Glencore's Mt Owen coal mine in Australia. Photo: Glencore

Glencore's Mt Owen coal mine in Australia. Photo: Glencore

 
 

The Yo-Yoing World of
Mining Bonds

Issue 169, October 2016

Meet bond trader Fred Jones, who has variously worked for Morgan Stanley, Bear Stearns and Merrill Lynch in New York, Singapore and London. He is now in Vancouver, running his own business, Jutland Capital. Amongst other things, Jutland specialises in distressed debt, including mining debt. The market, Jones says, has seen some outlandish swings.

“In December, the sorts of yields that you could get in mining debt ranged anywhere from 10 per cent to 27 per cent,” Jones says. “Incredible. That was in December. By July, those yields had compressed to anywhere from 6 to 3.5.”

Blue-chip mining bonds, from Glencore to Anglo American, have seen huge moves, as metal prices have rallied this year and companies have pulled back from the brink of a financing crisis. Jutland was a buyer at the end of last year, Jones says, piling into five and ten-year mining debt. Once companies committed to asset sales, “the risk was really out.”

“Binary”

“Miners were in a binary situation,” he says, tapping the keys of his Bloomberg terminal. “They were either going to take the necessary action, or there was going to be administration and in many cases, there was too much money to be lost. If you were maybe a shale driller in the US, or a tar sands miner in Alberta, you've got a different headache, but if you're Anglo, or if you're Glencore, even if you're Noble Group, you have a different portfolio of assets. They didn't have a portfolio of junk, is my point. There was always going to be a market.”

Rather than fret over interest payments, companies are now buying back debt. Rio Tinto launched a $1.5bn bond buyback this week, repurchasing debt due in the next six years. Trading giant Glencore made a similar move last week, spending up to a $1bn on bonds due in 2019. Companies including Anglo American, Fortescue, Thompson Creek and Barrick Gold have also bought back billions of dollars of debt.

High yields came with bankruptcy risk, Jones says, but the risks were over-stated. “Many people were calling for oil to go to $10 to $15. Of course it didn't get there. The same people were calling for iron ore to pretty much vanish and for gold to go below $900, all sorts of beyond the pale type prognostications that just weren't borne out by the fundamentals. The commodities markets aren't so vastly oversupplied. Now, you can go through these nasty spikes down, but they don't last for very long.”

Glencore, Jones says, made it abundantly clear at the bottom of the market that it would do anything to look after its bondholders...

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