Mining industry rings in 2016 with fresh round of writedowns

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Miners are marking the new year with a fresh round of writedowns, underlining the lingering impact of last year's plunge in commodity prices and raising troubling questions about when the sinking industry might finally find a bottom.

Anglo American Platinum Ltd., the world's top platinum miner, got the week off to an ominous start when the South African company announced on Monday that it was knocking down the paper value of its assets by $851-million (U.S.), an amount equal to more than a quarter of the company's book value.

Its writedown follows Barrick Gold Corp.'s announcement last week that it expects to take a hit of as much as $3-billion on goodwill and asset-impairment charges when it reports earnings next month. Earlier this month, BHP Billiton PLC, the world's largest miner, unveiled a $7.2-billion writedown on its U.S. shale assets.

Companies write down the value of their assets to reflect the lower earnings power of those holdings in deteriorating market conditions. As commodity prices have swooned, miners have become reluctant experts in the art. The industry as a whole has taken tens of millions of dollars in writedowns since the commodity cycle turned downward with a vengeance in 2012.

It would be tempting to think that the trend must be nearing its end, but the latest charges indicate that at least some asset values still have further to fall. They also illustrate how companies are having to run hard just to stay in the same place, financially speaking.

Barrick provides a good case in point. Early last year, the Toronto-based gold and copper miner committed itself to an ambitious program of debt reduction, pledging to carve $3-billion off its $13-billion mountain of loans. It surprised skeptics by meeting that goal through a deftly executed series of mine sales, as well as the sale of some future production.

But the asset-impairment charges and goodwill writedowns it indicated last week are more or less identical to all of the debt reduction it has worked so hard to achieve over the past year. As a result, barring other surprises, the company's debt-to-equity ratio is likely to end fiscal 2015 at pretty much the same lofty height it began at a year earlier.

To be sure, the debt-equity ratio is just one way to measure the burden of a company's borrowing. More broadly speaking, the effect of a writedown on a company's stock is hard to predict because reducing the value of an asset on the balance sheet doesn't involve paying out any actual cash. A writedown is essentially a belated recognition of the money a company has already wasted rather than a sign of more waste to come.

But all that being said, it's not a good sign for an industry when asset values are still being written down four years into a downturn. It's only natural for investors to wonder if the pain will ever stop.

Consider Anglo American PLC, the majority owner of Anglo American Platinum. It is an erstwhile industry giant that has put itself on a drastic diet with the goal of shrinking down to a profitable core. But James Bennett, a Citigroup analyst, wrote in a report Monday that he figures there is a 27-per-cent chance the company's net present value is now less than zero.

"We believe investors have genuine fatigue around Anglo's restructuring plans," he said. The company's three most recent chief executives have reported cumulative pretax savings of about $7-billion through vigorous measures to tame costs yet there's still no payoff in sight.

"Given that we expect a loss from Anglo in 2016, it is hard to see what has become of those combined $7-billion cost savings," Mr. Bennett said.

The market is clearly indicating its skepticism regarding Anglo and many other miners. A screen of global miners with market capitalizations of more than $1-billion shows that 38 out of 97 are trading for less than book value, an indication that investors figure the listed value of their assets is overstated.

Count on more writedowns ahead.