cox has researched and developed business, financial, and shipping models for every major global iron ore project. He is also an expert on mining industry market dynamics and metals, with a focus on raw materials including base metals, iron ore, platinum group metals, and industrial materials such as potash and lithium. Mr. Cox holds a B.S. from Brandeis University and an M.B.A. in Finance from Portland State University.

Benjamin discusses deleveraging by comparing and contrasting past and current applications. In past recessions, companies deleveraged assets by issuing dilute of stock to the parent company’s balance sheet. In this recession, Private Equity is willing to take the leverage and the sub-prime assets off of the majors’ balance sheets.

Benjamin questions whether the majors are “throwing the baby out with the bathwater” when they do this. You rarely need to go to a financial intermediary unless the deleveraging process is not material to the major, but if an asset is worth over 2-3% of their market cap, then they should be returning that value to their shareholders. Benjamin references a company back in the 1980s that was able to create more value by spinning out assets into new companies than the parent company ever had.

Shareholders should demand that the majors do this over just giving assets to a PE fund. Benjamin finishes by pointing out that, while the value of assets are down during this recession, it is better in the long run to return those undervalued assets to shareholders; he argues that this is preferable even over what cash value you would receive by giving it to a PE fund, because once the market returns, those assets will as well.