Anglo–Swiss commodity and mining behemoth Glencore saw its shares slip another 29 percent on Monday with analysts stressing that the weakness is likely to be felt across the entire sector.
London-listed shares of Glencore briefly hit 69 pence in morning trade Monday. It was on course for its worst intraday move on record with shares tumbling 75 percent year-to-date and 85 percent since its flotation in 2011. The U.K. FTSE 350 mining index hit its lowest level since 2008 on the back of Glencore's fall.
Weaker commodity prices and softening Chinese demand have put the brakes on the formerly formidable rise the sector enjoyed over the last decade, but analysts have highlighted that Glencore's main problem is actually its debt load.
"Mining companies gorged themselves on cheap debt in a race to grow production following the Chinese stimulus that occurred in the wake of the (global financial crash)," a team of Investec analysts, led by Hunter Hillcoat, said in a note on Monday morning.
"The consequences are only now coming home to roost, as mines take a long time to build."
Investec said that Glencore had a "higher debt base" than its peers and a "lower-margin asset base," adding that its debt levels would still be above its rivals despite an intense period of restructuring over the next five years.
Value 'virtually eliminated'
Investec detailed a scenario of weakening commodity prices - which is not its base case scenario - where it sees an "almost complete collapse" in potential earnings for Glencore as the company would be solely working to repay debt obligations.
Shareholder value would be would be "virtually eliminated" under this scenario, it said.
The FTSE 100-listed company, which specializes in copper, coal, nickel and zinc, has announced it would be scrapping its shareholder dividend and partaking in an equity issue. On Monday, it was confirmed that it would be selling a nickel mining project in Brazil to Horizonte Minerals for $8 million.
Credit Suisse slashed its earnings estimates last week for the metals and mining sector. Also on Thursday, Goldman Sachs said in a note that Glencore's steps to reduce debt and bolster its balance sheet were inadequate. Thirteen out of 25 analysts still have a "buy" rating on Glencore's stock, however, with five of them having a "strong buy" rating.
Who's next?
While Glencore suffered the brunt of the selling Monday, its closest rivals weren't immune from the plunge in share prices, or from the pessimism noted in Investec's research.
"While the picture is less extreme for BHP Billiton and Rio Tinto, they too would face a substantial challenge to meet management's apparently steadfast commitment to maintaining dividends, which we estimate would consume 50 percent of ongoing operating cash flows in this scenario," the investment bank said.
"Anglo American is also in a weaker position than BHP Billiton or Rio Tinto if commodity prices remain depressed."
Anglo American's shares slipped 8 percent, while BHP Billition and Rio Tinto both slid 4.7 percent. Traders in London highlighted the Investec note for the further weakness in the sector.
"The (copper) the price is presently scraping its knuckles on the floor and trading at $2.27 a pound," Brenda Kelly, the head analyst at London Capital Group, said in a note Monday.
"Investec's note this morning, while certainly on the money,… is certainly not helping."