It had been a while since we had any major news involving the ongoing devastation in the global mining sector courtesy of China, where as we previously reported more than half of the local commodity companies can't cover their interest expense and are thus caught in a deflationary race to the bottom even as the government has no choice but to bail them all out.
Indeed, complacency seemed ready to set back in, with Glencore stock recently rising as high as its recent equity offering price of 125p. And then today we noticed that not only is Glencore's CDS back above 700 bps, the widest it has been in three weeks, but that another mining company has fallen into the market's crosshairs, this time Belgium-based (with Zurich HQ) Nyrstar NV, Europe's largest refined-zinc producer, whose stock crashed the most since its initial public offering in 2007, while it bonds tumbled to a yield of 19%, suggesting a default may be imminent.
The official version is that this plunge happened after the company said "its mining business is being challenged by the rout in metals."
According to Bloomberg, "Investment in the company’s Port Pirie smelting operations in Australia will cost A$563 million ($405 million), about 10 percent more than previously forecast, it said in a statement Thursday. Nyrstar shares slumped as much as 27 percent, the most since at least October 2007, to the lowest in six years."
"Clearly, the business has underperformed for some time," Nyrstar CEO Bill Scotting said, referring to mining. "At these zinc prices we are not cash generating so we have to look at that portfolio. If zinc prices don’t recover we will potentially have to idle more mines."
However, none of this is news, or should be news.
What was news was the CEO's admission in Belgium's Tijd that the company "can't guarantee the full repayment of the company's notes due in May 2016. In other words, a default, by any other name.
So while other commodity traders such as Glencore and Trafigura are desperate to preserve the image that they have no liquidity problems, Nyrstar is the first to hint the D-word.
The reaction in the company's publicly traded bonds was swift and brutal: "Nyrstar’s 350 million euros of bonds due September 2019 erased gains made in October and dropped 19 cents on the euro to 71.6 cents, the lowest on record. The bonds now yield 19.1 percent, according to data compiled by Bloomberg. The company is evaluating debt and equity market alternatives to address a 415 million-euro bond maturity in May 2016, it said. The bond dropped 13.5 cents with a yield of 35.6 percent."
Putting that in context, a company which still has a $500MM market cap, has bonds yields nearly 20%. All this is coming to a commodity miner and/or trader near you, and perhaps this one first. From September 3, 2015:
Trafigura subsidiary Urion Holdings Ltd. increased its interest in Nyrstar to 68 million shares, or 20.02 percent of the voting rights, as of Aug. 28 from 52 million shares or 15.3 percent, according to a regulatory filing.
Commodity trader Trafigura Beheer BV said it has no immediate plans to bid for control of Nyrstar NV after raising its stake in the world’s largest producer of refined zinc to more than 20 percent.
“This is a continuation of our investment into Nyrstar,” Andrew Gowers, a Geneva-based spokesman for Trafigura, said by phone on Thursday. “It is a financial investment.”
Judging by the 30%+ loss since then, it was also a rather terrible financial investment, and perhaps a reason to wonder about the financial acument of companies such as Trafigura which are throwing money around as if oil is still back at $100, not to mention another reason to look at all the cross-asset holdings among a commodity mining/trading sector which - unless commodity prices rebound dramatically in the coming months - is insolvent across the board.