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

Continued from Page 1 ➤

...dumping assets, cancelling its dividend and issuing equity, to regain confidence amongst debt investors. “We focused on the top tier miners that were just ruthlessly rationalising their balance sheets. It was a very simple story: if they wanted to stay in business they were going to have to reshape their debt profile. It was a classic distressed asset shift.”

Rio Tinto and BHP Billiton, the world's two largest mining companies, were “far less volatile. Their bonds didn't come under the same calibre of pressure. But they got beaten up as well. Some of the Rio bonds that we looked at were paying around 12, 13 per cent.”

Nine months later, the same yields are unimaginable, in part because Europe's central bank, the ECB, has begun buying corporate debt, including Glencore's bonds, in its efforts to kickstart growth by pinning borrowing costs to the floor. “Effectively you had three sets of buyers: you had the companies themselves, you had the ECB that was in there buying, and you had private buyers such as ourselves, so you had really a groundswell of demand coming through for these bonds, but for completely different reasons.”

“Somewhat Steady”

Large institutional bond traders, however, fled the market when prices tumbled and yields spiked. “I have a bit of question for someone who's selling bonds at a 19% yield, but happy to buy them back at four. If you're saying that it's an issue of liquidity, again, it's a bit strange. I understand you have to meet redemptions, but that's really more of a business management question, not a portfolio management question. From our perspective, nobody wants the bonds at 60, but everybody wants them at 101. Fine, they can have them.”

Jones, who also trades tanker debt, runs portfolios in the $1m to $50m bracket, typically for US-based families, who arrive at Jutland via bulge-bracket banks. He describes it as “a somewhat steady business.”

As mining bond yields have fallen, distressed debt dealers have been forced to move on. Jutland has now sold almost all its mining investments. Jones has also “eliminated” sovereign bonds from Jutland's portfolios, because of the “absurdity” of negative yields. Instead, he is looking at physical gold.

“We think the time is coming in which it's going to be very difficult to get refined metal. Western central banks are hostage to conditions that they themselves in large measure are responsible for and won't be able to unwind, without serious destabilisation. You've had the Russian and the Chinese central banks that have been consistent buyers of physical. They've been tactical about it, but they're feeding a long term strategy.”

“If you are a gold investor, figure out a way to get the physical in your possession, meaning vaulted.”

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